Fracking should not be banned in New Zealand but oversight and regulation of the industry must be improved as the practice increases, the Parliamentary Commissioner for the Environment has found.
An interim report by commissioner Jan Wright concluded that the controversial process of hydraulic fracturing, known as "fracking", could be done safely in New Zealand if well-managed.
But the energy industry had not yet gained the trust of the public by showing it had used world's best practice, and the regulation which governed it could be too light-handed.
"During the course of this investigation I have come to a similar conclusion to the [British] Royal Society which is that fracking is safe if it is properly regulated and managed," Dr Wright said.
"However I have significant concerns about how fragmented and complicated the regulatory environment for fracking is and about how these rules are being applied."
Prime Minister John Key said what he took from Dr Wright's report was that it was okay to go ahead with fracking; "just make sure you do it properly.
"What she is fundamentally saying is that it's safe to undertake fracking in New Zealand, but you need to carry out that fracking using world class standards.
"She's going to do a little bit more work on that, which it to be encouraged.''
Mr Key said he was not concerned the industry was self-regulating at present.
He said it was critically important to go ahead with mining and fracking.
"Without fracking I suspect it would hold New Zealand back.''
Energy and Resources Minister Phil Heatley said Dr Wright was firm in saying a moratorium was not needed.
"She might change her mind in six months and we'll take her views very seriously, as we are now.''
Spokesman for Federated Farmers, Anders Crofoot, said the investigation had reduced unease over the fracking technique.
"After reading the PCE's report, I can say that Federated Farmers feels more comfortable with the technique.''
Dr Wright would not bow to calls from the Green Party for a moratorium on fracking, but said she would not hesitate to impose a ban if the second half of her investigation revealed that fracking was too dangerous.
"Recommending a moratorium is a big thing to do and I wouldn't do it lightly. It's a business employing lots of people with livelihoods at stake here.
"But I am the environmental commissioner so the environment must be primary concern. I've not seen anything yet that it is of high and urgent concern but that is not to say that everything has been done perfectly so far."
Fracking helps release natural gas and oil deposits, that would otherwise be uneconomical or impossible to recover, by pumping large volumes of mainly water and sand at high pressure through a wellbore into deeply buried gas-bearing rock.
The investigation found some instances of minor environmental damage as a result of fracking, but nothing of major concern.
The report said that if best practice was not followed, fracking could trigger earthquakes or pollute aquifers.
Dr Wright said small quakes had been caused by fracking in the United States, but these were highly infrequent and small - around 2 or 3 on the Richter scale, with one magnitude 5 quake observed in Colorado.
However, New Zealand was a seismically active part of the world and companies were discouraged from drilling wells near active faultlines.
Energy companies have proposed oil and gas exploration on the North Island's East Coast, where seismic activity was high.
A GNS Science report commissioned by the Taranaki Regional Council found that fracking activity in the region did not contribute to any of 3000 monitored earthquakes.
Dr Wright said the greater concern was chemicals used in the fracking process leaking into groundwater.
Fracking has been taking place in New Zealand for 23 years, but was expected to dramatically increase as part of Government plans to massively expand oil and gas exploration.
Dr Wright said the safe track record in Taranaki so far was not an indication that fracking could be expanded without reviewing regulations and oversight.
The second half of her investigation would focus on what regulation could be introduced to encourage best practice was used by industry.
The report said it was difficult to make conclusions about fracking's contribution to climate change. Dr Wright said that although natural gas was less harmful than coal mining in terms of carbon output, it still had a worse impact on climate change than renewable energy.
Energy and Resources Minister Phil Heatley and Environment Minister Amy Adams welcomed the interim report and said it provided a valuable contribution to the understanding of fracking in New Zealand.
"We agree that it is important to have strong and consistent regulation of fracking and to improve regulation and monitoring where necessary," they said in a joint statement.
The Ministry of Business, Innovation and Employment would be preparing a response to the report to inform the commissioner's final report, due in mid-2013.
Labour's Energy Spokesperson Moana Mackey said the government needed to take the commissioner's recommendations and observations "very seriously".
"The Parliamentary Commissioner for the Environment is to be congratulated for taking the public concern regarding fracking seriously when the Government failed to do so.
"Let's hope the assurances from the Minister of Energy, Phil Heatley, that the Government will support any recommendations that the PCE puts forward, don't turn into hollow promises," Mackey said.
The Green Party responded to the report by renewing its call for a moratorium on fracking.
"The PCE's report does not say that fracking in New Zealand is safe; the report concludes that fracking companies do not have a 'social licence' to operate and that the regulation is fragmented and light-handed," said energy spokesperson Gareth Hughes.
New Zealand regulation does not currently enforce best practice for fracking, he said.
"The fact that the PCE cannot not guarantee that world best practice is being implemented in New Zealand and has pointed out many potential gaps in regulation is in itself a compelling case to implement a moratorium on fracking."