Toxic chemicals contained in wastewater from AGL's coal seam gas operations near Gloucester were discharged into Hunter Water's sewage network, an investigation by the water agency has found.

Fairfax Media understands that BTEX chemicals were reported in both the pre- and post-treatment samples of flowback water shipments handled by AGL contractor Transpacific Industries between October and December last year.

BTEX chemicals are banned for use in hydraulic fracturing – or fracking – in NSW and Queensland. The discovery in January of the chemicals - benzene, toluene, ethylbenzene and xylenes – in two of AGL's coal seam gas wells and a storage tank prompted the Department of Resources and Energy and the Environment Protection Authority to order an immediate halt of to the pilot project.

Hunter Water declined to disclose details disclosed by Transpacific.

"Hunter Water has completed its analysis of this material and is currently seeking legal advice on whether it can share this information with a third party," Jeremy Bath, Hunter Water's group manager for public affairs, said.

Hunter Water last year warned AGL and Transpacific on multiple occasions including in letters that it rejected the discharge of even treated CSG wastewater into its system. Of particular concern was that BTEX and other contaminants could kill off bacteria used to treat sewage, potentially triggering a shut down in operations serving Newcastle and the region.

"We weren't confident the water could be treated to a standard that would not damage our wastewater treatment plant," Mr Bath said.

Despite Hunter Water's opposition to the wastewater being released into its network, a brief investigation by the EPA in January had cleared both AGL and Transpacific of any breaches. It is understood that the agency did not contact Hunter Water for updates on its findings.

"It sounds like AGL has some very serious questions to answer," Rob Stokes, environment minister, said.

AGL refused to comment on whether its flowback water shipments contained BTEX. In February, Tim Nelson, AGL's head of economic policy and sustainability, assured an upper house inquiry last month that no waste containing BTEX had been transported to a waste-processing facility since AGL had detected the chemicals in mid-January.

AGL's contractor Transpacific delivered 600,000 litres to its own Kooragang Island facilities.  After Hunter Water discovered the shipments and blocked further discharges, AGL diverted remaining wastewater to Worth Recycling near Windsor - until that company opted to stop taking the waste weeks later.

EPA's role

The EPA said it was up to Hunter Water to manage its Trade Waste Agreement with Transpacific and noted that if any damage resulted from the discharges, the water agency itself might face penalties.

Hunter Water is "licensed by the EPA and required to ensure that the treated effluent (including treated waste waters) that is released from its sewer system does not impact on the environment," an EPA spokeswoman said. "If Hunter Water operates in a manner that is found to result in environmental impacts – then it can be prosecuted by the EPA."

John Watts, a spokesman for Groundswell Gloucester, a group opposed to the AGL project, said regulation of the industry under the Baird government was "clearly woeful".

"This disturbing disclosure once again demonstrates that AGL cannot be trusted and is prepared to treat the community and the environment with contempt," Mr Watts said. "Just as worrying is the role of the EPA as lead regulator in allowing this to happen and then failing to properly investigate. Its investigation was obviously superficial and grossly inadequate."

Campaign view

The timing of the revelation is awkward for the Baird government, which has sought during the election campaign to play up its policy of buying back and cancelling petroleum exploration licences granted by the previous Labor administrations.

On Friday, energy minister Andrew Roberts announced the buyback of three more permits covering almost 10,000 square kilometres in areas near Armidale, Gunnedah and Wisemans Ferry.

Shadow Energy Minister Adam Searle called for a "full and transparent inquiry to get to the truth about what has happened in Gloucester".

"Operations that cannot prove to be safe at every stage of the process should not proceed," Mr Searle said. "Clearly the government's regulatory authorities are in disarray over which one of them is responsible for this problem."

The Greens, who are calling for an immediate and permanent ban on CSG in the state, said it was disturbing that toxic BTEX chemicals were turning up "throughout the wastewater chain".

"The chief scientist warned of 'unintended consequences' from fracking for coal seam gas and her prediction is coming true with a string of incidents," Jeremy Buckingham, a Greens MP, said.

"The EPA is the lead regulator of this industry and should follow pollution incidents through the system," Mr Buckingham said. "They should regulate from beginning to end, not turn a blind eye or handball to other agencies."