Groundwater models that are used to predict the impact of coal seam gas extraction on regional aquifer systems employ coarse grids and grossly upscaled representations of hydraulic properties. The numerical demands of regional simulation also require that representation of two-phase flow near points of gas and water extraction be simplified. By processing the outcomes of detailed two-phase simulation of near-field pressure and saturation distributions, the factors controlling flow of water close to extraction points, and propagation of induced drawdown further afield, can be properly understood. So too can the requirements of an upscaled representation of these processes, if this representation is to have integrity. It is shown that integrity of the upscaling process requires that particular attention be paid to simulation of near-source desaturation, and to meeting the numerical demands arising from high sensitivity of relative water permeability to this desaturation in a grossly upscaled model.