NSW Premier Mike Baird has warned that authorities will "come down like a ton of bricks" if breaches have occurred at a gas field where dangerous chemicals were detected.
AGL Energy has suspended operations at the Waukivory pilot project near Gloucester and an urgent investigation has been launched after benzene, toluene, ethylbenzene and xylene (BTEX) were discovered in flowback water from four drilling wells and in a water storage tank.
"We need to ensure that any coal seam gas (extraction) that is undertaken in this state is done in the safest possible way," Mr Baird told reporters on Wednesday.
"And if there are concerns, if there are breaches, then we'll come down like a ton of bricks."
Resources Minister Anthony Roberts says officers from his department had joined inspectors from the NSW Environmental Protection Authority at the mid-north coast site.
"I want to know exactly what has happened, whether or not this is naturally occurring or whether it is an additive," Mr Roberts told a NSW select committee inquiry.
AGL managing director Michael Fraser said on Tuesday the company has voluntarily suspended operations until a full review of the sample results has been completed.
The chemicals found in the flowback water can have harmful effects on the central nervous system, and Benzene is a known carcinogen.
The EPA on Wednesday said there had been a lack of transparency with AGL in its handling of the Gloucester project.
Anti-fracking advocates want the licence revoked.
"AGL have admitted BTEX is in their flow water. It's a bridge too far," Groundswell Gloucester chairwoman Julie Lyford told AAP.
The NSW Nature Conservation Council also said the matter raised serious questions about the company's competence and called for its licence to be withdrawn.
"It took AGL 12 days to report this incident to the EPA. What else is going on that they are not telling us about?" campaigns director Daisy Barham said.
"The industry says `trust us', but time and again they have demonstrated that they cannot be trusted."
It comes as a report found that demand for gas in NSW homes and businesses is expected to halve over the next decade.
The research at the University of Melbourne's Energy Institute warned that NSW's future gas needs are being overestimated and consumers have paid for unnecessary infrastructure to be built.
AGL's head of economic policy and sustainability, Tim Nelson, said tests were carried out as soon as BTEX was detected in a sample of water.
"It was found that it posed no material risk to human health or the environment," he said.
"That said, we went though a whole bunch of processes to try and look at what was causing that reading."
Mr Nelson said it was after conducting their own tests that the company notified the EPA on Tuesday.
"I think it's really important to note that no conditions of any licence were breached."
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