AGL will surrender three of its coal seam gas exploration permits including one covering much of the Sydney basin but will press ahead with its controversial Gloucester Gas Project despite waste water disposal issues.

The energy giant also announced on Monday that it would write down the value of the Gloucester assets by $193 million after tax as part of a $435 million impairment tally after concluding its upstream gas review. Pre-tax, the writedown will total $603 million.

The NSW government last week announced it was extending its scheme to purchase and extinguish CSG permits for another three months. CSG exploration - with AGL among the biggest players - was one of the most contentious issues during the state election campaign, triggering big swings against sitting National MPs in several north-eastern seats.

AGL's review, launched in February, concluded that the company would keep its Camden Gas Project, Gloucester Gas Project, Silver Springs underground storage facility, Wallumbilla Liquefied Petroleum Gas plant and the recently opened Newcastle Gas Storage Facility.

"These assets enhance AGL's flexibility in managing its gas portfolio," the company said in a statement to the Australian Stock Exchange.

However, AGL will end its proposed Camden Northern Expansion Project and hand back its Petroleum Exploration Licence 2 covering much of Sydney to the NSW government as part of a buyback scheme.

The permit had drawn widespread criticism as it covered most of western Sydney, from Robertson in the south, to Blaxland in the west, Thirroul through to Campbelltown, to beyond Wisemans Ferry on the Hawkesbury River.

The company will also surrender PEL 4 and PEL 267 in the Hunter Valley.

'Lemon' project

AGL's troubles in winning local support for its Gloucester project in the state's mid-north coast are unlikely to end soon.

The company noted in Monday's release it had recently signed an agreement to remove flowback water produced from the four pilot wells at Waukivory to "an approved treatment facility". That plant is at Narangba, north of Brisbane,  about 725 kilometres away, and AGL continues to seek a closer location.

AGL was earlier told not to dispose of the waste water in the Hunter Water facility but the company proceeded to truck the material to a site near Newcastle until the discharges were found out late last year.

John Watts, a spokesman for anti-CSG group Groundswell Gloucester, said the company's decision came as little surprise but it showed "AGL is  beginning to recognise that its Gloucester project is a lemon".

"AGL has stumbled from one crisis to another with its Gloucester project and it should abandon it completely if it wants to avoid major risks to its reputation and to its investors' money," Mr Watts said. "There is clear and strong community opposition to the project and such opposition is just going to keep growing."

Adam Searle, Shadow Minister for Resources and Energy, said Labor remained concerned that the Gloucester project will proceed "despite serious questions and significant community unease about its environmental impacts".

"Operations that cannot prove to be safe at every stage of the process should not proceed - and AGL has not proven to the Gloucester community that this CSG project is safe," Mr Searle said.

AGL indicated that planning obstacles excluding drilling from areas within two kilometres of homes - a move brought in by opposition to AGL's Camden expansion project - were behind its decision to drop plans to explore for CSG in the Hunter region:

"While there is significant coal seam gas in the Hunter Valley, the overlay of Critical Industry Clusters and the two-kilometre setback result in this resource not being economic to develop", it said.

Santos, the other major CSG developer in NSW, in February slashed the value of its main asset at Narrabri in the state's north by more than $800 million. It blamed project delays and a reduced estimate of reserves.

Two per cent of NSW

The latest three PELs to be given back covered more than 1.5 million hectares, or more almost 2 per cent of NSW, according to Anthony Roberts, Minister for Industry, Resources and Energy. All up 15 permits have been surrendered.

"We have now reduced the footprint of CSG from around 60 per cent of NSW to 9 per cent," Mr Roberts said in a statement. "The buyback of PEL 2 [covering 668,102 hectares] now means there is no CSG title covering the Special Areas of the Sydney Water Catchment."

It is understood the government's buyback plan for CSG exploration licences has cost about $200,000 each.

Daisy Barham, campaigns director for the Nature Conservation Council, said the Sydney permit exit was "a victory for commonsense".

"It vindicates those communities that have been concerned about CSG in our drinking water catchment for many years and who have campaigned vigorously for the government to make these areas no-go zones," Ms Barham said, adding the cancellation would "set a benchmark for protecting water catchments and communities across NSW from risky CSG developments".

"[Premier Mike] Baird should now address the existing threat posed by coal mining in Sydney's drinking water catchment by stopping any further expansion of coal mines in these sensitive areas," she said.

Jeremy Buckingham, Greens MP and mining spokesman, said AGL's move "reflects well on the direction of the new CEO Andy Vesey is taking with AGL".

"But it is also a missed opportunity for AGL to repair their battered corporate reputation by ditching their risky Gloucester gas plans," Mr Buckingham said.

"The $193 million writedown of this project is a recognition that coal seam gas in Gloucester doesn't stack up and the Greens look forward to AGL packing their bags in the near future," he said.