Arrow Energy Ltd. (AOE.AU) Wednesday said it's still in talks with Royal Dutch Shell PLC (RDSB.LN) about possibly supplying it with feed gas for its proposed LNG project at Gladstone in Queensland state.

But Arrow said it may consider selling gas to rival projects if the price is right.

Shell bought 30% of Arrow's local coal seam gas reserves last year but will need more feedstock if it goes ahead and builds four LNG processing trains at Gladstone to plan.

Arrow has also agreed to provide gas to a smaller-scale Gladstone project being built by Liquefied Natural Gas Ltd. at Fisherman's Landing and plans to take a 20% stake in that project early next year.

Its failure to come to some sort of supply agreement with Shell to date has led some analysts to ponder whether Arrow and the Anglo-Dutch company are having difficulty agreeing on a price for Arrow's gas.

Arrow's Australian Chief Executive Shaun Scott told analysts that any plan to possibly sell gas to rival projects was only at the "conceptual" stage.

"The reality is we're really still all guns blazing on what we're trying to do with Fisherman's Landing, and still deep in discussion with Shell," he told reporters on a conference call.

Although Arrow would like to do a deal sooner rather than later, Chief Executive Nick Davies said there was plenty of time to organize something with Shell.

"We're talking 2014, 2015 so there's no rush to conclude commercial negotiations," Davies told reporters, referring to Shell's target date for first LNG from its proposed plant at Gladstone.

"We want to get it right for both sides," Davies said.

Arrow shares have rallied in recent weeks amid speculation that Shell could make a full takeover for the company. The speculation was stoked earlier this month when Arrow issued a statement that said it's had discussions about a possible change of control transaction with "parties" but hasn't received any firm offers.

When asked to comment on the discussions by reporters Wednesday, Davies didn't give much away.

"I think you may be reading too much into that statement," he said. "The main thing for us is that we're extremely focused on delivering the Fisherman's Landing LNG project and then the later the Curtis Island project."

"But as a matter of course we will always be checking the market to see what the viable alternatives are."

Around a dozen LNG projects are earmarked for construction in Australia and Papua New Guinea with five of them hoping to build at Gladstone using Queensland's coal seam gas reserves as feedstock. Coal seam gas has never been used as feedstock for an LNG plant.

The untried nature of the process and fears of a possible LNG supply glut have raised doubts that some plants will find customers and financing.

Shipping company and major Liquefied Natural Gas Ltd. shareholder Golar LNG has agreed to buy gas from the Fisherman's Landing project but it's still looking for an end customer to on sell the gas to.

Scott said potential financiers are showing strong interest in the Liquefied Natural Gas Ltd. project and the associated pipeline infrastructure and upstream development component of the project to be borne by Arrow.

Fisherman's Landing is seen by some financiers as a "great entry point," he said.

"It's a smaller commitment from them that really establishes their credentials in financing for the Gladstone LNG projects," he told reporters.

"My feeling at the moment is very positive but it's still relatively early in the process."

Arrow on Wednesday reported an expected surge in full-year profit after it sold 30% of its local and 10% of international coal seam gas assets to Shell last year. Net profit for the year to June 30 surged to A$366.9 million from A$37.2 million a year earlier.

Earnings before interest, tax, depreciation and amortization excluding proceeds from asset sales fell to A$20.6 million from A$59.6 million, but rose to A$59.6 million excluding non-recurring foreign exchange losses and the impact of planned maintenance on the Townsville Power Station.

Revenue rose to A$112.3 million, from A$91.6 million in fiscal 2008.

The Brisbane-based company said it's on track to make a final investment decision on the upstream component of the Fisherman's Landing plant in the first quarter of 2010. Liquefied Natural Gas Ltd. is targeting a final decision on the downstream component in December.

-by Ross Kelly, Dow Jones Newswires; 61-2-8235-2957; ross.kelly@dowjones.com
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