Natural gas company Tamboran B2 was given the green light in May 2024 to explore the development of 15 gas wells in the Northern Territory's Beetaloo Basin under the Shenandoah fracking pilot.
Three wells have been constructed.
Lock The Gate Alliance unsuccessfully asked the Federal Court to grant an injunction compelling the government to assess the project under water trigger provisions of national environmental laws.
"Of course we are gutted that we were not successful in this case," the organisation's acting national co-ordinator Georgina Woods told AAP after their lawsuit was dismissed on Friday.
"We really feel this outcome still leaves really big unanswered questions over the future water security of the Northern Territory."
She called on the government to give certainty around how large fracking projects had to get before the water trigger was engaged and national environmental approval was required.
Justice Nicholas Owens dismissed the case on Friday.
He found Tamboran's pilot project did not trigger federal law that required an unconventional gas development to have a likely significant impact on a water resource.
Lawyers for Lock The Gate argued gas could breach the wells' casings and bubble up into limestone aquifers buried deep beneath the surface.
While they pointed to fracking contamination occurring elsewhere, Justice Owens said they had not provided any evidence the Tamboran wells carried this same risk.
"I accept that there is a risk that something might go wrong," the judge wrote in his decision.
"But the evidence ... did not support a finding that such a risk was 'likely' to be realised."
While a well integrity failure could lead to contamination of the aquifers, there would need to be a concatenation of individually unlikely discrete failures for this to occur, Justice Owens wrote.
Even if the risk of breach was likely, there was not enough evidence to show the aquifer would be contaminated by the natural gas, he added.
The concentration of the gas did not appear to be harmful and there was no evidence to show how likely it was that the gas could break down into the highly toxic gas hydrogen sulphide or what quantity could be produced, the judge found.
Ms Woods said it was too early to say whether Lock The Gate would appeal the decision.
"People in the Territory have been raising their fears about the fracking industry for a decade," she said.
"It's not clear how we go forward from here to secure comfort and protection of the water resources in the Northern Territory."
A statement from parent company Tamboran Resources welcomed the decision.
"Tamboran Resources ... remains committed to upholding the highest environmental standards and practices in our operations," a spokesperson told AAP.
In a prescient statement made a year ago, the company attacked the lawsuit as another in a "series of failed attempts".
It claimed the case attempted to deny the economic and social benefits the Beetaloo project would have for people in the region.
Fracking involves injecting a combination of water, chemicals and sand into deep shale layers underground at high pressure to extract gas.Â
The federal water trigger legislation was expanded by federal parliament in 2023 to require the assessment of the impact of large coal mining and coal seam gas projects on water resources.
Tamboran Resources is the largest acreage holder and operator in the Beetaloo Basin, with about 770,000 net prospective hectares.
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