The NSW government has decided to prosecute Santos for the spill of untreated water at its Pilliga drilling site in the north-west of the state.
It is also claimed the company failed to lodge environmental reports.
The allegations date back to 2011 when Santos was a shareholder of Eastern Star, a company it took over in November of the same year.
However former Eastern Star company director’s will not be prosecuted, SMH reported.
"I am advised that action is not possible by the department against Eastern Star Gas or their directors, given the sale of the company to Santos in November 2011," the Minister for Resources and Energy, Chris Hartcher, said in a statement.
"It is for this reason that proceedings have commenced against Santos. Amendments to the act currently before Parliament will enable the prosecution of directors in any future cases."
When Santos took over drilling sites in the Pilliga woodland it released a report detailing more than a dozen incidents of pollution which it says occurred under the previous operator.
Many of the breaches had not been previously reported.
SMH reports there were 16 spills or leaks of contaminated water from the series of about 30 "test wells" in the region.
Incidents included serious spills of saline water into woodland and a creek, to kangaroos drowning in a water storage area, both of which were not reported.
The opposition environment spokesman, Luke Foley, said the allegations showed the renewal of Santos’ exploration licence last year was a mistake.
"It is extraordinary the O'Farrell government renewed coal seam gas operation licences in the Pilliga Forest when investigations into serious breaches were not complete, and have now led to prosecutions," Foley said.
"The fact we now have the government initiating prosecutions against Santos, despite the minister renewing these licences only last year, confirms the O'Farrell Government was never serious about protecting our land and water from coal seam gas activity."
The Wilderness Society wants drilling on the site stopped until the matter is heard.
“Given their track record, Santos plans for 400 wells in the Pilliga Forest could turn the region into the biggest environmental disaster zone NSW has seen," said a spokeswoman, Naomi Hogan.
"Santos has not shown they can fix the past damage, let alone start drilling and spilling again on a larger scale."
Santos said a new water treatment system will be built to service the new holes and treat saline water.
"Santos has always made clear that the rehabilitation of small impacted areas of the Pilliga Forest will be addressed prior to our investment in a safe, sustainable project that could deliver in excess of 25 per cent of NSW's gas needs," the company said.
The Greens have welcomed the news of prosecution.
"The Greens have been warning that coal seam gas is unsafe, unnecessary and unwanted for a long time. This prosecution is proof that the warnings and risks of coal seam gas are well founded," said Greens MP Jeremy Buckingham.
"Coal seam gas water can be highly saline, contain a multitude of hydrocarbons and heavy metals, as well as drilling and fracking fluids. Disposal of the huge amounts of waste water produced by coal seam gas operations is risky and problematic as these spills in the Pilliga indicate.
"Instead of wasting billions in another fossil fuel, we should be investing in clean renewable energy like solar and wind.”