Domestic Gas Reservation draft design: Key takeaways

• New primary legislation will establish export approval process, the DSO, power for Ministers and regulator, powers to set reservation percentage, DSO formula and obligations.
• Subordinate legislation will set out rules specific to export approvals.
• The Gas Market Code will be amended to establish market-based mechanisms to govern domestic supply and market conduct obligations.  We expect that the price cap will be removed. 

• Consultation on Draft Framework closes on 30 June 2026.
• Legislation is intended to commence in 2027.
• Export approvals will be required from 1 July 2027 (based on a pro-rated CY 2027 LNG export volume).

• The Australian Energy Regulator (AER) will administer the Scheme.

• The Scheme will apply to LNG exporters.
• The new Gas Market Code conduct provisions will apply more broadly to regulated gas producers consistent with the existing framework. 

• LNG exporters will have an annual obligation to supply the domestic market with a proportion of their total exports, calculated as: DSO = 20% x LNG Exports.
• The ‘LNG Export’ volume is calculated on the thermal energy content of exports and is measured at the point of loading, such that gas lost during liquefication is not captured.
• LNG that is re-gassified and contracted for the domestic market (for example, through an import terminal) is excluded from ‘LNG Exports’ for the purposes of the DSO.
• LNG exporters are required to actually supply, rather than just offer the gas to the domestic market.
• The new legislation will include a mechanism by which the Ministers can review the required DSO percentage, but only if ‘clear and observable criteria based on the guiding principles for the domestic reservation are met, and with advice from the AER and AEMO’ (eg forecast material and persistent under and oversupply, changes to the composition of the market).  Any such review will not be time bound, meaning it is only triggered by a set schedule but by observable market conditions.

• LNG exporters can satisfy their DSO by entering into standard commercial and market-based arrangements, including sales through bilateral contracts and AEMO facilitated short-term markets.
• Where an exporter is unable to meet its DSO from its own production, it may meet its DSO through other third-party arrangements (subject to the ‘additionality test’).  This could include:
  • underwriting new third-party production of natural or renewable gasses through investment and offtake agreements;
  • third party purchases, including form other LNG exporters;
  • re-gassification of LNG at import terminals. 

• LNG exporters may seek a variation to their DSO to account for volumes committed under Pre-Existing Contracts (LNG export contracts entered into on or before 22 December 2025), provided they can demonstrate that there is no viable alternative to meeting their DSO without the variation.  Practically, this may be an onerous requirement for LNG exporters with limited uncontracted production volumes and will undermine the value of the Pre-Existing Contract carve out.
• Factors the Ministers may consider include volumes committed under current export and domestic contracts, forecast production, uncontracted gas volumes, the ability to source gas from third parties or international markets, and infrastructure constraints.
• The protection for Pre-Existing Contracts is more limited than previously expected and is likely to be of material concern to some LNG exporters and international investors and trading partners. 

• The Scheme provides several mechanisms for varying DSO obligations, but generally the scope for variations is limited and generally subject to ministerial discretion.
• These key flexibility measures include (i) flexibility for domestic demand; (ii) flexibility for infrastructure constraints; and (iii) a release-valve mechanism.

Annual DSO flexibility

• Ministers will have the power to approve a variation to a portion of the DSO for forthcoming years in line with domestic demand plus a small buffer following LNG exporter’s request as part of settling its annual compliance plan.
• Variations to DSO-volumes for an individual LNG producer made prior to the year of application may be ‘banked’ – ie, excess taken off future years, or ‘borrowed’ – ie, to be supplied in future years. 
• Variations to a DSO volume for an exporter made during the relevant year will be ‘borrowed’ against future years, preserving the effective DSO volume over time.

Infrastructure constraints

• Ministers may vary an exporter’s DSO where it can demonstrate that it is unable to physically supply gas to the domestic market due to infrastructure constraints.  This will be particularly relevant for NT exporters.
• However, regulated entities will be expected to demonstrate over time that they are pursuing commercial arrangements to overcome such constraints in the medium to longer term.

Market-Based Release Value Mechanism

• The Draft Framework includes a minimum liquidity obligation for exporters to supply ‘reserved gas’ to short term trading markets (discussed below), initially set at 30% of DSO. To address potential risks of oversupply, the AER will have the power to trigger a market-based release value mechanism that will excuse exporters from meeting a portion of their DSOs and permit them to export any excess volumes, provided they have met minimum liquidity requirements, conduct obligations, and near-term supply adequacy metrics.
• Any DSO volumes that are exported through the release valve mechanism must be made up in subsequent years.
• The volume of gas that can be released to exporters via the release valve will match the liquidity obligation (initially 30%) to promote greater long-term contracting and prevent exporters from gaming the liquidity and release valve mechanisms to reduce their DSO.

• LNG exporters must apply to the Ministers for export approval, providing details of their export contracts (including sale and purchase agreements), their terms and conditions, and how their DSO commitments will be met, including details of domestic contracts and intentions to market and sell gas.
• By 1 April 2027, LNG producers must apply for export approval and submit board-endorsed compliance plans for the initial (pro-rata) regulatory period from 1 July 2027.
• The AER, in consultation with the Australian Energy Market Operator (AEMO), will advise Ministers on each application, including assessments of the domestic demand outlook and the impact of exports on domestic supply.
• Before 1 July 2027, Ministers decide on export approval and confirm the individual DSOs, with each LNG producer, taking into account any approved variations.
• LNG exporters should start preparing an estimate of their DSO for CY 2027 and determining how they can comply with it, including identifying any potential grounds for an exemption (noting the narrower protection for Pre-Existing Contracts).

• Exporters will have a minimum liquidity obligation to support spot markets with ‘reserved’ gas, initially set at 30%.
• Due to the inherent constraints of shorter-term spot markets, the liquidity requirement will apply to all uncontracted DSO volumes. 

• Proposed transparency measures will consolidate gas price information across all tenors to be published on the Gas Bulletin Board, including establishing a forward price curve, a near-real-time commodity price and an LNG netback.
• These measures will also require available uncontracted gas and supplier expressions of interest to be published on the Gas Bulletin Board, rather than on individual supplier websites.
• At the request of gas buyers, AEMO will publish additional notifications to facilitate buyer led expressions of interest.  

• Regulated entities must submit a board-approved annual compliance plan to the AER covering estimated DSO, forecast gas availability, proposed compliance pathways, and any requests to utilise flexibility mechanisms.
• Regulated entities must also provide ongoing reporting at intervals determined by the AER. The AER is empowered to impose additional reporting obligations on entities at risk of non-compliance. 

• Where non-compliance relates to a failure to meet the DSO, the AER may escalate the matter to Ministers, who may then vary, suspend, or revoke an export approval.
• The AER will also have a range of standard remedies it can pursue if it identifies a risk or evidence of non-compliance with the obligations under the Scheme, or associated market reforms. These could include court enforceable undertakings, issuing infringement notices, or applying to the Federal Court to seek injunctions or financial penalties.
• It is proposed that a tiered civil penalty system will apply for breaches of obligations in new primary legislation.
• With the exception of possible export restrictions, remedies available for breaches of obligations in new primary legislation are expected to be the same, or similar to, the remedies currently available under the Gas Market Code. There are no proposed changes to remedies applicable for non-compliance with the Gas Market Code.