The announcement follows the completion of a 2005 feasibility study for a wastewater treatment plant designed to produce up to 6 million litres of water a day, recycled from effluent extracted by Sydney Water facilities.

Caltex and Continental Carbon will be the sole joint users of the treated wastewater, which will reduce the demand for potable water.

The 6 million litres of water is estimated to be comparable to the daily requirements of around 10,000 households.

"Conserving water is an important goal of the Kurnell refinery and this plant will mean 65-70 percent of its water needs would be met from recycled water," Caltex Refining general manager Eion Turnbull said.

"This project is an excellent example of business and government working together to remove obstacles and find opportunities to reduce the demand on Sydney's water supply."

The proposal to build the wastewater treatment plant was jointly commissioned by both companies and the Sydney Water Corporation, and facilitated by the NSW Department of Energy, Utilities and Sustainability.

The proposed plant would be built and operated as a joint venture between water treatment specialists Burns and Roe Worley and United Utilities Australia and is expected to be completed by mid-2007, subject to final agreements and approvals.

The Caltex refinery is one of Sydney Water's largest customers, requiring up to 6.2 million litres of water a day, primarily to generate steam used for heating and to drive rotating equipment such as pumps and compressors.

The refinery also requires large quantities of water for its cooling towers and for use in the oil refining process.

Caltex said it would invest in infrastructure connecting the refinery to the water recycling plant, including pipelines and control systems, with funding support to be provided through a grant from the NSW Government Water Savings Fund.