AGL has temporarily withdrawn its plans to drill 66 coal seam gas wells in Western Sydney.
On Friday the company said it had asked the Department of Planning and Infrastructure to suspend its assessment process, citing ''community concerns'' as the main reason for the backdown.
The gas company has been involved in ''ongoing discussions'' with the state government and it is understood the company has every intention to push on with the drilling project after community consultation, the SMH reported.
It wants to drill wells at a dozen sites between Liverpool and Campbelltown.
''The minister was advised by AGL of its decision late last night," a spokeswoman for the NSW Resources Minister, Chris Hartcher, said
Federal opposition spokesman for energy and resources, Ian Macfarlane, said he had been involved in talks with AGL and other coal seam gas companies and outlined his concerns about urban drilling but that was unrelated to AGL's recent decision.
''I can appreciate the natural cynicism amongst a few, but the fact is I would never compromise a company's financial position on the basis of politics. I said to the industry 18 months ago that they need to get out of urban areas, the Hunter Valley and northern NSW if they are going to go ahead. That position hasn't changed.''
But NSW Greens MP Jeremy Buckingham said the news was a ''cynical PR stunt by a company desperate to get their contentious project out of the spotlight of a federal election campaign in the marginal electorates''.
AGL spokeswoman, Karen Winsbury, would not specify the details of talks with the government over the decision to halt the project, but said AGL wanted to address community concerns.
''It's fair to say that 'community' also encompasses members of Parliament and councils.''
Before Gillard's announcement of the federal election Australian Mining reported that AGL publically reversed its position on fracking, putting the drilling technique back on the table as a possible option.
If the AGL project is eventually approved, the Greens said at the time that fracking is inevitable under Sydney.
''Our aquifers and geological formations are like Humpty Dumpty, once you've fracked it, you can't put it back together again,'' Greens member Jeremy Buckingham said.
''Barry O'Farrell should act now to protect land and water rather than leaving it to a future government to say sorry for the damage done by fracking for coal seam gas.''
Recently, protests have erupted in both the Hunter Valley and Northern Rivers regions in an effort to stop the development of coal seam gas operations.