The Parliamentary Commissioner for the Environment has announced there will be an official investigation on hydraulic fracturing for oil or gas, known as fracking.
Dr Jan Wright says a high level of public concern about the contentious practice has signalled the need to examine it more closely.
Fracking involves pouring fluids under pressure into oil or gas reservoirs to crack layers of rock and free trapped hydrocarbons.
Environmentalists say the method is highly damaging.
Dr Wright says the investigation will focus on water contamination, how fracking fluid is stored, whether fracking triggers earthquakes and air pollution from the release of methane gases.
Her office will produce a report for Parliament before the end of the year.
The Minister of Energy and Resources has ruled out a moratorium on fracking, while the investigation is conducted.
The Minister, Phil Heatley, says fracking will continue during the investigation because he believes fracking in New Zealand is being undertaken safely.
He says the inquiry will answer some questions that sceptics have about the practice.
The Green Party had called for a moratorium on fracking while the investigation is held.
Green Party co-leader Russel Norman says there should be a halt to fracking until the investigation is complete.
He says the practice has been banned in France and New Zealand should also take a precautionary approach to protect ground water from contamination.
Petroluem peak body welcomes investigation
The Petroleum exploration industry is welcoming the investigation into the environmental impacts of fracking.
The Petroleum Exploration and Production Association's chief executive David Robinson believes the investigation will find that fracking is an environmentally safe practice.
But he says the industry will take on board any recommendations that come from the investigation.