ExxonMobil has announced it will not extend the life of its Sable offshore energy project. (CBC)

Nova Scotia Energy Minister Bill Estabrooks says the news that ExxonMobil will not extend the life of its Sable offshore energy project is a "huge concern" for the government.

"We're looking at the fact that we have had some good income over the last couple of years, but it's something that we're going to address in a timely fashion and we're going to continue to make some of the tough budgetary decisions ahead," he said.

The project has generated $1.3 billion in royalties for the Nova Scotia government since production began in 1999.

A senior policy analyst with the Atlantic Provinces Economic Council said the loss of hundreds of million of dollars of revenue will have a significant impact on the province's finances.

"It's obviously fairly significant to the government — $173 million this year. That's a lot of revenue to make up. Obviously, if the government had to make that up with another HST increase, they'd have to probably increase the rate by 1.5 or two per cent, to put it in perspective."

ExxonMobil made its decision after evaluating significant untapped discoveries in the Sable Basin. In March, the company applied to conduct seismic testing to explore two previously identified gas fields under the seabed east of Sable Island.

The decision not to proceed was based on "project economics," said ExxonMobil spokesperson Merle MacIsaac. He said the company considered factors such as the cost of development and assumptions around price before deciding not to develop other discoveries near Sable Island.

"It's a serious morale kick," said Paul McEachern, managing director of the Nova Scotia Offshore/Onshore Technologies Association, a trade group for the oil and gas industry.

"There are hundreds of people in this province that depend on Sable gas to make a living. There are a lot of hospitals and a lot of roads that depend on Sable natural gas royalties."

A second, smaller offshore project is expected go into production at Deep Panuke in 2011. EnCana will produce natural gas from the Deep Panuke field, about 250 kilometres southeast of Halifax on the Scotian shelf.

"The glass is half-full, it's not empty. It's not full stop, we're just in neutral for a while," Estabrooks said.