Chevron Corp. (CVX) Wednesday received the conditional support of regulators in Western Australia state for its A$25 billion Wheatstone gas-export project, a key milestone in its drive to meet fast-growing Asian demand for clean fuels.

The recommendation by the Environmental Protection Authority moves Wheatstone closer to construction, with Chevron aiming to formally approve the project's first two processing units with a combined annual capacity of 8.9 million metric tons of liquefied natural gas later this year.

"This marks an important step towards a final investment decision in the second half of 2011 on one of Australia's biggest resource projects," Chevron Australia Managing Director Roy Krzywosinski said in a statement welcoming the EPA recommendation.

International oil companies are racing to develop gas reserves trapped below the seabed in Australia to capitalize on a shift away from crude oil and coal in North Asia, as the fossil fuels are blamed for a worsening pollution problem. In addition, the March 11 earthquake and tsunami in Japan have led many governments to relook plans to use more nuclear power, which could spur demand for alternative fuels such as LNG.

Australia, which currently has two operating LNG plants, could overtake Qatar to become the world's biggest exporter of LNG by the end of the decade if all the proposed projects are built.

Wheatstone is Chevron's second major LNG project it is developing in Australia, after the A$43 billion Gorgon project offshore Western Australia.

Chevron's proposal to build the Wheatstone plant with an output capacity of up to 25 million metric tons of LNG a year near the coastal town of Onslow should be allowed to proceed as long as the local environment is protected, EPA Chairman Paul Vogel said in statement.

Chevron plans to make a final investment decision on Wheatstone's first phase in the second half of 2011, subject to approvals from the Western Australian and federal Governments.

The project aims to deliver LNG--a natural gas supercooled to a liquid form so it can transported by ship--to customers in Japan and South Korea from 2016.

Chevron's proposal could be implemented with stringent conditions to limit the impact on the environment, which include risks from "one of Australia's largest marine dredging campaigns," Vogel said.

The EPA recommended that Chevron offset its reservoir gas emissions and be subject to strict dredging conditions to minimize disruptions to coral reefs and marine fauna, including whales and turtles.

The EPA's report to the Western Australian state government is now subject to a two-week public appeal period closing June 29, Vogel said.

"We believe the environmental and social impacts can be effectively managed and we will now review the EPA report," said Brian Smith, Chevron's general manager of Wheatstone.

"The front-end engineering and design phase of the Wheatstone Project is complete and we are continuing to work with government to obtain timely project approvals," he said in a statement.

Chevron is the operator and 73.6% owner of Wheatstone, alongside minority partners Apache Corp. (APA), Kuwait Foreign Petroleum Exploration Co. and Royal Dutch Shell PLC (RDSB).