The proposal by Enertrade involves the development of a new coal bed methane production field near Moranbah by gas supply company CH4, which is an operation of Macquarie Bank's private equity investment arm.

The proposal also involves the construction of 391km, 250mm diameter pipeline from the field to Townsville and nearby Yabulu as well as the conversion of the existing open cycle peaking plant at Yabulu to a 220 megawatt combined cycle, base-load gas-fired power station.

Queensland Deputy Premier and Treasurer Terry Mackenroth said the decision was in line with government strategy to have its state electricity retailers source at least 13% of its fuel from gas.

The project is expected to create 8000 full-time equivalent jobs over the first decade, boosting employment in the region by 5.43%.

The decision was a big, but not fatal blow to the $US3.5 billion PNG-Queensland Gas Project, whose partners are in gathering in Port Moresby for the formal signing of an agreement with the PNG Government covering fiscal terms for that project.

One of the participants in the pipeline project, Oil Search, saw its share price slump 19 cents to close at 88c, as the market digested the loss of one of the potential PNG pipeline markets.

"Oil Search is disappointed with the Premier's announcement, at least on a preliminary evaluation. Oil Search will discuss the ramifications of this development with the other PNG-Queensland Gas Project sponsors, with customers and with the PNG Government," Oil Search said in a statement to the market.

Another participant, ExxonMobil, said the Queensland Government's decision meant it would have to evaluate its position however the company remained positive because of negotiations with a number of customers were at an "advanced" stage.

Origin Energy, an unsuccessful bidder who was also pushing a coal bed methane proposal, said the decision was a great result for the Queensland CBM industry.