The Victorian Government will introduce legislation today to permanently ban fracking following what the Premier described as "one of the most amazing community campaigns" in Australian history.

Fracking is used to extract so-called unconventional gases such as coal seam, tight and shale gas by pumping high-pressure water and chemicals into rock, fracturing it to release trapped gases.

There has been fears the chemicals could contaminate groundwater supplies and threaten agricultural industries.

The Victorian Government held a parliamentary inquiry into unconventional gas industries and announced earlier this year it would bring in a permanent ban.

Premier Daniel Andrews said there was a strong community campaign against fracking and unconventional gas.

"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 occurs in all other states except the Northern Territory, with the most by far in Queensland.

Government to pay compensation to licence holders

The previous Government introduced a moratorium on fracking in 2012, but there are still companies holding exploration licences to look for unconventional gas deposits.

Resources Minister Wade Noonan said the Government would compensate licence holders because of the ban.

"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."

Lakes Oil to continue legal action

Mr Noonan said there were about 17 licence holders in Victoria, including Lakes Oil, which is part-owned by Gina Rinehart's Hancock Prospecting and holds exploration licences for areas of Gippsland and the Otways.

It has launched legal action in the Supreme Court of Victoria over the Government's move to introduce the ban, seeking a judicial review.

The oil and gas exploration company said it would continue with legal action against the Government's planned ban.

Lakes Oil is not exploring for coal seam gas, but had to halt drilling for tight gas at Seaspray in Gippsland when all onshore drilling was banned in 2014.

The company launched a judicial review into the Government's plans to ban unconventional gas industries and onshore drilling.

Lakes Oil Chief Executive Officer Roland Sleeman said the review would go ahead.

"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," he said.

Mr Sleeman said $200,000 was nowhere near what Lakes Oil had already spent on exploration.

"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.

Mr Noonan said he could not comment on that action, as it was before the courts.

Premium meat markets 'secure' thanks to fracking ban

A small crowd of anti-coal seam gas campaigners gathered on the steps of Parliament in Melbourne to welcome the bill.

Hamilton farmer Mal Rowe said fracking could undermine lamb and beef producers. ( ABC News: Stephanie Anderson )

Farmer Mal Rowe, from Hamilton in the state's west, said communities have been fighting for a ban for a long time.

"It just makes our livelihoods, farms across Victoria, so secure," he said.

"We produce probably some of the best prime lamb and premium beef in Australia that goes to both domestic and international markets.

"If those markets realised that the produce we were providing for them came from a gas field, I'm sure that those markets would be compromised."

The Government has also extended its ban on onshore drilling for conventional gas until 2020, saying it would take time to look at the economic and environmental impacts.