Reservations required: Australia’s 20% domestic gas reservation scheme

Australia’s gas market is poised for one of its most consequential reforms in decades, with the Commonwealth announcing a mandatory domestic gas reservation scheme that will require LNG exporters to divert the equivalent of 20% of export volumes into the local market from 1 July 2027. Positioned as a response to affordability and supply pressures, the policy marks a decisive move away from market‑based regulation and introduces substantial regulatory and investment uncertainty for upstream projects.

A structural shift with investment risk

While intended to address affordability and supply concerns, there is a material risk that mandating domestic allocation will weaken incentives for new upstream investment. In that context, the policy may ultimately entrench, rather than resolve, structural supply constraints over the medium to long term.

Industry commentary has emphasised that diverting approximately 20% of export volumes into the domestic market may also:

• crowd out smaller and independent domestic producers;
• reduce competition in upstream supply; and
• affect future project sanctioning decisions.

Government position

The Government has positioned the reservation scheme as a central element of its energy policy, designed to put downward pressure on domestic gas prices, shield the Australian industry and households from global price volatility, and avoid forecast domestic gas supply shortfalls.

The reform is also framed as supporting the Government’s 'Future Made in Australia' agenda, particularly by securing supply for trade-exposed industrial users.

Background and policy context

The announcement follows the 2025 Gas Market Review, which identified shortcomings in existing mechanisms including the ADGSM, Heads of Agreement and Gas Market Code.

Existing regulatory measures will remain in place until the new scheme is implemented, contributing to continued regulatory layering and uncertainty in the interim period.

Key features of the reservation scheme

Key unresolved issues: Design questions and compliance framework

In various statements following the initial announcement, Government Ministers have confirmed that the 20% reservation will be calculated based upon all exported gas, not just uncontracted volumes. Gas reserved under the existing WA DomGas reservation Policy will count towards the new reservation obligation.

However, at a time when the Government is eager to ensure that Australia’s key trade partners are not offended during the fuel crisis, it has also confirmed an intention not to disturb existing export contracts.

There remain several material uncertainties, including:

• how the 20% requirement will be measured (project-level, participant-level or portfolio basis);
• how the mechanism providing flexibility to preserve existing export contracts will work;
• whether domestic supply by related entities will be counted toward compliance;
• how the scheme will interact with joint venture structures and marketing rights; and
• the pricing framework applicable to reserved gas.

Commercial implications for LNG exporters and upstream producers

Reservation obligations will compress margins and introduce additional regulatory risk. For marginal or capital-intensive projects, this may materially affect development decisions.

Producers will need to reassess contracting strategies and portfolio allocation, particularly in relation to domestic supply obligations and export commitments.

While the immediate supply impact of the scheme may be muted due to grandfathering, the announcement itself may have an immediate effect on investment sentiment and project timing.

Industry participants have also raised concerns that the scheme may:

• materially alter the competitive dynamics of the east coast gas market; and
• adversely affect Australia’s reputation as a reliable LNG trading partner, particularly in Asia.

Policy tension: Short-term affordability vs long-term supply development

The announcement highlights a central tension in the east coast gas market between delivering short-term affordability outcomes and maintaining the long-term investment incentives required to develop new supply.

Industry responses have emphasised that prior regulatory advice (including from AEMO and the ACCC) has pointed to removal of barriers to new supply as the primary solution to forecast shortfalls, rather than reallocation of existing production.

Where there are absent complementary measures that support development of new gas resources, there is a material risk that the policy will undermine the investment signals needed to meet future demand.

Lessons from Western Australia’s Policy

Western Australia has had a DomGas Policy in place since 2006.

In 2024, a Parliamentary Inquiry into the Policy found it to be effective in ensuring a reliable supply of gas at relatively stable and affordable prices, and in reducing exposure to price and supply volatility.

The WA Policy requires producers to reserve 15% of gas for domestic use. The Inquiry concluded that increasing this percentage would be an unjustified level of government intervention and could create regulatory uncertainty. While similar concerns about sovereign risk may arise at the federal level, the Inquiry noted that such concerns are not always decisive where there is a clear benefit to the State.

The WA Policy is not set out in legislation. Instead, it operates through individual agreements between the State and producers. This approach has allowed flexibility and better accommodation of commercial arrangements, but it has also raised issues around consistency, transparency and enforcement. As a result, the Inquiry recommended that WA consider strengthening the Policy framework, including by introducing legislation.

The WA regime likely provides a blueprint for domestic gas reservation and learnings from WA’s experience should be useful at a Commonwealth level.

Next steps

While the Government has announced funding to develop and implement the new scheme in its May budget, no new detail regarding the scheme has been provided.

The introduction of a domestic reservation scheme marks a decisive shift in Australia’s gas market policy and its success will depend on whether it can be implemented without undermining confidence in the regulatory stability of the sector. The announcement has been characterised as raising “more questions than answers”, particularly in relation to implementation detail, market impacts and long-term investment settings.

HopgoodGanim’s Resources & Energy team is closely monitoring developments and advising clients on structuring, contracting and regulatory strategy in response to the proposed reforms. We have previously advised on the ADGSM, Gas Market Code and WA DomGas Policy for major projects, and we are well placed nationally to assist with strategic and contractual considerations as the Commonwealth position unfolds.