The NSW government has given the gas giant the green light to continue using royalty-free gas from its wells near Narrabri to fuel its Wilga Park power station.

The NSW Department of Planning said gas extracted during exploration does not attract royalties, and also allows exemptions for the use of gas in power plants rather than being vented or flared.

However, Greens energy spokesman Jeremy Buckingham slammed the move and said in the past four years the same loophole had allowed Santos to avoid paying $3.68 million in royalties on more than 4.25 million gigajoules of gas.

Mr Buckingham said the loophole extension would cost taxpayers millions, and questioned how the gas could be classified as exploration, given Santos has submitted its detailed plans for a gasfield.

“The NSW government and Santos should also drop the outrageous fiction that this is genuine gas exploration,” he said.

“Santos have been operating these wells for up to eight years, they have submitted a detailed application for a commercial 800 well gas field and they have dodged the key question about how much more gas will be sent to the power station than would otherwise have been flared.

“This whole process stinks. It is coal seam gas production by stealth and a multi-million dollar taxpayer subsidy to Santos.”

In 2014, the NSW Planning Department raised concerns with the loophole, and sought to ensure it was “not open-ended”.

However, a recent report by the same department recommended approving the extension, as using the gas “that would otherwise be wasted” would be a positive environmental outcome.

“Not only would the gas be used beneficially, it would mean less power may have to be generated elsewhere to meet the demand for electricity,” the report stated.

A spokeswoman for Santos said: “It makes environmental sense for the gas to be used to generate power reducing waste and emissions.”

“Royalties are payable on the gas from the appraisal wells in accordance with the NSW royalty regime which, in the usual way, allows deductibility of certain capital and operating expenditure from revenues,” they said.