Australia softens gas reservation plan to up to 20% as start moves to January 2028

Australia has materially redesigned its proposed national Domestic Gas Reservation Scheme, replacing the earlier expectation of a fixed 20% supply requirement for LNG exporters with an obligation of up to 20% that can be calibrated according to domestic-market needs.

The exposure draft released on September 10 targets enough reserved gas to keep the relevant domestic market supplied at approximately 110% of forecast demand. Government estimates indicate the framework could make up to 200 petajoules of additional gas available annually, compared with projected supply shortfalls of up to roughly 140 petajoules.

Exporter obligations are now expected to begin on January 1, 2028, six months later than the July 2027 timetable associated with earlier proposals. Existing export contracts will receive protection under the design, while the Australian Energy Regulator and government will use market information to determine how large an obligation is actually necessary rather than automatically applying the full ceiling.

The compromise gives major exporters including Santos Limited (ASX: STO), Shell plc and Origin Energy-backed Australia Pacific LNG more flexibility, but it does not remove the central feature opposed by parts of the industry. Exporters subject to the regime will still be required to supply gas into the domestic market rather than merely make volumes notionally available.

How different is the new “up to 20%” scheme from the earlier proposal?

The difference is economically significant because the maximum obligation and the actual obligation are no longer necessarily the same number. Under the revised approach, the government wants enough additional supply to maintain a modest domestic surplus, with the obligation reduced when market forecasts show that the full 20% is unnecessary.

That design addresses one of the gas industry’s main criticisms of the earlier framework. Producers argued that forcing the same percentage into the domestic market regardless of actual shortages could create excessive supply, depress prices below levels required to support investment and discourage development of the very fields Australia will need later.

The new 110% demand target creates a measurable policy objective. Instead of reserving gas simply because it is exported, regulators would attempt to calculate the volume required to keep forecast supply approximately 10% above domestic demand.

Uncertainty has not disappeared because forecasts can change and exporters still need to understand precisely how obligations will be allocated between projects. A flexible percentage can reduce unnecessary intervention, but it may also make annual planning more complicated if companies cannot predict their future requirement far enough in advance.

Why does the January 2028 start provide meaningful relief to Santos and GLNG?

Santos has been particularly vocal because its Gladstone LNG venture operates differently from some competing export projects. GLNG has historically relied on third-party gas and swaps alongside its own production, leaving it sensitive to any requirement that could force additional domestic supply while maintaining long-term LNG contracts.

Moving the obligation from July 2027 to January 2028 provides another six months for producers to adjust portfolios, negotiate supply and respond to detailed regulations. The treatment of existing contracts also reduces the risk of immediate conflict between domestic obligations and previously signed export commitments.

The revised framework still leaves GLNG exposed over time as contracts expire or change. A flexible maximum reduces the initial burden but does not create a permanent exemption, which means Santos will continue to evaluate whether incremental Queensland development or third-party purchases are needed to satisfy future obligations.

Santos shares closed at A$8.53 on September 10, virtually unchanged from A$8.52 the previous day and around 3.9% above the September 4 close of A$8.21. The subdued session suggests investors did not treat publication of the draft as a dramatic new valuation event, although the company had already recovered strongly during the preceding week.

Why does Australia want 110% of forecast demand instead of simply matching consumption?

Matching forecast demand exactly would leave little protection against production outages, unusual winter consumption or errors in supply estimates. The government therefore wants a modest surplus designed to improve availability and reduce the risk that individual industrial customers struggle to secure contracts.

Manufacturers have argued that Australian gas prices can remain elevated even though the country is a major exporter. Chemicals, fertilisers, glass, food processing and other energy-intensive industries need gas both as a fuel and, in some cases, as a feedstock, making reliable supply directly relevant to domestic manufacturing competitiveness.

The 110% target is intended to create enough competition between sellers to put downward pressure on prices without generating an enormous structural oversupply. Whether that balance can actually be achieved will depend on the accuracy of demand forecasts and how producers respond to lower domestic prices.

This creates the core policy contradiction. Consumers benefit when more gas is available at lower prices, while future consumers suffer if those lower prices make new production uneconomic and supply falls later.

Why is the new scheme still controversial despite industry concessions?

Australian Energy Producers has acknowledged that the flexible design is an improvement on earlier proposals, but the industry remains concerned about mandatory sales and the possibility that forced oversupply weakens investment signals.

Producers typically make development decisions years before new gas reaches the market. A company considering drilling, processing or pipeline infrastructure must estimate future selling prices, so a government mechanism capable of requiring additional volumes at uncertain prices can affect investment even before an obligation takes effect.

Industrial consumers see the problem differently. Waiting until a shortage becomes severe before intervening would give factories little protection because new gas projects cannot be developed instantly, while importing LNG or building emergency infrastructure can be expensive.

The consultation process therefore has to resolve how obligations are calculated, what constitutes a compliant domestic sale and how existing contracts, regional markets and infrastructure constraints are treated. Submissions on the draft legislation close on September 24, after which the government intends to introduce legislation to parliament.

Is this a genuinely new development after the earlier 20% reservation debate?

Yes, because the policy architecture has materially changed rather than merely repeating the original proposal. Earlier debate centred on a 20% obligation and a July 2027 start, while the September exposure draft introduces an adjustable ceiling, the 110% supply target and a January 1, 2028 start for exporter obligations.

Those changes alter the economics for affected LNG projects. A lower requirement during well-supplied years can reduce forced domestic volumes, while the six-month delay gives producers additional transition time.

The scheme still preserves enough of the original policy that exporters have not achieved everything they wanted. The government remains committed to requiring domestic supply and believes the framework can provide up to 200 petajoules annually when market conditions justify that level.

The next important milestone is therefore legislation, not another round of policy speculation. Once the final calculation rules are known, companies such as Santos, Origin Energy and Shell can estimate the actual burden on individual LNG portfolios rather than debating a single headline percentage.