The NSW government is offering energy company Metgasco $25 million to buy back three petroleum exploration licences in the state's north following a local backlash.
The licences were for the Northern Rivers area and had been the subject of fierce protests by locals worried about coal seam gas developments.
Metgasco's board has backed the government's offer and agreed to end the company's long-running legal dispute with the state over its licences.
While Metgasco's shareholders have yet to vote on whether to accept the offer, green groups have welcomed the government's offer as a victory for "people power".
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"This is a day that people around our region have worked for and wanted for over three years," Gasfield Free Northern Rivers co-coordinator Elly Bird said.
But she added that locals wanted the government to go even further and introduce laws to ensure the area was free of gasfields.
Metgasco chairman Len Gill says board members believed it was in the company's best interests to accept the government's offer, which will be put to a shareholder vote in December.
"While the identified gas resources could have a significant value if developed in an efficient and timely manner, the board has to consider the risks associated with ongoing project approval delays, higher costs and difficulties funding activities over the next few years," he said in a statement on Monday.
Under the deal, the government will compensate Metgasco in exchange for cancelling the three licences and the company withdrawing its development application.
Metgasco and the government will also settle their legal battle over the unlawful suspension of a controversial drilling approval at its Rosella well in Bentley, near Lismore.
Metgasco had threatened to sue the government over the licence suspension in 2014, which came just days before thousands of protesters were expected to blockade the site.
The Supreme Court in April overturned that decision, paving the way for Metgasco to seek compensation and push ahead with its drilling plan.
The deal is part of the NSW government's petroleum exploration licence buyback program aimed at reducing the footprint of possible CSG activity from 60 per cent of the state to less than eight per cent.
"Going forward, our new Strategic Release Framework, outlined in the NSW Gas Plan, will ensure that areas will only be released for exploration following an assessment of economic, social and environmental factors, with community consultation conducted upfront," Energy Minister Anthony Roberts said.
The government's buyback plan has been criticised by the Greens and anti-CSG groups which say the state should reclaim CSG tenements without offering compensation.
Greens NSW mining spokesperson Jeremy Buckingham hailed the buyback as an "historic victory for people power".
"The Greens urge shareholders to accept the generous offer from the government as the only route out of a quagmire," he said.
Shares in Metgasco closed 0.3 of a cent higher at 5.1 cents.
