By Gwladys Fouche

OSLO (Reuters) - Norway is deciding whether to team up with China to explore for oil in Iceland, Icelandic authorities said, setting up a rare cooperation for the two 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 license with Chinese oil firm CNOOC to look for oil in the waters between Iceland and Norway's Jan Mayen, a tiny speck of land in the Arctic.

Communications between Beijing and Oslo have been mostly cool since the 2010 Peace Prize and collaboration in Iceland may be a signal that relations are on the mend.

"We expect an answer from the Norwegian authorities in the last week of November," said Gudni Johannesson, director-general of Iceland's National Energy Authority, emphasizing that there had been no diplomatic tensions over the issue.

"It has been a quite normal administrative process," he told Reuters.

Norway's Conservative-led government took office last month and China has signaled that it was up to Norway to repair the relationship, which has damaged business ties and prevented Statoil from exploring for shale gas in China.

Iceland awarded its first two licenses in January. In June it gave CNOOC and Icelandic firm Eykon Energy a further license as it seeks boost its fragile economy.

At the time of the announcement, it was the first time a Chinese oil firm was licensed to look for oil in the Arctic.

Under a 1981 treaty, Norway has a right to take a 25 percent stake in the licenses.

It did so with the first two licenses Reykjavik awarded in January, to London-listed Faroe Petroleum and Canada's Ithaca Energy together with local Icelandic partners.

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 it signed a free trade deal with Iceland, abolishing tariffs between the two.

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

There are no figures for how much oil and gas the area where the licenses lie could hold.

But the area off Norway's Jan Mayen island, geologically similar, could hold 566 million barrels of oil equivalent, according to a February survey by the Norwegian Petroleum Directorate. That is the equivalent of a sizeable North Sea field.

The Norwegian oil and energy ministry, which is taking the decision, declined to comment. A representative of CNOOC was not immediately available to comment.

(Editing by Keiron Henderson)