Australia's domestic gas reservation scheme: draft design and what it means for LNG exporters 13 min read
The Federal Government has now released its consultation paper, setting out the first substantive detail on how it proposes to implement the announced domestic gas reservation scheme from 1 July 2027. Consultation is open until 30 June 2026.
The headline settings remain as announced on 7 May 2026: from 1 July 2027, all Australian LNG exporters will have a domestic supply obligation of 20% of exported gas volumes, with protections for LNG contracts entered into on or before 22 December 2025.
What is new, however, is the level of detail now proposed around how the scheme would operate in practice. That detail has important implications for LNG exporters, domestic gas market participants and counterparties assessing compliance pathways, contract exposure and potential grounds for variation of the domestic supply obligation.
In this Insight, we outline the key elements of the proposed framework, highlight where the draft design materially affects risk allocation and compliance planning, and identify the issues clients should consider now, including:
- scope and commencement;
- how the domestic supply obligation is calculated;
- grounds for varying the domestic supply obligation;
- the circumstances in which domestic supply obligation can be met from third party volumes
- the export approval process; and
- other regulatory settings including conduct and transparency obligations, the regulator and remedies for contraventions.
We expect many of these issues to attract close scrutiny during consultation. But with just over a year until the first mandated domestic supply date, affected participants should also be using this period to test likely compliance positions and prepare for implementation.
The draft framework provides meaningful additional detail, but it still leaves important questions to future AER and ministerial decisions. While the additional detail provides more certainty as to how the regime will operate, it is clear that the government is pursuing a model where it seems to maintain some discretion to adapt it to domestic gas market circumstances, even if that occurs at the cost of greater certainty as to how the regime will operate.
For further background to these reforms, see our previous Insights, 'Gas market reforms taking shape' and Australia's gas reservation scheme which discussed earlier announcements.
Key takeaways
- The draft framework moves the policy from headline announcement to the next level of detail of the regulatory model, giving LNG exporters and other market participants a clearer basis for assessing likely exposure.
- From 1 July 2027, Australian LNG exporters will be required to domestically supply 20% of the volume of their gas exports, subject to a range of proposed mechanisms for variations and and compliance flexibility.
- The draft envisages applications for export approvals and compliance plans being submitted between 1 January 2027 and 1 July 2027 in preparation for that commencement.
- The proposed design relies heavily on future AER and ministerial decisions. That may allow the regime to respond to market conditions, but it also leaves important areas of uncertainty for parties making commercial and operational decisions now.
- The 20% domestic supply requirement is qualified by potential grounds for applying for Ministerial approval for a reduction of that obligation, but such approvals may be conditional and/or difficult to qualify for.
- The protection proposed for pre-22 December 2025 LNG contracts appears narrower than many market participants may have anticipated, particularly given the high threshold required to reduce the domestic supply obligation (DSO) on this basis of showing there is no viable alternative to meeting the DSO.
- The framework creates a possible pathway for meeting the DSO through third-party supply, but the additionality test (requiring that the third party gas is additional to that which would otherwise have been available to the domestic market) and timing constraints are likely to make that pathway more viable for some participants than others.
- There remains significant areas of ongoing uncertainty in relation to how the scheme will practically apply to LNG exporters in Western Australia and the Northern Territory.
- The period before 1 July 2027 is likely to be commercially significant. Clients should be using it not only to engage in consultation, but also to model likely DSO exposure, test compliance options and identify possible grounds for variations to the DSO.
Summary of key elements of the draft domestic gas framework
We have summarised below the key elements of the draft domestic gas framework. The summary is intended as a practical reference point, with the commentary that follows focusing on the issues most likely to matter in practice for clients assessing risk, compliance and strategy.
Elements and proposal in draft framework
Export approvals required from 1 July 2027
LNG exporters required to meet their domestic supply obligation from 1 July 2027, with no transitional phase in beyond that provided by some of the grounds for varying the domestic supply obligations discussed below, such as grandfathering and infrastructure constraints).
Between 1 January 2027 and 1 July 2027, LNG exporters will be required to:
- apply for an export approval
- submit compliance plans for the 2027 regulatory period
- propose any variation in their annual DSO to recognise existing export contracts
(see descriptions of each of those processes further below and the detailed flow chart released).
LNG export approval process
LNG exporters nationally.
The DSO will initially be calculated as 20% of LNG Exports to create an annual DSO (measured in thermal energy content, i.e. joules).
LNG regassified and contracted for the domestic market (i.e. delivered through an import terminal) does not count as LNG Exports.
Ministerial power to review the Reservation Percentage (i.e. the 20%) with advice from AER and AEMO based on criteria with examples given being in circumstances of material and persistent undersupply or oversupply.
At the request of LNG exporters (either through the export approval process or annual compliance planning), Ministers will have the power to:
- vary an exporters DSO (see examples below); and
- attach bespoke conditions (including in their export approval) that will ensure regulated entities with varied DSOs can continue to meaningfully support domestic supply.
Ministers will seek advice from the AER and consider all exporter DSO positions to ensure any variations maintain the policy objectives of the domestic gas reservation scheme (i.e. maintain domestic supply in line with domestic demand plus a small buffer).
There are a number of specific instances of grounds for variations referenced, with the key examples listed separate below. In addition to those key examples, it is recognised that DSOs can also be varied due to unforeseen and unavoidable circumstances (with the example given being unplanned outages with existing infrastructure).
To inform decisions on annual flexibility, AER (in consultation with AEMO) will provide advice on the domestic market demand outlook, impact of all LNG exporters compliance plans on domestic supply to ensure there is no overall shortfall and any adjustments to DSO requirements to avoid significant oversupply of the domestic market in the year ahead.
Where an LNG exporter supplies domestic gas in excess of its DSO it may seek Ministerial approval for a credit to supply a reduced DSO in future years.
Whether an unmet obligation is carried forward and results in a higher DSO in future years will be determined by a Ministerial decision based on assessment of domestic demand over the forward period and the conditions of variation request.
Exporters may propose a variation to their annual DSO to account for contracts existing on 22 December 2025 subject to the following limits:
- extension or variations executed after 22 December 2025 are not considered existing contracts (even if the underlying contract pre-dates 22 December 2025).
- To reduce the DSO, the exporter must first demonstrate they have no viable alternative to meet their DSO without breaking existing contracts, taking into account a range of matters including the ability to:
- buy gas from third parties
- flex down delivery volumes under export contracts
- fulfil export contracts using LNG sourced from portfolios of international markets
which sets a high threshold for protection.
Exporters must apply to Minister for export approvals.
AER will provide advice on domestic market demand outlook, impact of exports on domestic supply and any adjustments to DSO requirements.
Consideration is being given to whether application and approvals are based on calendar year or financial year.
As part of applying for export approvals, Ministers will be able to agree to a varied DSO if entities are able to provide they are unable to physically supply gas due to infrastructure constraints.
Over time, such LNG exporters would need to demonstrate they are pursuing commercial arrangements to overcome any infrastructure constraints that may otherwise prevent them supplying their DSO gas into the domestic market over the medium-longer term.
It is recognised in passing that existing regulatory arrangements may form a basis an application to vary an annual DSO. However, there is no further detail provided.
This evidently leaves significant uncertainty remaining around how this regime will interact with the Western Australian domestic gas policy.
Meeting an LNG exporter's DSO requires an actual domestic supply (not just an offer).
LNG exporters can satisfy their DSO by:
- supplying gas from their own production (under term contracts, spot contracts, sales into AEMO facilitated markets, and other contractual arrangements that result in delivery to the domestic market as approved by Ministers); or
- where unable to supply gas from their own production, engaging third parties to supply additional gas (including via swap arrangements) through investment or offtake agreements provided it can be demonstrated that this gas satisfies an 'additionality' test (i.e. the gas would not otherwise have been available to the domestic market), with examples given including gas supplied where the LNG exporter has underwritten the development of supply from a new field or expansion of an existing field through investment and offtake).
Being able to rely on third party supply arrangements of that type would be subject to application for and receipt of an export approval.
DSOs can be satisfied by existing domestic supply arrangements.
Timing (e.g. seasonal shifting) and/or location-swap arrangements may be allowed as long as the LNG exporter's DSO provides for a net contribution to the domestic market (for example over a forward period).
Any DSO volumes unable to be contracted under longer term arrangements will be required to be made available to the domestic market through short term markets (as determined by the AER in consultation with AEMO).
The Gas Market Code will include a minimum liquidity requirement for LNG exporters to support spot markets with 'reserved' DSO gas and which will outline the liquidity commitment conditions which must be met for the AER to allow volumes under the DSO that are surplus to the domestic market's demand to be exported (i.e. released from the DSO).
These arrangements are intended to ensure the quantum of gas available to the domestic market supports a 'modest oversupply' and functional spot markets.
However:
- gas will only be considered surplus if:
- market indicators shown near-term supply adequacy
- regulated entities have met transparency, liquidity, marketing and conduct obligations (making gas available on reasonable terms)
- once established, participation in a new market mechanism based on periodic auctions aimed at balancing short-term supply and demand
- any DSO volumes exported through the release valve mechanism must be made up in subsequent years (with the rationale being they could be called on to support market resilience during future anticipated supply tightness or shortfalls)
- accrual of DSO volumes by an LNG exporter will be limited to a share of their annual DSO (indicatively suggested to be 30% to reflect the current structure of the domestic contract market where around 10-30% of gas is traded in spot markets)
Gas Market Code's conduct and negotiation obligations (Parts 3-4 of existing Code) to be replaced by selling practice requirements, proposed to include:
- producers to determine reasonable offer open periods
- producers and prospective buyers should determine negotiation timeframes
- price and non-price terms should reflect appropriate risk allocation
- producers should not withdraw or terminate offers unless there is a material change in circumstances
- express of interest (EOI) responses should receive timely feedback
- sellers and buyers should negotiate in good faith
- EOIs for gas supply arrangements to be published on the AEMO Gas Bulletin Board
AER guidelines on selling practices would apply to LNG exporters, but also to gas buyers and sellers and other regulated gas producers (as defined under the existing Gas Market Code).
Measures to improve transparency of gas prices and available gas supply on the AEMO Gas Bulletin Board, as detailed in Attachment B of the consultation paper.
LNG exporters must annually submit a forward-looking annual compliance plan to the AER covering estimated DSO, forecast gas availability, proposed compliance pathway and prior-year positions, risks and mitigations.
AER will establish a performance reporting framework to assess the progress of LNG exporters towards meeting their DSO.
Australian Energy Regulator (AER) will administer and enforce the reservation scheme
But with Ministerial and Department decisions in respect of matters including:
- setting the DSO percentage (through initial approvals and reviews)
- issuing export approvals
- agreeing individual project DSO variations
- any review of the formula used to calculate the DSO
- other decisions (undefined) relating to the operation of the domestic gas market
- directing and delegating matters to the AER
The AER is intended to have its usual range of regulatory remedies available including court enforceable undertakings, infringement notices, injunctions and/or financial penalties.
The penalty system is intended to be tiered with higher penalties for contraventions of core obligations, with the highest tier expected to be as high as those for tier 1 penalty provisions in the current Gas Market Code (maximum penalty for a corporation of $100 million, three times the value of the benefit obtained or if the benefit cannot be determined 30% of the corporation's adjusted turnover during the breach turnover period).
What the draft framework means in practice
The draft framework has only recently been released, but several features are already likely to shape how industry participants respond to the consultation process and prepare for implementation.
- Relatively interventionist design – Domestic gas reservation is inherently interventionist, but this draft goes further than simply setting a reservation percentage. It leaves significant matters to future AER and ministerial decisions, including decisions that may directly affect annual obligations, compliance pathways and market access. That may give the regime flexibility, but it also increases uncertainty for clients planning contracting, supply and investment strategies.
- Weaker protection for grandfathered contracts – The draft protection for pre-22 December 2025 LNG contracts appears weaker than many in industry may have expected. In particular, the requirement to show there is no viable alternative to meeting the DSO without breaking those contracts sets a high threshold for obtaining a reduced DSO on this basis. For some exporters, that may mean the practical value of grandfathering will turn heavily on whether alternatives such as third-party gas, portfolio flexibility or reduced export volumes are realistic.
- A possible, but confined, pathway to compliance through third-party supply – The draft introduces a pathway to meet the DSO using third-party production, including through investment and offtake structures. That is potentially important, but the additionality test is likely to be demanding. The pathway may also be difficult to use where new supply depends on approvals, development lead times or infrastructure, such that the new supply timing does not align with annual DSO compliance periods.
- Continued uncertainty about interaction with the WA domestic gas policy – The draft acknowledges that existing regulatory arrangements may justify a variation to an annual DSO, but gives little detail on how the Commonwealth regime would operate alongside Western Australia's existing domestic gas policy. That uncertainty is commercially significant for affected participants and is likely to be a central issue in consultation.
- Continued uncertainty for NT exporters facing infrastructure constraints – The draft recognises infrastructure constraints as a basis for variation to a DSO, but indicates that to be available the exporter will need to be pursuing arrangements to overcome such constraints. For Northern Territory exporters, where pipeline connectivity to the east coast market is limited, and the economics and feasibility of new pipeline arrangements may be challenging (at least without 3rd party volume), how .
- Some flexibility, but less clear how often it will be granted– The proposed mechanisms for variation, credits, carry-forward treatment and in-year flexibility show that the Government has responded to feedback that a rigid application of the 20% requirement could produce impractical outcomes. However, most of those mechanisms are conditional and discretionary, so the extent to which they will actually delivery such flexibility in practice remains to be seen.
- Focus on maintaining a 'modest oversupply' – The release valve, liquidity requirements and AER assessments of the domestic market to support those and DSO variation mechanisms are designed to avoid a framework that either starves the domestic market of supply or forces additional volumes into a market that cannot absorb them efficiently. This is clearly intended to respond to feedback that a rigid application of 20% of export volumes will swamp domestic suppliers and depress pricing sufficiently to eliminate incentives to invest in new domestic supply.
The significance of each of these issues will differ between participants across the gas value chain.
Next steps
The consultation process now matters on two fronts. It is an opportunity for stakeholders across the gas value chain to seek changes to the design of the regime, but it is also the clearest signal yet that affected participants should begin preparing on the basis that some form of the scheme will proceed.
Submissions on the draft framework are open until 30 June 2026.
The draft also contains enough detail for LNG exporters, in particular, to begin estimating likely DSO exposure and considering the practical steps required to respond. That includes considering:
- how they could bring themselves into compliance with the DSO obligation; and/or
- what grounds they may have for varying their DSO.
Given the relatively short period between now and commencement, affected parties should be using this window to do two things in parallel: make submissions on the policy settings that matter most to them, and develop a workable strategy for compliance if the framework proceeds in broadly its current form.
For clients, the immediate priority is to identify the issues that are most material to their position, engage early on those issues and move quickly to assess the legal, commercial and operational steps that may be required. We will continue to monitor developments and provide updates as the draft framework progresses.