Arrow Energy NL plans to establish a coal seam gas base in the energy-hungry Chinese market, to capitalise on China "s higher gas sales margins and the country"s ambitious targets to develop its huge coal bed methane (CBM) resource.

Arrow's chief executive Nick Davies says the deal with US-owned Orion Energy International Inc, which specialises in CBM operations and services in China , was identified by Arrow's international arm Arrow Global CBM Pty Ltd.

Nick Davies says Orion has the rights to operate coal seam methane businesses in two concessions in China and would provide an entry point into China for future growth.

He says the deal proves the merits of the company's recent acquisition of a portfolio of international CBM opportunities encompassing China , India , Indonesia and Vietnam .

"Arrow is confident of replicating its success as one of the pioneers of the Australian coal seam gas industry in China , which has one-sixth of the world's total CBM resource," he says.

"Arrow Global CBM and Orion will undertake a joint study of two concessions in China's CBM-rich basins of Ordos and Qinshu, gaining a 5% share in both blocks with the option to farm in for a further 25% based on funding a work program of up to $10 million."

Already the world's second-biggest energy consumer, the deal offers significant opportunities for both companies to grow their businesses in China by capitalising on their existing in-country relationships and extensive databases, Nick Davies says.

"The study phase of the farm-in is set to be completed within two months, after which the assets will add to Arrow Global CBM's portfolio," he says.

"Arrow Global CBM is targeting adding further assets in Indonesia and Vietnam to its portfolio, and these together with Arrow's Indian tenements will form the basis of our planned international IPO of Arrow Energy International later this year."

Arrow announced on January 18 the acquisition of 50% of the issued capital of Arrow Global CBM, with a two-year option to acquire the remaining equity.

" India , China and Indonesia have enormous potential resources of coal seam gas, and all three are experiencing long-term critical supply shortages of gas," Nick Davies says.

"Following the award of three CBM blocks in India in October last year and our deal to farm in to Indonesian tenements announced last December, Arrow continues to add international assets as part of our long term, high margin strategy with the overall goal of becoming the region's technical partner of choice."