An ancient Hunter river 70 metres beneath the surface could provide the region with its first new drinking water supply in more than 50 years.
Hunter Water is increasingly confident that a palaeochannel that lies under the Tomago sand beds may contain "billions of litres" of groundwater that can be tapped to supplement existing supplies.
The channel, which was once part of the Hunter River, is located under a layer of clay that separates it from the sandbed aquifer.
Fresh water, which has not been exposed to the atmosphere for between 15,000 and 25,000 years, is stored in a layer of gravel that is several kilometres wide and 23 metres deep.
"Where we are drilling is what we think is the historic path of the Hunter River that used to come through this area back when sea levels were much lower. The sea levels came back in then we had an estuarine area that laid mud over it and then the dunes that we are currently walking on formed," Hunter Water chief investment officer Darren Cleary said.
"The aquifer could be quite large; we think it could go up to Heatherbrae and out to the coast. We are drilling to find the full extent."
Research is also underway to determine if the water in the palaeochannel is connected to the sandbed.
"We are optimistic that the paleochannel is not connected to the sandbeds," project consultant Professor Ron Boyd, from the University of Newcastle's school of environmental and life science said.
"We have found the right type of materials in about 50 per cent of the bores that have been dug."
Hunter Water will decide early next year if the $750,000 exploration project should proceed to the next stage.
"There are lots of unknowns but by March we will have a pretty good idea about whether we will continue with investigations and develop this as a full-on scheme or whether it's not viable to keep going," Mr Cleary said.
If it does proceed, water will be pumped via existing infrastructure into Grahamstown Dam.
Water utilities are increasingly looking to groundwater sources as the relentless drought takes a heavy toll on traditional storages.
Perth and South Australia presently draw significant amounts of water from groundwater while numerous other projects are underway around the country.
The first inkling of the palaeochannel's existence was contained in core samples collected by the University of Newcastle and Hunter Water in the 1990s.
"It wasn't until we shared the results that we realised we could be onto something," Professor Boyd said.