The High Court in London ruled against Greenpeace and Uplift, who argued that the licencing round had not taken into account the greenhouse gas emissions from burning the newly-extracted fossil fuels.
Greenpeace said it planned to appeal, with Uplift adding it was considering its next move.
"If you told most people that the government is allowed to approve new oil and gas while ignoring 80 percent of the emissions it would produce, they simply wouldn't believe you," Philip Evans, Greenpeace UK's climate campaigner, said following the court's decision.
"This is completely irresponsible behaviour from ministers during a climate crisis. That's why we will be appealing, and hope this ruling will be overturned.
Uplift executive director Tessa Khan described it as "a deeply disappointing decision".
Welcoming the judge's ruling, the Department for Energy Security and Net Zero said that while the government was "decarbonising our economy and scaling up homegrown clean energy, the transition cannot happen overnight and we'll continue to need oil and gas".
The Conservative government also argues that drilling for new oil and gas is necessary to boost Britain's energy security after Ukraine's invasion by Russia -- a key producer of fossil fuels -- sent energy prices soaring on tightened supplies.
Thursday's ruling comes after the UK government last month authorised oil and gas production in its largest undeveloped field -- and decided to dilute its net zero targets.
Prime Minister Rishi Sunak has softened policies aimed at the UK achieving net zero carbon emissions by 2050.
Specifically, he announced in September that a ban on the sale of petrol and diesel cars would be pushed back to 2035 from 2030.
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