A Shell sign is seen at a petrol station in Melbourne March 8, 2010.
Credit: Reuters/Mick Tsikas
Analysts said an improved bid could raise the cash portion to at least A$5/share compared to the A$4.45 on offer.
"I read it as the negotiations will lead to a possible higher bid," said Tim Schroeders, portfolio manager at Pengana Global Resources Fund. He does not hold Arrow shares.
Shell and PetroChina would also be keen to push for regulatory clearance from Australia's Foreign Investment Review Board, as relations between Australia and China, its main trading partner, risk being soured by the upcoming trial of Rio Tinto (RIO.AX) staff in China over alleged commercial spying.
Australia's Trade Minister Simon Crean said earlier the Rio case was a separate issue and would have no wider implications for Australia-China trade ties.
Rio Tinto later announced it signed an agreement with Chinese metals group Chinalco to jointly develop the Simandou iron ore project in Guinea.
But political commentators note the Rio Tinto case could rekindle opposition among some Australia lawmakers critical of Chinese investment in Australia. Some high profile deals have fallen through, including a planned $19.5 billion tie-up between Rio and Chinalco last year.
A successful takeover of Arrow would be the first major Chinese investment in an Australian company since the $3 billion takeover of Felix Resources by Yanzhou Coal Mining Co (1171.HK) (600188.SS) that was agreed last August.
MORE CASH?
The deal, also the first major Chinese investment in Australia's booming coal-seam gas sector, could be agreed by the firms as early as Friday, the Australian Financial review said in an unsourced report.
An Arrow spokesman declined to comment.
While Arrow's shares have risen 52 percent to a record since the deal was first announced, analysts believe the current offer price is low given the potential reserves.
"We believe the offer will succeed or fail on the cash component for local investors ... and $4.45 a share appears too low," Credit Suisse analyst Andrew Williams said, adding Arrow's potential reserves support a valuation of A$5.5O a share.
Earlier this week, a source told Reuters that Arrow had opened its books to Shell and PetroChina, and would respond to the offer within days.
Shell and PetroChina have offered A$4.45 in cash for each Arrow share, plus a share in a new entity comprising its international business.
Shell and PetroChina are targeting Arrow's coal-seam gas reserves, estimated at 6,150 petajoules, the largest in Australia. Coal-seam gas is natural gas trapped in seams of coal.
(Additional reporting by James Grubel in CANBERRA, Victoria Thieberger in MELBOURNE; Editing by Balazs Koranyi and Valerie Lee)
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