AGL will make a final decision on whether to proceed with the first phase development for a second coal seam gas project in NSW, at Gloucester north of Sydney, as soon as next year.
AGL already operates a project at Camden.
The first stage of the Gloucester project involves drilling 110 wells, mostly on land held by coal miners such as Gloucester Coal and the privately held GRL, and would cost between $400 million and $500 million, AGL managing director Michael Fraser said.
This figure includes a central processing facility along with a small gas-fired power station.
Under the project, it is planned to produce 20 petajoules to 30 petajoules of gas annually, which would account for 15 per cent to 20 per cent of annual gas demand in NSW.
The intention is to pipe the gas to Newcastle, about 100 kilometres south of Gloucester, where AGL is constructing a $300 million gas storage centre.
Consumers in Newcastle now pay among the highest prices nationally for gas, since it is at the end of the pipeline that transports gas from either the Cooper Basin in central Australia or from Bass Strait.
Tapping a local supply source would give AGL a strong competitive advantage, and an increase in gas supplies feeding Newcastle could open the door for gas to be piped to Sydney.
The final engineering and design studies are to be completed next year, which will give AGL a clearer costing for the Gloucester project as well as clarity around the design features.
The first stage of the project has already been approved by the NSW government, and agreement has also been reached with Gloucester Shire Council to fund the hiring of a water scientist to help the council assess the various reports on the likely impact of the project.
"We need the independent technical advice, and this was a good way to get it," mayor John Rosenbaum said.
"We don't have the resources or the time."
Also included in the AGL proposal is the construction of a small gas-fired power station to feed the planned gas processing plant.
AGL is also proposing a stage two and stage three expansion of the Gloucester project, although the details are yet to be decided.