Asset Energy's proposal to explore for gas off the Hunter coast has suffered a major setback with the minister responsible for determining the project indicating it should not proceed.
The company is seeking an extension of Petroleum Exploration Permit 11, or PEP11, which extends from Port Stephens to south of Sydney.
The area targeted for gas deposits is in Commonwealth waters 26 kilometres off Lake Munmorah.
The project has previously been dogged by significant community and political opposition.
Federal Industry and Science minister Ed Husic said on Wednesday that, based on the material provided by Asset Energy, he had formed a "preliminary view" that the PEP 11 permit should not be renewed.
The company has been invited to provide further information to address Mr Husic's concerns before a final determination is made.
Asset Energy is a wholly owned subsidiary of Advent Energy.
Advent Energy chief executive David Breeze said the company was awaiting legal advice on the matter.
"We will take whatever legal action is needed in the circumstances, but I note there remains a significant and ongoing need for gas in NSW," he said.
Newcastle MP Sharon Claydon welcomed Mr Husic's preliminary view, which she said was "great news" for Newcastle.
"Novocastrians have been saying for years that they do not want PEP11. It is a project without friends - it's not welcome in Sydney, not on the Central Coast and certainly not Newcastle," she said.
"This is an important step in making sure that we put an end to PEP-11 once and for all" " I thank the Newcastle community - this couldn't have happened without your steadfast advocacy".
Surfers for Climate chief executive Josh Kirkman said Mr Husic's preliminary view was a promising development for coastal communities.
"It shouldn't be understated that there is a toll being taken on coastal communities when they are constantly on edge about potential oil and gas activity off their beaches," he said.
"Australia does not need new oil and gas projects in our ocean, when the tide is certainly turning towards renewables and the electrification of our homes at scale."
The PEP11 project was sensationally stopped late in 2021 when former prime minister Scott Morrison intervened directly to override then resources minister Keith Pitt.
Asset Energy is waiting for its permit to return to the joint panel under the NSW government and the federal government.
Mr Breeze told the Newcastle Herald in June that despite the obstacles, his company would not give up on the project.
"The need for gas has become much more critical," Mr Breeze said.
"NSW is suffering the highest rate of business insolvencies relative to past times, inflation is still at a high and the cost of energy is a key point there. It's critical that this project proceeds."
The state government recently introduced legislation earlier this year banning offshore petroleum drilling projects, such as PEP11, in NSW coastal waters.
The legislation was driven, in part, by a significant public backlash against the PEP11 project.
