AGL's coal seam gas ambitions in the Gloucester area have been dealt a double blow with the launch of two government investigations into the detection of toxic BTEX chemicals in flowback water from two of the company's four wells.

The energy giant is also at risk of losing a key link to the local community with Gloucester Shire mayor John Rosenbaum threatening to pull his council out of monthly consultations with AGL and government officials.

Energy Minister Anthony Roberts on Wednesday ordered AGL to suspend all CSG activities at its Waukivory project, save those required for safety reasons, while the Division of Resources and Energy investigates the source of the four chemicals – benzene, toluene, ethylbenzene and xylenes – found in water samples.

The Environment Protection Authority, meanwhile, said AGL would not be permitted to start operations until the agency is satisfied it did not "pose a risk to the environment".

Mark Gifford, the EPA's chief environment regulator, said AGL was served on Wednesday with a demand for records.

"The legal notice directs AGL to provide sampling results and quality assurance/quality control reports and all records relating to results of sampling that show a detection of BTEX," Mr Gifford said in a statement.

AGL also has to report the results of analysis of samples collected on December 16 and 29 last year, and  January 12 this year, and provide "an analysis of the scientific rigour" employed.

The EPA has blasted AGL for its lack of transparency and tardiness in telling the agency of the presence of BTEX on January 15 but then failing to provide results of the samples or make them public until 12 days later.

"The EPA is reviewing AGL's Environment Protection Licence to include new conditions requiring immediate reporting of these types of results when they are detected," Mr Gifford said. "All companies are required to immediately report any significant environmental harm or threat of harm to the EPA."

BTEX chemicals are banned in NSW for fracking, with benzene a known carcinogen and the others contaminants. The chemicals can, however, occur naturally in coal seams.

AGL said it concluded from its own analysis that there was no harm to human health or the environment. The company acted to suspend its operations voluntarily on Tuesday "in the interests of acting prudently", a spokeswoman said.

John Rosenbaum, Gloucester's mayor, said the council was "terribly disappointed" that AGL's CSG chief, Mike Moraza, had failed to disclose the BTEX findings at last week's Gloucester Dialogue meeting.

"This is when you start to question if they are telling us everything," Mr Rosenbaum said.

Mr Rosenbaum said a motion would need to go to the next council meeting before it could withdraw from the monthly meetings held in the town with AGL, government bodies such as the EPA and the NSW Office of Water, and local residents.

"People are saying why are we still there when you're being treated like this?" Mr Rosenbaum said. "You rely on the people that are the authorities who are making the final decisions to be honest and transparent with it all.

"Now when I start asking 'Can I trust any more', is it worth being there?" he said.