The Victorian Government has introduced legislation to permanently ban fracking.

After what Premier Daniel Andrews called “one of the most amazing community campaigns” in Australian history, the state will now turn its existing moratorium on hydraulic fracturing into a permanent ban.

Fracking is a controversial technique that involves the pumping of high-pressure water and chemicals into the ground, fracturing open rocks release trapped resources.

But there are significant fears that the chemical cocktails used in fracking could leak into the surface environment or groundwater, threatening agricultural industries.

The Government has also extended its ban on onshore drilling for conventional gas to 2020.

Premier Daniel Andrews said it would have been hard to ignore the vocal community sentiment.

“This is a triumph of one of the most amazing community campaigns that our state and indeed our nation has ever seen,” Mr Andrews said.

“Local communities have put an elegant and articulate argument, and we have responded to that.”

Fracking is allowed in all other states except the Northern Territory, and is used significantly more in Queensland than in any other state.

A number of companies have been left holding exploration licences for unconventional gas deposits in Victoria, which have now been rendered useless.

Victorian Resources Minister Wade Noonan said there would be compensation.

“I think it's important to preserve Victoria's place as a reliable place to do business,” Mr Noonan said.

“Where a licence holder is prepared to voluntarily relinquish that licence, a reasonable payment can be made to that licence holder, capped to essentially cover expenses.

“If you're looking for a figure, in the case of New South Wales it was capped at about $200,000 [per licence] and we think that's about the mark.”

One of those licence holders - Lakes Oil, which is part-owned by Gina Rinehart's Hancock Prospecting - has launched legal action in the Supreme Court of Victoria over the ban, calling for a judicial review.

Lakes Oil was forced to halt drilling for tight gas at Seaspray in Gippsland under the moratorium on onshore drilling in 2014.

“We are not going to walk away from the acreage that we have on the cusp of commerciality … we're not going to walk away from that for a relative pittance of money,” Lakes Oil CEO Roland Sleeman said.

Mr Sleeman said the company had been offered $200,000 in compensation, which was barely a fraction of what Lakes Oil had already spent.

“By way of putting some logic behind that statement, Lakes Oil in the last 30 odd years has spent well over $80 million exploring for oil and gas in Victoria,” he said.