The move also raises doubts about the even bigger Watermark mine, an open-cut venture planned for a nearby region by China's Shenhua group.

Caroona, by contrast, was to have been an underground mine.

Premier Mike Baird and Deputy Premier Troy Grant on Thursday said the government had reached a commercial agreement with the world's biggest miner to purchase its Caroona exploration licence, covering about 344 square kilometres in the Liverpool Plains.

The company had paid $100 million for the licence, issued in 2006, to mine the coal used in power plants. It is understood the payment of $220 million, which took into account inflation, would leave "not a huge gap" for BHP Billiton to pick up.

"While we believe that Caroona would have been developed responsibly, we accept the government's decision and appreciate its willingness to work with us to agree an acceptable financial outcome for the cancellation of our exploration licence," Mike Henry, president of the Australian division of BHP Billiton Minerals, said.

Mr Baird said the decision to buy back the Caroona licence followed advice from the NSW Planning Assessment Commission, which recommended mining be banned on the black soil plains.

"After careful consideration, the NSW government has determined that coal mining under these highly fertile black soil plains, as proposed by Labor, poses too great a risk for the future of this food bowl and the underground water sources that support it," Mr Baird said in a statement.

It is understood that BHP Billiton was less prompted by the fall in coal prices than the fierce response generated by the approvals given to the Shenhua coal mine, with Caroona "next in the queue".

Caroona would have been mined for 30 years, with the main target market Asian customers seeking its low-emission coal. At its peak, the mine was expected to produce up to 10 million tonnes of a coal a year.

The buyback has implications for Watermark, with the government saying it had begun negotiations to purchase parts of the Shenhua mine that would encroach on the plains.

Talks were likely to take months, Fairfax Media understands. Shenhua paid $300 million for its licence in 2008.

"It's really an expensive gift to give to BHP," Tim Buckley, an analyst with the Institute for Energy Economics and Financial Analysis, said. "There was no need to give them compensation."

Local farmer and activist Tim Duddy welcomed the BHP move and said it means that "Shenhua's mine is valueless today".

"But these lands need to be protected by being included in the [State Environmental Planning Policy] as agriculture," Mr Duddy said, preserving them from all extractive operations, including coal seam gas.

Adam Searle, the opposition energy spokesman, said the government had paid "a very significant amount of public money and there must be full disclosure of why it is being paid and how the amount was determined".

"What is the motivation of the NSW government here: to protect vital agricultural land or compensate a major commercial player for a failed investment?" Mr Searle said. "What are the implications for other controversial licences impacting valuable agricultural lands?"

Jeremy Buckingham, the Greens' energy spokesman, said Thursday's buyback marked a "historic victory for farmers, Greens and the community who have fought a decade-long campaign to save the Liverpool Plains from coal mining".

"The NSW government have today woken up to the reality that new coal mines are unviable and the Greens are calling on Mike Baird to commit to a transition plan away from coal," he said, adding that the next move should be to cancel plans for the Watermark mine, KEPCO's Bylong project and Hume Coal's Berrima proposal."

Matt Brand, chief executive of the NSW Farmers, said his group was pleased to see the government protecting "iconic food-producing regions".

"This has been one of NSW Farmers' heartland issues for almost a decade," Mr Brand said. "We look forward to the same protections being extended to agricultural land and resources impacted by the Shenhua Watermark licence."

BHP's work in the region included drilling about 400 bore holes to model the aquifers and other features, and taking some 500 soil samples.

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