The decision secures up to 1,400 jobs at the Harland and Wolff shipyard in Belfast which has won the order to build the floating production vessel for the field.
Schiehallion, operated by BP, is the second-largest oilfield after Scott to be approved in the last 10 years. It has recoverable reserves of 340 million barrels, with the first oil expected to start flowing in 1998.
Tim Eggar, minister for energy and industry, said the development would play an important role in establishing the region as an important new oil province.
BP and its partners should be congratulated for "surmounting the hostile environment" in an area known in the industry as the Atlantic frontier. BP, which this year also starts production in the Foinaven field west of Shetland, has 33.35 per cent of Schiehallion with Shell holding a further 33.35 per cent. Other partners include Amerada Hess, Aran (owned by Statoil), OMV and Murphy Petroleum.
The contract for the design, engineering and production of the production vessel goes to the Atlantic Frontier Alliance - a group including Brown and Root and Harland and Wolff.
The pounds 400m new-generation specialist floating production, storage and offloading vessel will be largest of its kind. It will eventually be moored 120 miles off the Shetland Islands in water up to 1,500ft deep and will have the capacity to process about 140,000 barrels of oil every day. One controversial decision as yet outstanding is where the crude will be landed.
Sullom Voe in Shetland and Flotta in Orkney are vying for the deal but one option may be to send the crude direct to European refineries.
Mr Eggar said: "This order will establish the company as one of the most experienced builders of this type of specialist vessel, and should lead to orders from all over the world."
Separately, Shell Expro, a joint venture with Exxon, said it awarded the contract for the onshore recycling and disposal of its North Sea Leman BK gas compression platform to Able, a UK firm.Reuse content