"A rejection by Arrow could precipitate a formal bid by Shell and PetroChina, which will allow shareholders to make a decision," said John Young, energy analyst at Wilson HTM Investment Group.
"My view is that they (Shell/PetroChina) will need to raise their offer to the high-$5-$6 (per share) range for the deal to go through."
Shell and PetroChina last week offered A$4.45 in cash for each Arrow share, plus a share in a new Arrow entity, in a first foray for a Chinese company in Australia's burgeoning coal-seam gas sector.
An Arrow spokesman said on Monday the firm does not comment on media speculation. He said discussions were continuing.
PetroChina was not immediately available to comment.
Shares in Arrow, which has a market value of A$3.8 billion, were up 1 percent at A$5.25, outpacing a 0.7 percent drop on the broader share index.
Analysts said the offer values Arrow's proven and probable reserves at A$0.88 a gigajoule, much lower than an average A$1.88 a gigajoule for 20 offers in Australia since 2005.
The report came as China National Offshore Oil Corp, China's biggest offshore oil explorer, said it plans to buy a 50 percent stake in Argentina's Bridas Energy Holdings, for $3.1 billion, the latest move by state-backed Chinese firms to secure energy resources to feed China's fast-growing economy.
Analysts at Macquarie and JPMorgan reckon it's unlikely that any white knight will emerge, given that Shell already owns a 30 percent stake in Arrow's domestic gas assets and has partnered a major Chinese buyer for the bid.
However, some market observers noted BP Plc and GDF Suez have previously shown interest in Australian coal seam gas assets and could see Arrow's vast assets as a way to swiftly get a foothold in that sector.
Arrow could also strike a gas sale agreement with Britain's BG Group to boost its cash balance, which would in turn alleviate concerns about its ability to fund the A$2.2 billion Fisherman's Landing liquefied natural gas (LNG) project.
The Australian Financial Review said in an unsourced report that Shell and PetroChina want to scrap Arrow's proposed Fisherman's Landing project in Queensland and divert the firm's sizeable gas reserves into Shell's larger planned LNG facility nearby.
Arrow is now weighing whether it can deliver better returns to shareholders by pursuing its own LNG plans, it added.
Negotiations are expected to have been complicated by the valuation of the target's international business, analysts said, with them sharing a widely differing valuation on Arrow's offshore business that range between 15-74 cents a share.
Separately, Australia's Liquefied National Gas Ltd said it plans to update the market on Monday or Tuesday on the proposed sale of the Fisherman's Landing project to Arrow and put its shares on a trading halt pending that announcement.
LNG Ltd agreed last month to sell its stake in the 1.5 million tonne per year project to partner Arrow, which would allow Arrow to gain full ownership of the development.
Arrow's board, led by CEO and Managing Director Nick Davies, a former BP manager, has recommended shareholders take no action on the Shell/PetroChina offer, which is non-binding and conditional, and appointed Citi and UBS as financial advisers to evaluate it.