Former prime minister Scott Morrison's decision to reject a controversial offshore gas exploration licence off the New South Wales coast is set to be overturned.

The PEP-11 exploration licence covers about 4,500 square kilometres offshore from Manly in the south to Newcastle in the north.

Mr Morrison announced in late 2021 that his government would reject a two-year extension of the exploratory drilling licence, amid fierce community opposition to the project.

It would later be revealed the former prime minister had sworn himself into the portfolio of then-resources minister Keith Pitt to reject the application, and circumvent Mr Pitt's wishes to extend it.

Asset Energy took the federal government to the Federal Court challenging the decision after Mr Morrison's multiple portfolios came to light.

The Albanese government and Asset Energy have now agreed to end that court action, asking the court to vacate Mr Morrison's decision.

A decision on the project will then rest with a joint authority made up of both the Commonwealth and NSW governments. And the Commonwealth has indicated it will allow New South Wales to consider its position first.

Federal Resources Minister Madeleine King said the government intended to follow protocol going forward, and would not comment on the future of the project.

"I assure Australians that any decisions that I take as the federal minister for resources will always be based on sound evidence and in accordance with the law," she said.

"Australians quite rightly expect this of their elected leaders.

"I am not going to provide an ongoing commentary on future official decisions that come before the joint authority, whether in relation to PEP-11 or any other matter."

Calls for Labor to reject project

Labor went to last year's federal election strongly opposing PEP-11.

At a press conference on the New South Wales Central Coast in November 2021, then opposition leader Anthony Albanese was clear on Labor's stance.

"Absolutely, we will stop PEP-11 going ahead, full stop. Exclamation mark. No question. Not equivocal. No ifs, no buts," he said.

Asset Energy is proposing to drill an exploration well for both natural gas and greenhouse gas storage at a site roughly 30 kilometres south-east of Newcastle.

Its drilling rig would be 26 kilometres offshore, which the company has said would not be visible from the shoreline.

Independent MP for Mackellar Sophie Scamps, whose seat covers the northern tip of Sydney's northern beaches, said the government should end the project for good.

"This decision is a major setback for my community," she said.

"However the Albanese Government now has a chance to show it can do what the Liberal Party never could, and that is act in the best interests of communities up and down the east coast of Australia and finally cancel the PEP-11 licence."

Newcastle Labor MP Sharon Claydon said the views of her community have not changed.

"Our community’s message has been loud, clear and consistent - PEP-11 is not welcome," she said.

"Not in Sydney, not in the Central Coast. And certainly not in Newcastle."

Asset Energy has been contacted for comment.