"The board of BG Group ... confirms that it is in advanced discussions with Royal Dutch Shell regarding a possible offer by Shell for BG," it said in a statement on Monday night, London time.
"There can be no certainty that any offer will ultimately be made for BG.
"A further announcement will be made shortly."
A spokesman from Shell, which has a market capitalisation of £135 billion, declined to comment.
Shell arguably has some money to play with having slashed its stake in Woodside Petroleum from 23% to just 4.5% last June by selling 78.27 million shares to institutional investors at $A41.35 per share, for a grand total of $US2.7 billion ($A3.53 billion).
At the time, Woodside also announced it had signed a buy-back agreement with Shell to purchase an additional 78.3 million shares.
Shell's stake in Woodside were a legacy from its 2001 takeover bid of Woodside which then-Treasurer Peter Costello rejected.
Shell, which had $US21.6 billion in cash and short-term investments on hand as of 2014 year-end, also has a relatively new CEO - Ben van Beurden, who took over last year.
He has been selling assets and cutting costs, like his peers, and the company is gearing up for a costly and controversial Arctic exploration campaign off the coast of Alaska.
There has been speculation about Shell-BG talks since the end of last year, following the drop in oil prices.
The deal could resolve Shell's issues with the Arrow LNG project, which it owns half of with PetroChina, after the project was officially cancelled in January.
The Arrow owners have long flagged collaborating with other major players to commercialise the estimated 70,000 petajoules of contingent CSG resource across its acreage in Queensland, and this new deal could enable Shell to send it through QCLNG.
The news of the potential acquisition of BG comes just days after BG confirmed that its new CEO Helge Lund had poached Katie Jackson, formerly with Shell, who oversaw Statoil's M&A strategy under Lund when he was at the Norwegian major before himself being poached by BG.
Jackson will become BG's vice president of its global strategy and business development under Lund, the company's third CEO in as many years who took over on February 9.
BG is the third-largest UK-listed energy company after Shell and BP, but analysts have recently positioned the company as a takeover target after it slumped to a pre-tax loss of $US2.3 billion ($A3.01 billion) for the full year, down from a pre-tax profit of $3.9 billion in 2013.
BG also cut 15% from its 5000-plus staff, has flagged plans to slash this by a further 10% in 2015, and was forced to write down its oil and gas assets by $9 billion in February before parachuting Lund in to start a month early.
