Cougar Energy says it cannot understand why the Queensland Government shut down its underground coal gasification (UCG) site on environmental grounds when breaches have occurred at coal seam gas projects.

The Government has ordered the permanent closure of the UCG trial site at Kingaroy, in the state's south, after traces of banned chemicals were found in water bores last year.

The company plans to appeal against the decision and managing director Len Walker says the traces found at the site are smaller than those detected at some coal seam gas operations.

"The levels of benzene that have been quoted from the coal seam gas industry [that] has been recovered in their sampling is substantially higher than the limited number of readings that we've encountered and has not been treated with any significance," he said.

"Why that is, is for the Government to explain."