A spokeswoman for the authority, which manages Sydney's drinking water catchments, said the drilling of a borehole to extract coal seam gas near the dam would not pollute the water supply so long as its recommendations were adhered to.

She said the proposal by coal seam gas exploration company Apex to drill a bore in the Warragamba catchment was about 20 kilometres from the dam on land privately owned at Oakdale.

The plan was approved in June by the resources and energy division of the Trade and Investment Department.

The spokeswoman said the authority had made several recommendations that the company had followed up.

They included a neutral or beneficial effect on water quality, a water management plan, an erosion and sediment control plan, rehabilitation of the site, an emergency response plan and notification of any incidents. The authority had also recommended a condition be imposed that there be no fracking.

The controversial technique involves pumping water, sand and chemicals underground to fracture the rock walls and force coal seam gas to the surface.

Apex ruled out the use of fracking at its Warragamba project. On its website, Apex said: "Our position is clear, we have no intention to complete any wells via the fracking completion method. "[APEX is] currently considering other innovative ways, which do not involve fracking, to successfully deliver gas."

Coal seam gas activities are regulated by the Trade and Investment, Regional Infrastructure and Services Department and the Planning and Infrastructure Department. The Sydney Catchment Authority provides expert advice before consent is granted.