Shell will drill for gas in the Great South Basin, which had been predicted by optimistic Southland leaders this week.
The Energy giant had a government-imposed deadline of Friday to make its decision.
Shell said after careful consideration, the Great South Basin joint venture parties Shell New Zealand, OMV New Zealand Ltd and Mitsui E&P Australia Pty Ltd had made a decision to take up the option to drill an exploration well in the PEP 50119 block.
The timing of the drilling programme will be determined following detailed planning and will most likely target the early 2016 summer.
Shell New Zealand country chairman Rob Jager said it had not yet been decided if operations would be based from Bluff or Dunedin.
"We are very grateful to the communities of Otago and Southland for the way in which they have engaged with us so far," he said.
"We will ensure that open and honest engagement with all interested parties continues as the project matures towards the drilling campaign."
Southland economic leaders said this week if drilling proceeded, Southland would not see any immediate financial impact but there could be future possibilities for the region.
- The Southland Times