"We are developing ground-breaking technology," Prime Minister Jens Stoltenberg told a news conference.

The plan calls for the creation of a technology company, in which the state would initially own an 80 percent stake, to develop CO2 capture and storage in Mongstad, where Statoil plans to build a gas-fired power plant to feed its nearby refinery.

The technology advances made by the company could pave way for even bigger CO2 capture projects, which have so far been held up by high costs and unclear or undeveloped regulation.

"We see this is primarily a technology development project, which could lead to cost cuts that allow companies to do similar projects without public support," Petroleum and Energy Minister Odd Roger Enoksen told Reuters.

He said Norway may spend 4 billion crowns (US$594 million) to build the facility, which aims to capture 100,000 tonnes of CO2 in 2010 and meet final capacity of 1.3 million tonnes in 2014.

Earlier, Norway's environmental authority demanded the power plant to be equipped to capture CO2 emissions from the start, but Statoil said this requirement would derail the project.

In a statement, Statoil said the government "accepts the principal responsibility" for meeting the cost of capturing, transporting and storing carbon dioxide.

PUBLIC AID REQUIRED

The International Energy Agency expects global energy demand to increase 60 percent by 2030, with fossil fuels set to remain the dominant source for power, and emissions of greenhouse gasses seen rising accordingly, potentially influencing global weather.

Storing heat-trapping gasses is not economically viable unless the prices of permits to emit more CO2 jump, making it more costly not to capture the emissions.

Energy-rich Norway, unlike many other states, can inject CO2 into subsea petroleum reservoirs to help push oil to the surface. But even with this benefit, CO2 projects are not economically viable without state aid, studies have shown.

Statoil and Anglo-Dutch major Shell seek state aid to build a planned US$1.5 billion power plant-CO2 capture facility at the Norwegian firm's Tjeldbergodden methanol complex.

The CO2 would then be piped to Shell's Draugen oilfield off Norway and later also to Statoil's Heidrun field.

"We need to know how much and in what way the state plans to contribute and kick-start this project," Kai Lima, manager of the Halten CO2 project for Statoil, told Reuters on the sidelines of a conference about CO2 storage in Oslo.

The government also has to clear legal obstacles hampering such projects, such as amending international marine pollution agreements which may bar firms from "dumping" CO2 waste offshore. It is also not clear when countries should take over liability for maintaining the storage facility from companies.