Norway to join Chinese firm in Iceland oil exploration

* Norwegian, Chinese relations nearly frozen

* Norway to join CNOOC (HKSE: 0883.HK - news) 's licence off Iceland

* Norway has right under 1981 treaty to take licence stake

OSLO, Nov 22 (Reuters) - Norway said it would team up with a Chinese firm to explore for oil offshore Iceland, in a rare cooperation for the two countries since a diplomatic row over the award of the 2010 Nobel Peace Prize to Chinese dissident Liu Xiaobo.

Norway has the right to join an exploration licence with Chinese oil firm CNOOC in the waters between Iceland and Norway's Jan Mayen island, and Norway's government decided it should participate.

"Icelandic authorities are now planning to allocate an additional licence as part of the second licensing round, and Norway should participate," the oil ministry said in a statement on Friday.

Diplomatic ties between Beijing and Oslo have been virtually frozen since the 2010 Peace Prize, and collaboration in Iceland may be a sign that relations could be improving.

Under a 1981 treaty, Norway has a right to take a 25 percent stake in Iceland's oil licences.

Iceland awarded its first two licences in January, in which Norway decided to participate. In June it gave another licence to CNOOC and Icelandic firm Eykon Energy, the first for a Chinese firm to look for oil in the Arctic.

China is keen to find natural resources, and the Arctic could hold some 90 billion barrels of oil equivalent, according to the U.S. Geological Survey. In April China signed a free trade deal with Iceland that abolished tariffs.

Norway's Conservative-led government took office last month, and China has signalled that it is up to Norway to repair the relationship, which has damaged business ties and prevented Statoil (Xetra: DNQ.DE - news) from exploring for shale gas in China.

Iceland, still recovering from the 2008 financial crisis, is keen to develop its natural resources to help spur its economy.