Together with the planned $850 million Queensland Hunter Gas Pipeline and the State Government's apparent preference for gas to fire a new baseload power station at Bayswater near Muswellbrook, the Santos investment represents a major step forward for the gas industry in NSW.

Coal seam methane has been opposed by environmentalists and farmers in the Wollombi and Broke regions but Santos chief executive David Knox and Queensland Hunter Gas Pipeline managing director Garbis Simonian said yesterday that gas retained substantial environmental advantages over coal.

Mr Knox said Santos was spending $300 million to buy a 35 per cent stake in various Gunnedah Basin coal seam methane exploration permits and production areas operated by another company, Eastern Star Gas.

It was also paying $176 million to take a 19.99 per cent stake in Eastern Star Gas.

Once the transaction is complete, Santos and Eastern Star Gas will have control of a roughly rectangular block of gas rights running from Muswellbrook to Dubbo in the south, stretching north through Gunnedah and Narrabri to the Queensland border.

Mr Knox said the coal seam gas industry was less than a decade old in this country yet it was already accounting for more than 20 per cent of eastern Australian gas production.

He said Santos had been exploring in the Gunnedah Basin since 2007, while Eastern Star Gas had been there since 2002.

"This $476 million transaction is a significant step in Santos's Gunnedah Basin strategy and advances the region's potential as Australia's next major coal seam gas province, bringing jobs and investment to the area," Mr Knox said.

He said developing NSW's "abundant coal seam gas resources" meant the opportunity to replace coal with "carbon-light" gas-fired power generation.

Mr Simonian said the Santos investment was a sign of confidence in the region's gas industry and good news for future industrial development.

He said the global financial crisis had made it harder to obtain private-sector funding for such projects as the Hunter pipeline, but he was absolutely certain the line would be built.