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Shell, PetroChina Win Arrow With Sweetened $3.2 Billion Offer

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March 22, 2010, 3:41 AM EDT

By Ben Sharples

March 22 (Bloomberg) — Royal Dutch Shell Plc and PetroChina Co. agreed to buy Arrow Energy Ltd. after increasing their offer to A$3.5 billion ($3.2 billion), marking China’s entry to Australia’s coal-seam gas industry.

Shell and PetroChina will pay A$4.70 cash a share for Arrow’s Australian business, the Brisbane-based company said today. The price was raised from A$4.45 and is 35 percent above the stock’s level before the initial bid was reported March 8. Investors will also get shares in a new company holding Arrow’s gas assets in China, Indonesia, India and Vietnam, which may be worth as much as A$400 million, according to analysts.

Shell and PetroChina would gain control of Australia’s largest holder of permits to extract gas from coal seams for processing into liquid form for export. They are paying less for reserves than BG Plc did in 2008, said John Young, an analyst at Wilson HTM Investment Group. Chinese companies spent a record $32 billion last year on oil fields and coal and metal mines to obtain resources for the fastest-growing major economy.

“Arrow’s assets in Australia are located in close geographical proximity to Asia and the reserves are of a very significant scale,” Young said by telephone from Melbourne. “They are world-scale, it’s material to companies as large as Shell and PetroChina.”

Arrow fell 2.6 percent to close at A$5.10 in Sydney, reflecting disappointment among some investors who had expected a bigger increase in the bid. The stock had climbed 52 percent, reaching a record close of A$5.29 on March 18, as investors bet the initial offer would be sweetened.

‘Good Premium’

“The price was arrived at after an extremely robust negotiation with Arrow over two weeks,” Shell Australia Chairman Russell Caplan said on a conference call. “This is a good premium for the stage of maturity of this project.”

Shell and PetroChina would have had to bid A$6.10 a share for Arrow if the gas reserves were valued at the price BG paid for Queensland Gas Co. in 2008, Wilson HTM’s Young said.

The Arrow acquisition is the biggest Australian coal-seam gas transaction since ConocoPhillips paid $5 billion for a stake in Origin Energy Ltd.’s gas assets in 2008. BG and Malaysia’s Petroliam Nasional Bhd. have also acquired coal-seam gas assets in Queensland to feed planned projects in the state that are among more than 12 proposed Australian LNG ventures.

Shell plans a liquefied natural gas project on Curtis Island off the central Queensland coast that is expected to produce as much as 16 million metric tons of LNG a year and have four processing units. The acquisition provides enough gas to underpin development of the first two plants, Caplan said.

Australia ‘Key’

“Australia is a key growth centre for Shell globally,” Caplan said. Arrow “will give us scale in Australia and is underpinned by secure access to the critical Chinese market.”

A development decision on the Curtis Island project is expected by 2012, Malcolm Brinded, Shell’s executive director for international production and exploration, said in a joint statement with PetroChina today.

Shell and PetroChina join explorers including ExxonMobil Corp. and BP Plc in tapping unconventional gas supplies, such as those trapped in shale formations, on the surface of coal, and tight gas that is locked in impermeable sandstone. Exploiting these has become attractive because of drilling techniques that cut production costs at a time when easier-to-develop fields face depletion and deep-sea drilling grows more expensive.

Exxon agreed to buy gas producer XTO Energy Inc. in December, 14 months after abandoning its own drilling program in Texas’s Barnett Shale unconventional gas formation, where XTO gets more than 20 percent of its output. As of March 16, the value of the deal was $28.4 billion.

Dart Energy

Arrow investors will receive one share in the new company called Dart Energy Ltd. for each Arrow share they hold. Dart, which will listed on the Australian stock exchange, is evaluating opportunities in Europe and Southern Africa, to add to its Asian assets, Arrow said.

Arrow’s international business is worth about A$400 million, or 55 Australian cents a share, according to Nik Burns, a Melbourne-based analyst for RBS Morgans.

Nick Davies, chief executive officer of Arrow, said it has held talks with New Hope Corp., which owns almost 17 percent of Arrow, about the future of its stake. New Hope Chairman Robert Millner wasn’t immediately available to comment.

Coal-seam gas is mostly methane found on the surface of coal. The gas can be extracted when pressure on the seams is reduced, usually by removing water. LNG is natural gas chilled to liquid form for transport by ship to destinations not connected by pipeline.

–With assistance from James Paton in Sydney. Editors: John Viljoen, Amit Prakash.

To contact the reporter on this story: Ben Sharples in Melbourne at [email protected]

To contact the editor responsible for this story: Clyde Russell in Melbourne at [email protected]

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