The Premier's Department and the Department of State and Regional Development will oversee the study, which aims to establish the feasibility of CBM production from the Muswellbrook and Singleton regions of NSW.
The company said the agreement recognised the importance of coalbed methane to New South Wales as an alternative energy supply that is clean, environmentally friendly and less expensive than other forms of energy currently available.
Premier Bob Carr said "This is an important study that has the potential to create jobs, improve mine safety, help the environment and provide an alternative energy source for the upper Hunter."
"Sydney Gas has a vision to use the methane in the upper Hunter coal beds to meet the future energy needs of the region," said Mr Carr.
"This agreement is another watershed event for Sydney Gas as it is the first time that a coalbed methane company in New South Wales has received direct financial assistance from the New South Wales Government.
"This initiative is to be applauded. Clearly, the Government now recognises that gas is critical for industrial and economic growth in New South Wales, and is alive to the imperative of doing more for companies such as ours, that are intent upon redressing the State's energy needs", said Sydney Gas CEO Dr Bruce Butcher.
