Rosebank, the UK's largest untapped oilfield, has been granted approval by UK regulators.
The North Sea Transition Authority (NSTA) said consent had been given to owners Norwegian state-controlled Equinor and Ithaca Energy following the acceptance of the environmental statement.
The oilfield off Shetland could produce almost 70,000 barrels per day at its peak, about 8 per cent of the UK's projected daily output between 2026 and 2030.
It could also produce 44 million cubic feet of gas daily, Equinor said.
But critics have raised concerns about its impact on the environment.
Last month, a group of MPs said the oilfield could produce 200 million tonnes of carbon dioxide.
The field is not due to begin pumping oil and gas until 2026 at the earliest and is not large enough to have an effect on energy prices.
However, it was seen as a test case for whether a country such as the UK, which claims leadership in the area of low-carbon policies, should continue to tap fossil fuels.
"We have today approved the Rosebank Field Development Plan which allows the owners to proceed with their project,” said an NSTA representative.
"The FDP is awarded in accordance with our published guidance and taking net-zero considerations into account throughout the project's life cycle."
"As we make the transition to renewables, we will still need oil and gas – it makes sense to use our own supplies such as Rosebank," he wrote in a post on X, formerly known as Twitter.
Equinor ASA and partner Ithaca Energy have now taken a "final investment decision" to proceed with Rosebank, together investing $3.8 billion, a statement from the companies said on Wednesday.
The field is located about 130 kilometres north-west of the Shetland Islands, with total recoverable resources estimated at about 300 million barrels of oil, Equinor’s website says.
Its crude will be transported to refineries by shuttle tankers and the gas shipped to mainland Scotland by pipeline.
During the height of its construction, the oilfield is expected to create about 1,600 jobs and will continue to support 450 UK-based jobs during its lifetime.
"Rosebank stands as the largest undeveloped field in the UK," said Gilad Myerson, executive chairman at Ithaca Energy.
"The Rosebank project will create thousands of jobs and contribute significantly to securing the UK's energy needs for many years to come."
Ithaca shares jumped 7.2 per cent and Equinor rose 0.9 per cent on the news of the approval.
The UK government welcomed the decision by regulators and said it was subject to extensive scrutiny by the regulators, including undergoing a detailed environmental impact assessment process and a period of public consultation before approval.
It said all new projects, including Rosebank, would be in line with the natural decline of the North Sea basin.
"We are investing in our world-leading renewable energy but, as the independent Climate Change Committee recognise, we will need oil and gas as part of that mix on the path to net zero and so it makes sense to use our own supplies from North Sea fields such as Rosebank," said Energy Security Secretary Claire Coutinho.
"The jobs and billions of pounds this is worth to our economy will enable us to have greater energy independence, making us more secure against tyrants like [Russian President Vladimir] Putin.
"We will continue to back the UK's oil and gas industry to underpin our energy security, grow our economy and help us deliver the transition to cheaper, cleaner energy."
Environmental activist group Greenpeace UK said in response that Mr Sunak had proven “once and for all that he puts the profits of oil companies above everyday people”.
"We know that relying on fossil fuels is terrible for our energy security, the cost of living and the climate. Our sky-high bills and recent extreme weather have shown us that,” said Greenpeace spokesman Philip Evans.
Jess Ralston, of the Energy and Climate Intelligence Unit said the decision showed the "Prime Minister has shown that he would rather give tax breaks to oil companies than lower energy bills".
"Taxpayers will fork out around £4 billion to the developers of the oilfield, money that could have insulated millions of homes with many set to be colder and poorer this winter.
“To make matters worse, Rosebank oil will mostly be exported and then sold back to us at whatever price the oil companies can get. So it won't help one bit with energy independence or gas bills, despite the government's rhetoric. New renewables could help but Treasury rules meant that no new wind power was secured at the latest renewable auction."
The UK North Sea was first tapped in the 1960s and production has been in decline for more than 20 years.
That has accelerated in recent years due to lack of investment, with flows through the region’s most important pipeline system down 40 per cent in the past six years, operator Ineos has said.
Permission for the development is consistent with long-standing UK government policy to continue tapping fossil fuels beneath the North Sea but comes at a time of growing tension between energy security and action against climate change.
Last week, Mr Sunak rolled back on several measures that were part of the push for net-zero emissions by 2050.