Chief Minister Terry Mills announced the news in Parliament today.
The news will come as a relief to the people of Nhulunbuy, who had feared that hundreds of jobs would be lost if the refinery was shut down.
The mining company's decision to keep the facility operating follows an announcement this week by the Northern Territory Government to offer the refinery, operated by Rio Tinto subsidiary Pacific Aluminium, 10 years' worth of its domestic gas supply.
The gas is supplied by Italian energy company Eni and is sourced from the Blacktip field, off the north-west coast of Australia.
It is piped to Wadeye, about 250 kilometres south-west of Darwin.
Mr Mills said the Rio Tinto decision would lead to a $1.2 billion project to supply gas to Gove.
He said this would comprise about $500 million in infrastructure upgrades to allow Eni to move gas from the Blacktip field to Gove, $200 million for Pacific Aluminium to convert generators to gas operation, and $500 million to construct a gas pipeline.
Rio Tinto wants the Federal Government to underwrite the pipeline construction
Federal Resources and Energy Minister Martin Ferguson said Canberra would consider the proposals "as quickly as practical".
"This decision is highly beneficial for the Northern Territory," he said.
"It will now encourage onshore and offshore exploration that, in all likelihood, would result in new gas being brought to market, and the increase in supply having a real impact on domestic prices."
Pacific Aluminium chief executive officer Sandeep Biswas says commercial arrangements for the gas supply still need to be negotiated before a pipeline becomes a reality.
"The plan is that gas to Gove will be available in 2016," he said.
He says the refinery will continue to run on fuel oil until then.
"Then we'll have a changeover in 2016 as we convert our diesel-fired boiler and kilns over to gas."
Analysts say the gas offer was an attractive option for Rio Tinto to extend the life of its Gove mine and refinery, and also to improve the value of the operation if they choose to sell it.
Mr Mills said the complex negotiations to get gas to Gove highlighted the need for a national pipeline grid, connecting the Territory with existing pipelines infrastructure across Australia.
Nhulunbuy residents and traditional owners have welcomed the Rio Tinto decision.
Northern Land Council chairman Wally Wunungmurra says he is very happy for the future of the town and the thousands of Yolgnu people living in East Arnhem Land who use it as a service hub.
"Good news, very good news," he said.
"It made me so happy.
"If Rio Tinto had of closed this, it would have left our life in a very big mess."
Local newsagency owner Judy Carter says she is thrilled.
"I'm thrilled for not only myself, but for the miners, for the contractors and for the whole region of North-East Arnhem Land," she said.