The Division of Resources and Energy said on Tuesday that AGL is "entitled to resume operations" at its Waukivory pilot project near Gloucester.

A separate investigation by the NSW EPA found "no evidence of harm to the environment" from the BTEX group of chemicals found in samples of flowback water from one of the project's four wells, the agency said on Tuesday.

Those operations were suspended in January after the company admitted - after an 11-day delay - that it had detected BTEX chemicals.

The chemicals -  benzene, toluene, ethylbenzene and xylenes - are banned for use in hydraulic fracturing - or fracking - in NSW, and the government sought to determine the source of the toxic compounds.

"Investigators could find no evidence that BTEX had been used by AGL in any fracture stimulation fluid or drilling process," the division said. The source of the chemicals was found to be "naturally occurring" in the groundwater, 600 metres below the surface.

"There is no evidence of BTEX being detected in aquifers close to the surface," the statement said, adding that the University of Queensland conducted an independent review of the evidence.

Scott Thomas, acting head of AGL's upstream gas division, welcomed the results of both investigations "which show we have not caused harm to the environment during the Waukivory Pilot".

"AGL will now determine appropriate next steps to resume the Pilot," Mr Thomas said in a statement. "However, it is very encouraging that we can move on with the project which has the potential to provide a reliable source of gas to more than one million users in NSW."

The company is conducting an internal review of its entire upstream gas operations in part because of the troubles at its Gloucester project.

'Flawed project'

John Watts, a spokesman for anti-CSG group Groundswell Gloucester, said the reports' findings were "extraordinary but not really a surprise".

"Minister [Anthony] Roberts and his department seem determined to excuse whatever AGL does so they can plough on with their flawed CSG project," Mr Watts said.

"This inquiry, which was anything but independent, has clearly not dealt properly with the issue of how naturally occurring BTEX should be handled in the future by AGL," he said. "BTEX is so toxic that its use has been banned and the fact that it is might occur naturally should make no difference."

Mr Watts said Minister Roberts should not be clearing AGL to resume operations because the company "has no way of disposing of its toxic flowback fluid or its produced water".

Controversy has dogged AGL's operations in Waukivory, including a change to planning rules allowing the company to continue exploration activities without a full environmental impact study.

AGL has also been left without an easy disposal option for the so-called flowback water resulting from fracking after its contractor Transpacific Industries was found to be dumping the treated waste without approval in Hunter Water's network near Newcastle.

Fairfax understands that BTEX chemicals were found in samples before and after treatment by the contractor.

The Division of Resources and Energy noted in its statement that AGL has an application to change "the manner in which flowback water is disposed of".

'Smokescreen'

Greens NSW mining spokesman Jeremy Buckingham said the reports failed to address why AGL didn't report the BTEX findings to regulators immediately.

"The public have a right to know why the detection of toxic chemicals went unreported for nearly two weeks and the relevant Ministers should explain why this is the case," Mr Buckingham said. "They can't just sweep this failure under the carpet."

The upper house MP also said banning BTEX in fracking operations "was always a smokescreen for the fact that BTEX occurs naturally in the coal seams and can be brought to the surface by gas extraction techniques".

"BTEX chemicals are known carcinogens and should be left in the coal seams underground, not brought to the surface in coal seam gas waste water," Mr Buckingham said. "The simple fact is that no amount of regulation can make safe an industry that extracts large amounts of salty, chemical laden water to the surface."

EPA findings

The EPA's team, including hydrogeological, water quality and chemistry specialists, found that it was "unlikely that BTEX travelled outside of the fractured part of the coal seam".

"The EPA's investigation into the detection of BTEX in flowback water examined if AGL breached its environment protection licence conditions or the Protection of the Environment Operations Act," Mark Gifford, chief environmental regulator at the agency, said. "The EPA has determined that no breaches occurred."

Still, the agency will add new conditions to the monitoring and reporting of BTEX "to ensure appropriate handling and disposal at a licensed waste facility".

AGL will also have its licence altered to ensure immediate reporting of fracking additives and changing height levels of groundwater.

These conditions were prompted in part by separate EPA probes into the detection of monoethanolamine borate (MEB), a thickening agent, and an algaecide, Tetrakis hydroxymethyl phosphonium sulphate - also known by its brand name Tolcide)

The agency found AGL was in "technical breach" of its pollution licence conditions L3.4 which requires that there be no detection of MEB or Tolcide.

"[I]mmediate reporting of any detection of fracture stimulation additives and groundwater height variation would provide better protection for the environment than a strictly "non-detect" limit," Mr Gifford said in the statement. "This will be reflected in the licence."