May 31 (Reuters) - Indonesia will revoke existing forestry licences held by palm oil and timber firms to save natural forests under a $1 billion climate change deal signed with Norway last week, a government official said on Monday.

Indonesia's president, Susilo Bambang Yudhoyono, who announced the deal last week in Oslo, said new concessions for the conversion of natural forest and peatlands would be suspended for two years. But he did not say at the time how existing concessions would be affected. [ID:nJAK326556].

Preserving forests is seen as crucial to slowing climate change because trees absorb enormous amounts of greenhouse gases.

Indonesia has huge tracts of tropical forests but a rapid deforestation rate. It has pledged to cut emissions by 2020 to 26 percent lower than the level if no action were taken or 41 percent lower if it is able to secure foreign funding and other assistance, like technology.

Part of the $1 billion promised by Norway will be spent on compensating businesses that have existing concessions cancelled in order to keep forests standing, said Agus Purnomo, head of the secretariat of Indonesia's National Climate Change Council.

"When you revoke licences, when you cancel things, it involves money," Purnomo told Reuters by telephone.

"It's not that we will cancel all licences but [only] if there is a need to do so" to keep primary forest intact, he said.

Compensation to permit holders could include cash, land swaps or other "amicable, workable and realistic solutions", he said.

Palm oil firms such as Wilmar (WLIL.SI) and Indofood Agri Resources (IFAR.SI) have ambitious expansion plans in Indonesia, already the largest producer of an oil used to make products ranging from chocolate to soap.

Palm oil and pulp and paper firms are most likely to be affected, said Purnomo.

"But I am not ruling out any possibility. The spirit of the agreement was to save the remaining natural forest and peatland and we will do whatever humanly possibly to make it happen, within the legal context of Indonesia," he said.

"If we have to go through cancellations in the court system, we will do it."

Permit holders will find out within six months if their concessions will be honoured, he said.

"Some of them don't have a valid permit, they are just making a claim," said Purnomo. "If they don't have a valid permit, we are not going to compensate. If they are getting it through bribery, we are not going to give" compensation. (Editing by Sara Webb and Ron Popeski)