Gas market reforms taking shape

Balancing domestic reservation with energy security for Australia’s trading partners 9 min read

The Federal Government has announced a major intended shift in Australia’s gas policy: that, from 2027, LNG exporters be required to reserve 15–25% of their production for domestic use. This new domestic gas reservation scheme aims to secure affordable energy for Australian households and businesses, while balancing the needs of international trading partners. The move follows the release of the Gas Market Review report (the Review Report) and marks a turning point for Australia’s gas, LNG, electricity and manufacturing sectors. 

While the new scheme will affect some Australian LNG projects and proponents, its 2027 start date and anticipated protection for existing contracts give exporters some time and flexibility to plan compliance. However, the timelines for bringing on new production may still make that timing challenging. The protection for existing contracts is an important element to provide security and comfort to Australia's major trading partners, who rely on Australian LNG supply for energy security.

Meanwhile, the Review Report recommends removing other short-term government interventions into the gas market such as the Australian Domestic Gas Security Mechanism (ADGSM), the East Coast gas market gas price cap and prescriptive gas supply negotiation provisions. If those streamlining recommendations are implemented, that could finally signal the end of ad-hoc government interventions, which has the potential to return much-needed regulatory certainty to Australia's gas sector.

In this Insight, we discuss the announced reforms and highlight the key recommendations of the Review Report from amongst the many potential reforms put before the Government, including the principles to be incorporated into the new domestic gas reservation system as it is developed in 2026.

Key takeaways 

• Industry consultation to commence in 2026 on the introduction of a domestic gas reservation scheme that will require exporters to reserve 15-25% of production for domestic supply, with the intention for the scheme to commence in 2027.
• Limited other details on how the scheme will operate, but recommended principles in the Review Report are likely to provide a starting point, including critically in respect of existing contracts.
• It was recommended that the reservation scheme have the capacity to be national in scope, expanding the reach beyond the Queensland LNG projects which have been the target of scrutiny to date, to the Northern Territory LNG projects and raising questions about how it would interact with Western Australia's existing domestic gas reservation arrangements.
• The Review Report also proposes removing the short-term interventionist measures in the East Coast gas market, including the ADGSM, the gas price cap and the Heads of Agreement, and making other complementary and targeted reforms.

Domestic gas reservation

As the Review Report recognises, the reality is that the growth of the East Coast LNG industry has linked the East Coast gas market to export markets, but has also had significant economic benefits. There is also an acknowledgement in the government announcement and Review Report that the previous government interventions have not provided a workable long-term solution.

While the Review Report does not itself propose a proportion of an exporter's production that must be supplied domestically, the government announcements refer to between 15-25% (notably set as levels reflecting the Western Australian policy for the 15% lower bound and the Indonesian policy for the 25% higher bound). The proportion ultimately implemented will make a significant difference to the implications of the reforms.

However, beyond the proportion adopted there will also be challenging questions of detail to resolve in the 2026 consultations, including:

• the extent to which the domestic supply commitments can be satisfied by domestic supply in other parts of an LNG producer's corporate group or joint ventures in which they participate; and
• whether there is any appetite for a market-trading-type mechanism that could enable LNG exporters to purchase domestic supply credits or certificates to incentivise the development of the most efficient projects for domestic supply irrespective of ownership (rather than only incentivising development of projects owned by LNG exporters).

Potential principles to underpin the domestic gas reservation scheme

While the Government's announcement deferred much of the detailed design, the Review Report suggests the reservation scheme could be guided by the following principles:

• Existing contracts would be respected—both domestic and international contracts.
• Capacity to be national in scope, working in tandem with federal, state and territory gas market mechanisms.
• Aim to commence in 2027.
• Consultation on design to ensure additional domestic supply as existing contracts expire, and to drive downward pressure on price.
• If the domestic gas reservation model requires export approvals, exporters will need to meet domestic supply obligations before exports are approved.
• Producers would have flexibility to domestic and export obligations through a variety of standard commercial/market-based arrangements, including contracting with exporters or domestic producers so long as supply obligations are met.
• Encourage long-term domestic gas supply contracts to support investment decisions that rely on gas as an input, including commercial and industrial (C&I) users and supporting gas infrastructure providers.
• Provide long-term certainty for commercial production and investment, including by clearly setting domestic supply requirements well in advance of establishment and minimise impact on Australia's LNG trade partners and their energy security.

Those principles reflect an attempt to balance a desire to increase domestic supply and place some downward pressure on domestic gas prices, while seeking to not disrupt the often long-term contracts and allow sufficient time for both sound regulatory design and adoption by LNG exporters.

The envisaged potential national application is an interesting element as it:

• involves application to the two Northern Territory LNG facilities, which have fairly limited domestic gas customers near them (and pipeline capacity constraints in supplying gas to the balance of the East Coast gas market—although perhaps LNG import terminals could play a part); and
• gives rise to interesting questions about how the reservation scheme would interact with the existing Western Australian domestic gas reservation scheme, which is implemented through bilateral arrangements between the state government and Western Australian LNG projects.

Removing other interventions

In welcome news for LNG producers, the Review Report recognises that an appropriately designed domestic reservation scheme would enable streamlining of the regulatory framework by removing the need for, or phasing out, the current (somewhat piecemeal) policies:

• the export controls imposed by ADGSM
• the gas price cap in the Gas Market Code
• the conditional Ministerial exemption framework in the Gas Market Code (where exemptions where available for domestic supply commitments)
• the domestic supply obligations in the Heads of Agreement with the Gladstone LNG producers
• cessation of the ACCC East Coast gas market inquiry in its current form, and consolidation of market monitoring, analysis and reporting of gas markets through the AER (replacing the multiple and overlapping information production requirements imposed on producers currently).

Where the reservation scheme only commences in 2027, we anticipate these measures may continue to apply in the interim (with a short extension of the Heads of Agreement being negotiated being specifically noted).

Complementary reforms

The Review Report proposes that to complement a domestic gas reservation scheme, the Government could also pursue other initiatives, with recommendations we consider particularly notable including:

The government announcement is light on detail, but refers to pairing the domestic gas reservation scheme with 'targeted market reforms', which suggests that at least some of these other complementary recommendations will be implemented alongside the domestic gas reservation scheme.

States and territories play an important role

As the Report recognises, to avoid or mitigate forecast shortfalls, new sources of gas supply and increased production are needed, and federal, state and territory legislative and regulatory barriers to investment in new gas supply and infrastructure projects must be addressed to support that.

At the federal level, the Review Report identifies that reforms to the Environment Protection and Biodiversity Conservation Act 1999 (Cth) will reduce some of the regulatory costs associated with greenfield gas projects. However, the greatest barriers to new gas development have been in the southern East Coast states, which also contain high gas demand and declining production from the major gas basins in those regions.

For both gas suppliers and customers, it is critical that this other aspect of the domestic supply equation is also appropriately addressed. However, we are conscious this has been noted regularly in the ACCC's periodic East Coast Gas Market inquiry reports, without much meaningful change of this type.

The hope is that the Federal Government's clear policy direction and the increasing recognition of the importance of gas to the energy transition and preserving Australia's strategic manufacturing capacity will create the momentum to encourage other governments to do their part in encouraging greater production and supply.

Next steps

Industry consultation is likely to commence early in 2026, and we anticipate that LNG proponents, domestic suppliers, gas explorers, gas-fired electricity generators, manufacturers and governments will want to have their say in shaping how these landmark reforms will ultimately proceed.