The Lostock to Glennies Creek pipeline represents a key link of a broader water security strategy to connect the upper and lower Hunter and Central Coast water supplies.
Tuesday's budget allocated $11.1 million for the continued development of the project.
The pipeline was among several linkages identified in the November 2018 Greater Hunter Regional Water Strategy.
The State Government has to date invested $4.3 million to investigate the viability of a two-way pipeline between the 20 gigalitre Lostock Dam and the 283 gigalitre Glennies Creek Dam.
"The Upper Hunter has low water reliability because although Glenbawn and Glennies Creek Dams are large they only regulate a small proportion of the valley," the regional strategy said.
"Lostock, which has the potential yield, is a small dam. The eastern catchment is high yielding but largely unregulated and disconnected from the demands for mining and power stations located in the central catchment."
The 750 gigalitre Glenbawn Dam is the Upper Hunter's major dam.
Water NSW's 20 Infrastructure Options Study shows the Glennies Creek to Lostock pipeline could be built to transfer between 7.5 gigalitres per annum to 73 gigalitres per annum.
It would cost between $115 million to $502 million to build.
NSW Senator Perin Davey welcomed the investment in the project, which would form part of the Hunter Valley's bulk water supply network.
"This funding commitment is great news for local communities, agricultural water users and the construction industry," she said.
Planning is also underway for a proposed pipeline that will connect the Lower Hunter water network to Singleton.
The 190 gigalitre Mangrove Creek dam on the Central Coast is already connected to the Lower Hunter via the Hunter-Central Coast water transfer system.
