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

Those operations were suspended in January after the company admitted - after an 11-day delay - that it had detected BTEX chemicals in a sample from one of its four wells.

BTEX 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.

The NSW Environment Protection Authority conducted a separate investigation, the results of which are likely to made public "very soon", a spokeswoman said.

Fairfax Media sought comment from AGL.

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 Transfield 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 both 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".

AGL is conducting an internal review of its entire upstream gas operations.