(Adds BHP comment)
MELBOURNE, Aug 11 (Reuters) - New South Wales agreed to pay BHP Billiton (LON:BLT) A$220 million ($170 million) to buy back a coal exploration licence that extends under prime farmland in the state's eastern Liverpool Plains, the government said on Thursday.
"After careful consideration, the NSW Government has determined that coal mining under these highly fertile black soil plains... poses too great a risk for the future of this food-bowl and the underground water sources that support it," Premier Mike Baird said in a release.
The agreement relates to a commercial exploration licence in the state's northeast, at Caroona, for underground coal mining covering approximately 344 square kilometres. BHP bought the licence for A$100 million in 2006.
"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," BHP Billiton Minerals Australia President Mike Henry said in a statement.
Baird also indicated that negotiations with China Shenhua Energy Co Ltd 601088.SS , whose Watermark coal mining title extends into the area, had also begun.
China Shenhua did not immediately respond to an emailed request for comment.
Shenhua bought a licence to develop the A$1 billion Watermark thermal and semi-soft coking coal project seven years ago, but development was delayed following lengthy assessments and modifications to plans in response to concerns raised by farmers. ($1 = 1.2963 Australian dollars)