Draft legislation signals a more flexible approach, but key concerns remain 7 min read
The Federal Government has released exposure draft legislation for its proposed domestic gas reservation scheme. The Government appears to have responded to some industry concerns, notably by revising an obligation for LNG exporters to supply 20% of their export volume for domestic use, softening that amount to 'up to 20%'. However, the draft legislation also significantly expands the Commonwealth Resources Minister’s discretion over how the regime will operate.
The draft legislation contemplates LNG exporters supplying up to 20% of export volumes (with the proportion set by the Minister), with obligations designed to ensure the domestic market remains modestly oversupplied. However, the retention of forced supply obligations and a target of domestic supply reaching 110% of forecast domestic demand have drawn concern from across the industry.
The Government has also pushed back commencement of domestic supply obligations (DSO) by six months. LNG exporters are now expected to meet domestic supply obligations from 1 January 2028, rather than 1 July 2027 (with the scheme itself commencing on 1 January 2027 to allow export licence approvals to occur during 2027).
In this Insight, we examine what has changed and some practical implications for LNG exporters, gas producers, domestic gas users and investors.
Key takeaways
- The Government has moved from a fixed 20% domestic reservation requirement to a more flexible regime requiring exporters to supply up to 20% of export volumes, with the proportion determined by the Minister.
- Commencement has been delayed by six months, with domestic supply obligations (DSO) now proposed to apply from 1 January 2028.
- Export licences will be granted for 20–50 years (and renewable for an additional 20–50 years).
- The extent of relief available to any individual exporter will depend on the Minister. Carve-outs for existing contracts, infrastructure constraints and existing reservation arrangements are each subject to Ministerial determination, not automatic entitlement.
- For some participants, a key challenge will shift from fulfilling a fixed 20% obligation to understanding how the Minister and Australian Energy Regulator (AER) will set and calibrate individual exporters' obligations.
Key changes since the May 2026 framework
|
Issue |
May 2026 draft framework |
September 2026 exposure draft legislation |
Why the change matters |
|---|---|---|---|
|
Reservation requirement |
Fixed 20% domestic supply obligation. |
Supply obligation of up to 20%. |
Discards the mandatory reservation percentage in favour of Government discretion. |
|
Policy design |
Universal volume-based compliance model. |
Market-balancing model focused on maintaining adequate supply (with recognition that Western Australian and East Coast markets are separate based on physical connections). |
Suggests obligations will be linked more closely to forecast market conditions. |
|
Commencement |
1 July 2027 |
1 January 2028 |
Provides an additional six months for obtaining licences, planning, contracting and implementation (and aligns supply obligation better to domestic gas contracts, which are typically calendar-year based). |
|
Regulatory role |
Significant regulatory oversight and variation mechanisms. |
Ministerial discretion over DSO percentage and carve-outs for individual exporters, and AER calibrating individual obligations to demand. |
Creates additional uncertainty around future compliance requirements, and creates reliance on accuracy of forecasts. |
|
Primary risk for exporters |
Volume diversion risk from a known 20% obligation. |
Uncertainty regarding future obligation levels and carve-out availability. |
Shifts attention from complying with a fixed percentage to understanding how the Minister and AER will exercise discretion, including on carve-outs. |
What has changed?
When the Government released its draft design framework in May 2026, the central feature of the scheme was straightforward: LNG exporters would be required to domestically supply an amount equivalent to 20% of export volumes.
That approach drew criticism from a range of stakeholders, including LNG exporters, investors and some domestic gas producers.
The latest draft legislation appears to reflect at least some of that feedback. Instead of requiring a fixed 20% reservation, the Government is now proposing a regime under which exporters may be required to supply up to 20% of export volumes to the domestic market.
The Government has retained the obligation to ‘supply’, not merely to ‘offer’, meaning that satisfying the obligation will usually require a legally binding contract or net contribution to facilitated markets. At the same time, the Government has retained its broader policy objective of ensuring adequate domestic gas availability while maintaining a 'modest' degree of market oversupply.
Domestic supply obligations will be aligned to the physical market in which the exporter operates. The obligation in Western Australian and the East Coast markets will differ based on their supply/demand balances. For WA exporters, it is uncertain how the new federal obligation will interact with the state's existing domestic gas reservation policy, which already requires 15% of LNG project gas to be reserved for domestic use. However, existing reservation arrangements are a recognised basis for reducing an exporter's DSO (subject to Ministerial discretion on how much).
The draft legislation has also replaced the May 2026 framework's 'release valve' mechanism, which would have allowed exporters to export surplus DSO volumes if minimum liquidity requirements were met. Under the draft legislation, there is instead an 'overs and unders' mechanism, where a proponent that meets 90% of the supply obligation may defer the remaining quantity across the next three regulatory periods. Notably, the removal of the release valve means that even where the domestic market does not need additional gas, there is no express mechanism to export the surplus.
The draft legislation also expands on the proposed additionality framework, designed to ensure the integrity of the DSO by distinguishing gas that genuinely adds to domestic supply from gas that would have been available regardless. While the draft legislation establishes the core architecture of this, the practical detail, including how baselines are set and what criteria the AER will apply in approving additional gas below the baseline, will be determined by the AER's subordinate instruments, which are not yet available.
A shift from a volume obligation to a market-balancing mechanism?
The most significant development may not be the relaxation of the fixed 20% obligation, but what it suggests about the underlying design of the scheme.
Rather than requiring a fixed DSO percentage irrespective of market conditions, the DSO percentage will effectively operate by reference to the level of supply required to maintain the target domestic market oversupply.
This involves both Ministerial and AER discretion. The Minister sets the DSO percentage and determines carve-outs for individual exporters, while the AER calibrates individual obligations to forecast demand. The accuracy of this forecast will have a significant impact on how the regime plays out.
There is a natural tension between what industry may consider too much uncertainty and the flexibility the Government needs to achieve its target domestic market oversupply. For an industry built on long-term investments and long-term sales contracts, the prospect of DSO settings being subject to periodic regulatory and Ministerial adjustment may be difficult to reconcile with the certainty needed for investment decisions and financing.
Assuming this is how the scheme is implemented, LNG exporters could face varying DSO depending on market conditions, demand forecasts and regulatory assessments. Participants may find the new regime harder to assess than the original fixed-percentage model (albeit likely less onerous) and, subject to the prevailing price of LNG, investment signals are likely to have substantial knock-on impacts on the domestic market.
What does this mean for LNG exporters?
For LNG exporters, the apparent softening of the framework may provide some comfort and reduce concerns that they could be forced to divert gas into a domestic market that does not require additional supply.
The revised approach may also provide greater flexibility in dealing with:
- grandfathering of long-term LNG contractual commitments;
- portfolio balancing constraints;
- infrastructure limitations; and
- existing domestic reservation arrangements.
However, that flexibility comes at a cost. Under the original model, exporters knew their headline compliance obligation. Under the revised framework, the maximum obligation is known, but the actual obligation depends on future Ministerial and AER decisions informed by market assessments and an evaluation which individual exporters should receive carve-outs. Licence holders will also be required to maintain financial assurance as prescribed by the rules, the form, quantum and conditions of which are not yet defined.
The Minister's power to suspend or cancel an export licence for non-compliance, without compensation, adds a further layer of uncertainty that may weigh on investment decisions.
What does this mean for domestic gas users?
For domestic gas consumers and large industrial users, the revised approach suggests the Government remains committed to increasing domestic gas availability and reducing the risk of future supply shortfalls.
However, a deliberate oversupply target of 110% of forecast demand, combined with forced supply obligations, risks pushing surplus gas into the market for which there may not be clear demand. Domestic suppliers will continue to hold concerns that this approach may flood the market with gas diverted from exports, suppress pricing below levels that support new investment, and crowd out smaller, domestic-focused producers. The challenge will be balancing the Government’s supply security objective against the need to maintain investment incentives and encourage future gas development.
This comes at a time which is already challenging for new gas developments, in particular due to approvals and approval timelines remaining problematic, particularly outside of the Northern Territory, Queensland and Western Australia.
A regime that successfully balances those objectives could improve supply security while preserving incentives for investment. A regime that is overly discretionary may struggle to provide the certainty required for long-term project development and contracting.
What's next
The release of draft legislation marks an important evolution in the Government's domestic gas reservation policy. While the move from a fixed 20% reservation requirement to an obligation of up to 20% may alleviate some industry concerns, key features of the draft include the retention of forced supply obligations, a 110% oversupply target, broad Ministerial discretion, and the power to cancel licences without compensation. The draft also introduces uncertainty about how domestic supply obligations will be determined and administered, with Ministerial discretion at the centre of the regime’s operation.
How well the framework strikes a workable balance between domestic energy security, investment certainty, and a competitive domestic gas market remains to be seen.
Submissions on the draft legislation are open until 24 September 2026.