Natural Resources Minister Andrew Cripps says the Queensland Government plans to approve the development of a commercial shale oil industry, but only under strict environmental conditions.
Mr Cripps says existing shale oil operator, Queensland Energy Resources (QER), will be able to progress its trial plant in Gladstone in the state's central region to a commercial stage.
He says the plant has proved it operates well within environmental requirements.
"The new policy will allow the consideration and development of other oil shale deposits in Queensland of course, pending thorough environmental investigation," he said.
He says as conventional crude oil supplies dry up, Queensland could fill the void.
"There is a strong opportunity for Queensland to position itself as a major supplier of oil into the future," Mr Cripps said.
However, Mr Cripps says the previous state government's 20-year moratorium suspending development of the McFarlane oil shale deposit near Proserpine, north of Mackay, will remain until 2028.
Queensland Premier Campbell Newman says the oil shale industry will create thousands of jobs across the state and provide a huge royalty stream into the future.
Mr Newman says the development of the state's burgeoning oil shale industry will occur under strict environmental guidelines.
He says oil shale could become the next major source of liquid fuel supplies in Australia.
"I do accept the criticism about this energy intensiveness, but at the end of the day we are running out of oil," he said.
"If this thing can work and work competitively and provide that fuel source for this state and potentially an export industry from Gladstone, which is well set up to do that, than that is ultimately a win."
Mr Newman says other projects are likely to be developed, although the 20-year moratorium on oil shale development near Proserpine will remain in place.
"In fact I say today that I have grave concerns about any prospect of mining occuring in that area," he said.
"Why - because it's a wonderful pristine coastal environment and it is adjacent to the Great Barrier Reef and I don't think it's tenable to to in there and mine the stuff there."
QER says the Government's approval to move its shale oil plant in Gladstone from a trial to a commercial stage is the first of several steps towards long-term viability.
But QER spokesman John Hewitt says there is still a long way to go.
"We'll be taking a careful step-by-step approach," he said.
"We have challenges to meet to progress this industry, not just environmental as important as that is, but significantly economic challenges."
The Queensland Resources Council (QRC) says the Government's decision is a welcome change.
QRC spokesman Michael Roche says move will help reduce Australia dependence on foreign oil.
"We are rapidly diminished our local production of conventional oil and oil shale provides a huge opportunity to address that problem," he said.
"This decision gives a shot in the arm of confident generally in the resources sector.
"The concept of banning certain commodities as opposed to allowing them to prove their merits on a case by case basis is the way to go."
However, Mr Roche says it is unlikely there will be enough political will to lift the moratorium.
"The deposit near Proserpine is locked up by legislation under a 20-year moratorium and at the moment there's no sign that the Newman Government is going to change that moratorium," he said.
But Opposition environment spokeswoman Jackie Trad says it is a major change in policy that will not be good for Queensland.
"What we have seen from the Newman Government is a repeat of the uranium mining decision in Queensland," he said.
"There is a significant policy shift in terms of resource extraction in Queensland that represents significant environmental concerns and it's one that has been undertaken with no consultation."
Australian Conservation Foundation (ACF) spokesman Tony Mohr says it is a step in the wrong direction.
"The proposal was knocked back years ago because it had huge environmental impacts," he said.
"It's the only oil shale project in Queensland."
He says the shale oil industry still poses a massive risk to the environment.
"Just isolating one particular area isn't really the point here," he said.
"There's a number of shale oil deposits in Queensland that could be exploited but then you still have to take the oil through the Great Barrier Reef channels.
"That's a big threat to the Great Barrier Reef and it doesn't matter if we've just isolated this small part of the Queensland coast that's protected from shale oil."
He says it is surprised by the State Government's decision.
"It was a bit of an 1980s issue - it should have really stayed in the 1980s - it's old technology for an old fuel," he said.
"This proposal was knocked back years and years ago, given it has huge environmental impacts and isn't good for Queensland."
The Mackay Conservation Group (MCG) has also questioned the viability of developing a shale oil industry.
MCG spokeswoman Patricia Julien says oil shale is very hard to mine and process and she cannot understand why the Government is trying to develop the industry.
"They don't tell you that the energy needed to produce it is almost equivalent to the energy you get out of it, so it's hardly a cost-effective way of doing things, let alone the environmental damage," she said.
"The Government really needs to look a bit more carefully about what it's proposing to do."