Campaigners fighting coal seam gas (CSG) activity north, south and west of Sydney are celebrating after a gas company sold three exploration licences back to the New South Wales Government.

The Petroleum Exploration Licences (PELs) were bought back from AGL and cancelled by the Government as part of its wider review of the CSG industry in NSW.

They covered 1.5 million hectares in the Hunter and Illawarra regions and west of Sydney.

AGL made the announcement in a statement to the Australian Securities Exchange.

The company said it had reviewed its upstream gas business and decided to "focus on core gas projects and divest non-core and underperforming gas assets and activities".

It said although there was significant CSG in the Hunter Valley, land use restrictions had resulted "in this resource not being economic to develop".

It also wrote down the value of its contentious CSG project at Gloucester, north of Newcastle, by almost $200 million.

The Government said it had now bought back 15 licences, after last year declaring it would "reset" the industry and develop a new strategy detailing where and how CSG activity could occur.

Cancelled licences PEL 2, covering 668,102 hectares stretching from south of Fitzroy Falls, through Western Sydney to west of Lake Macquarie

PEL 2, covering 668,102 hectares stretching from south of Fitzroy Falls, through Western Sydney to west of Lake Macquarie PEL 4, covering 383,492 hectares in the Hunter around Muswellbrook, Scone and Denman

PEL 4, covering 383,492 hectares in the Hunter around Muswellbrook, Scone and Denman PEL 267, covering 489,827 hectares in the Hunter, including Singleton, Broke and Maitland

Energy and Resources Minister Anthony Roberts said the PELs covered almost 2 per cent of the state.

"When I became Energy Minister, some 60 per cent of the state was covered by licences and exploration licences and applications," Mr Roberts said.

"That is now down to 9 per cent, which is good news for communities."

He said the Government's strategic review of land use meant CSG activity in those areas was now unlikely, but the state was not closing the door on CSG development.

Lock the Gate Alliance spokeswoman Georgina Woods said the cancellation of the licences was a huge relief for wine-makers and others in the affected regions, who had campaigned against CSG activity for years.

"I think AGL knew that they were in for a battle that wasn't worth it with a very tight community that was determined not to allow it to go ahead," she said.

Greens MP Jeremy Buckingham said it was the "strongest signal we've had in the community that coal seam gas is over".

"We've fought tooth and nail to see this toxic industry off, out of our water catchment, and today's announcement by AGL is the writing on the wall for coal seam gas," he said.

Mr Buckingham said he hoped AGL went further and cancelled all of its gas plans in the Hunter Valley.

"Now it's up to them to abandon the projects in Gloucester that risk that community's wellbeing."

Jess Moore from the 6,000-strong protest group Stop CSG Illawarra, said there was no room for complacency and has repeated her call for a royal commission into the industry.

''Sadly, it's not the end and I think it's really important that people know it's not the end because we could rest right now and not worry about it, but then there is nothing to stop that new licence being introduced in our region in the drinking water catchment," she said.

"So the campaign continues.''