On 10 September 2026, the Federal Government released the much anticipated exposure draft legislation for its Domestic Gas Reservation Scheme (Scheme). The core features of the Scheme were announced on 7 May 2026, followed by a the draft Design Framework released on 25 May 2026 (Draft Framework) (see our previous alert here).
Several elements of the Scheme have been the subject of scrutiny from gas market participants (both the LNG exporters captured by the Scheme and other domestic gas producers) and other stakeholders.
As expected, the Government proposes to implement the Scheme through new primary legislation (the Domestic Gas Reservation Bill 2026 (Bill) and Domestic Gas Reservation Levy Bill 2026 (Levy Bill)) and amendments the existing Gas Market Code. The domestic price cap under the Code and the Australian Domestic Gas Security Mechanism (ADGSM) will be repealed.
The draft legislation is broadly consistent with the Draft Framework for the Scheme but contains important refinements and additional detail that will be of interest to stakeholders. The Government has also made some limited concessions, including by incorporating a ‘reasonableness’ test in determining exemptions for pre-existing export contracts (albeit the threshold for gaining an exemption remains high), allowing the Minister to practically reduce the Domestic Supply Obligation (DSO) percentages for a specific market (eg, the Western Australian market), and allowing exporters to accrue unsold DSO volumes (where certain conditions are met) and carry those obligations forward to future years (up to 10% of DSO to be supplied in the next 3-years).
The requirement to hold an export licence, and comply with the associated DSO, has been delayed to commence on 1 January 2028.
The new export licensing and compliance regimes will be administered by the Australian Energy Regulator (AER), which will see a significant expansion of its regulatory remit.
Our key takeaways from the exposure draft legislation are discussed below. Stakeholders who will be impacted by the Scheme should start to consider the position under their pre-existing contracts (including whether they may be entitled to a DSO adjustment or alternatively relief from performance by reason of the DSO) and assess the compliance requirements and costs.
Stakeholder feedback is open until 24 September 2026 through the Department of Industry, Science and Resources consultation hub.
Key takeaways
- New export licensing regime: From 1 January 2028, an LNG exporter must hold an export licence. Applications may be made from 1 January 2027. Licences will be granted for terms of 20-50 years and are non-transferable (with Ministerial consent required for changes in control).
- DSO with demand calibration - “up to” 20%: The headline DSO for all exporters remains at 20% of total export volume but this will practically operate as a maximum possible upper limit on their supply obligation, rather than a static obligation. The draft legislation requires the AER to determine a yearly “demand calibrated quantity” (DCQ) for each licence holder by 30 June of the prior year and also allows for the Minister to vary the DSO percentage for a domestic gas market (ie the east coast market or Western Australian market) by 1 August in the year prior to the relevant period (with the first determinations to be made by 30 June and 1 August 2027, respectively). The DCQ and DSO quantities operate as alternative minimum obligations. If the DCQ determined for a licence holder is lower than the DSO for the same period, the DCQ will become the licence holder’s minimum supply obligation for that period.
Licence holders will acquit their DSO if their supply 90% of the minimum supply obligation (either the DCQ or DSO) per calendar year and make genuine attempts to supply the remainder in accordance with the requirements of the Code (with up to 10% deferred to future years).
- Meeting the DSO – how the obligation works: Licence holders will need to supply a minimum of at least 90% of their DSO in a year to acquit their licence requirements (ie not just offer the gas into the market). There is no floor price on the supply of gas into the market. The remaining 10% is subject to a flexibility regime that allows for it to be accrued and deferred to future years where certain conditions are met, but those volumes must still be supplied.
Consistent with the Draft Framework, a licence holder makes a DSO supply where it (or a controlled related body corporate, or a third party supplying entity acting on its behalf) physically supplies natural gas to the domestic market. The gas must be the licence holder’s ‘own gas’ (gas in which the licence holder holds a legal or equitable interest at the time of production) or ‘additional gas’ (currently defined as gas produced domestically above an AER-determined production baseline under the Gas Market Code). LNG exporters with integrated upstream supply chains may need to review their current contractual chain arrangements (especially for Joint Venture assets) in light the definition of ‘own gas’ and requirements for DSO supplies needing to be made on behalf of licence holders.
For contracts entered into after commencement, contracts must require the gas to be consumed in the domestic market (other than as feedgas) and not exported.
If a licence holder purchases a volume of domestic gas that is not ‘additional gas’, its DSO will increase by that volume. - Targeted “modest” oversupply: In determining the “demand calibrated volume”, the legislation requires the AER to target aggregate supply in each domestic market of 110% of forecast demand (which the Minister may reduce to 100% if they consider reasonable). It remains to be seen how a market will practically accommodate an oversupply and how this target will interact with the DSOs (including the carry forward of the DSO that is not supplied), which require licence holders to physically supply the gas for domestic consumption.
- Flexibility for Government: The draft legislation provides a significant amount of flexibility for Government in practically implementing the scheme by allowing Ministerial discretion (subject to certain criteria and reasonableness tests) to vary DSO percentages in each domestic market (up to 20%) and determine individual DSO variations for pre-existing contracts and infrastructure constraints, and giving the AER powers to make both scheme-wide and individual adjustments based on supply and demand forecasts.
- Pre-Existing Export Contracts: The draft legislation provides some limited protection for LNG export contracts entered into on or before 22 December 2025 (Pre-Existing Contracts) through DSO adjustment determinations. However, the exemption is not automatic and despite a ‘reasonableness’ being introduced, the bar remains high. To make a DSO adjustment determination based on a Pre-Existing Contract, the Minister must be reasonably satisfied that:
- without the adjustment to the DSO, the licence holder would be likely to breach the contract;
- the licence holder cannot reasonably produce or acquire additional gas for DSO supplies; and
- the licence holder is actively taking steps to improve its ability to make DSO supplies.
All three limbs must be satisfied. The Explanatory Memorandum confirms, this ‘ensures adjustment relief is limited to circumstances where there is a genuine conflict between existing contractual obligations and a licence holder’s DSO’ and ‘practical alternatives are not reasonably available’.
Practically, whether a licence holder will be able to make out the basis for an exemption will require an analysis of the Pre-Existing Contract and the relevant circumstances. It will be a question of interpretation for each specific contract. Careful consideration will need to be given to whether any provision in a Pre-Existing Contract might relieve performance in these circumstances (eg, change in law or force majeure provisions), having regard to mitigation measures such as replacement LNG cargoes (ie whether there is only a cost consequence, rather than an inability to perform). If a provision does relieve performance, this could disentitle a licence holder to a DSO adjustment determination. Similarly, if the licence holder could “reasonably” purchase gas (including from international sources) or “reasonably” produce or underwrite production of additional gas to meet its DSO, the second limb would not be satisfied.
In any event, licence holders will need to be actively taking steps to improve their ability to make DSO supplies in future years, which suggests that any Pre-Existing Contract protection is likely to be temporary.
A DSO adjustment determination must be made before 31 December 2027.
- Infrastructure constraints: The Minister may also make a DSO adjustment determination where infrastructure constraints limit the ability to make DSO supplies provided that they are reasonably satisfied that the licence holder is actively taking steps to improve its ability to make DSO supplies. What will ultimately be considered reasonable ‘active steps’ remains to be seen, but could conceivably include underwriting new pipeline capacity or other relevant infrastructure. This may be particularly relevant for Northern Territory exporters, given the limited capacity to bring gas to the remainder of the east coast market.
- Compliance and enforcement regime: The draft legislation contains detailed compliance and enforcement regime. For core obligations—including exporting without a licence, failing to meet the DSO and anti-avoidance, the maximum penalty for a body corporate is the greatest of 50,000 penalty units ($18.2 million), three times the benefit derived or detriment avoided, or 10% of annual turnover, capped at 2.5 million penalty units ($910 million). Executive officer liability may also arise. The AER will have monitoring, investigation and audit powers, and may issue directions, require special reports, accept enforceable undertakings and seek injunctions. The Minister may suspend or cancel export licences for non-compliance.
- Western Australia — a practical pathway to a carve out: WA is not expressly exempted from the Scheme. However, the Bill allows for differentiation between non-interconnected ‘domestic gas markets’. LNG exporters will only be required to supply the domestic market to which their facilities are connected. The practical effect is that WA exporters already subject to state-based reservation arrangements may receive a lower and more flexibly timed (through DSO variations and ‘extended period declarations’) DSOs that conform more neatly with the existing WA regime, which east coast exporters (especially in Queensland) remain subject to 20% DSOs.
