Gas company AGL has suspended operations at its Gloucester coal seam gas (CSG) project north of Newcastle, after the discovery of potentially toxic chemicals in flowback water.

AGL announced on Tuesday afternoon it was voluntarily suspending the controversial coal seam gas pilot program in Gloucester.

Late in 2014 the company performed test fracking operations on four pilot wells at Waukivory, just outside the Gloucester township.

The company said the chemical BTEX was found in a sample of flowback water, taken from two of the wells and an above-ground tank.

But the company said it can categorically state BTEX was not in any of the hydraulic fracturing fluids used in their pilot operation.

Flowback water is water returned to the surface after it has been pumped into the ground mixed with chemicals to open up coal seams.

AGL managing director Michael Fraser said a full review of the samples taken was underway.

"Because of the community's concern about any detection of BTEX and in the interests of acting prudently, AGL has voluntarily suspended the Waukivory Pilot Project until a full review of the sample results has been completed," he said.

Greens NSW mining spokesman Jeremy Buckingham said AGL should leave the Gloucester Valley following the discovery.

"BTEX chemicals in the water are an absolute nightmare and the Greens want a permanent ban on coal seam gas and fracking in NSW," he said.

"Coal seam gas is unsafe, unnecessary and unwanted.

"AGL should pack up and leave the Gloucester Valley for good following this latest pollution incident before they do any more damage to either their battered corporate reputation or our precious water.

"How many more spills, leaks and accidents will it take before the government acts to ban coal seam gas?"

Julie Lyford from Groundswell Gloucester, a local activist group opposed to CSG activities in the area, said it was time the licence was removed all together.

"What we'd like Mr Baird to do or Mr Foley if he gets elected, is to actually remove the licence from the Gloucester Valley completely," she said.

In a statement, the NSW Government Energy Minister Anthony Roberts said AGL had notified the Environment Protection Authority (EPA), NSW Office of Water and Office of Coal Seam Gas about the chemical discovery.

"The NSW Government supports AGL's decision to suspend its operation pending further investigation," he said.

"The use of BTEX chemicals for fracture stimulation processes are banned in NSW."