* First REDD forest carbon project approved in Indonesia
* Investors including Gazprom to earn carbon offsets
* Approval marks end of four years of troubled negotiations
By David Fogarty
SINGAPORE, Dec 5 (Reuters) - Indonesia on Wednesday approved a rainforest conservation project that sets aside an area roughly the size of Singapore and rewards investors with tradable carbon credits in the first of its kind to win formal backing in the country.
Four years in the making, the Rimba Raya Biodiversity Reserve will protect nearly 80,000 hectares (200,000 acres), much of it carbon-rich peat swamp forest at risk of being felled for palm oil plantations.
Russian energy giant Gazprom and German insurance firm Allianz are backers of the project, the world's first on deep peat.
A senior Indonesian official announced the approval on the sidelines of U.N. climate talks in Doha, Qatar. Forestry Minister Zulkifli Hasan signed a letter last week saying the project had passed all the key steps. Reuters has seen a copy.
"We hope projects like Rimba Raya will lead the way in proving that conservation can address the rural development needs of the communities and also preserve our forests for generations to come," Hasan said in a statement.
Indonesia has the world's third-largest expanse of tropical forests but these are disappearing quickly in the rush to grow more food and exploit timber and mineral wealth. Forest clearance is a major source of greenhouse gases.
By saving the forest and locking away planet-warming carbon, investors such as Gazprom will receive carbon credits they can sell for profit or use to cut their own emissions. Money from credit sales will also fund local livelihood projects.
The project area, in Central Kalimantan province on Borneo island, is brimming with rare animal species and adjoins a national park. It is designed to be a sanctuary for endangered orangutans.
Rimba Raya is part of a U.N.-led scheme called reducing emissions from deforestation and degradation (REDD). The aim is to show forests can pay for themselves and compete with powerful palm oil, mining and timber interests.
It challenges Indonesia's often poor conservation record and lax enforcement where national parks are illegally logged. Palm oil firms have also been found guilty of flouting laws and illegally clearing forest for plantations.
"This is a small but significant step in terms of contributing to the government's efforts to reduce carbon emissions and showing that larger volumes of forest carbon credits can be sold to credible buyers," said Andrew Wardell, programme director, forests and governance, at the Center for International Forestry Research in Indonesia.
But he said REDD projects remain costly to develop and validate.
Over Rimba Raya's 30-year life, the project will generate about 104 million credits, each representing a tonne of carbon. In total, that equates to 300 million to 500 million euros ($390 million to $650 million) based on current market rates for REDD carbon offsets.
Hasan's comments mark a dramatic swing in Rimba Raya's fortunes.
The project initially met all the ministry of forestry milestones and look set for approval in 2010. But it fell foul of opaque land use rules and pressure from a palm oil firm.
After being approved to cover 90,000 ha, the project in early 2011 was slashed in half, jeopardizing its viability. The ministry cited overlapping claims to the land. The ministry also granted palm oil firm PT Best Agro International 9,000 ha of land previously allotted to the Rimba Raya project.
A Reuters special report last year on the project highlighted the ministry's about-face and the mismatch between the government's green goals and the power of palm oil firms.
After the Reuters story, the project found powerful backers that eventually restored the ministry's support.
These included Indonesian businessman Rusmin Widjaja, who stepped in as a white knight to use his influence and financial backing. Singapore-based Widjaja supplies flight simulators to the Indonesian military but also invests in waste-to-energy projects. He recently told Reuters of his worries about the rapid loss of Indonesia's forests.
"Forests in Indonesia need good governance, need clear rules and this project is a good for Indonesia and the world. That's why I wanted to save this project from disarray," he said.
Central Kalimantan governor A. Teras Narang also offered critical support in letter last month seen by Reuters.
Perhaps most influential, though, is Triwatty Marciano, a special adviser to Rimba Raya and wife of the Marciano Norman, the head of Indonesia's State Intelligence Agency.
Ibu Watty, as she is known, helped resolve differences within the ministry and overcome opposition from PT Best. In a July 2012 letter to the ministry approved by Best President Director Winarto Tjajadi, and seen by Reuters, the firm effectively renounced its claim to any overlapping concessions in return for replacement land elsewhere.
For the project developers, Americans Todd Lemons and Jim Procanik, it marks the end of long and at times bitter process.
"Our mistake was in assuming that the logic of REDD and Rimba Raya was self-evident," said Lemons, CEO of project development firm InfiniteEARTH.
Both men, along with Gazprom, invested heavily in Rimba Raya to ensure it met the toughest verification standards. Credits are expected to start to flow to Gazprom, Allianz and other buyers in early 2013.