Australia softens local gas supply rules, easing fears in Asia

Labor has softened some of its proposed laws compelling gas exporters to reserve more supply for Australians after holding talks with gas producers and buyers and facing pressure from key trading partners in Asia.

Under the modified plan to take effect from January 2028, liquefied natural gas shippers will still face a requirement to reserve up to 20 per cent of their export volumes for local customers. The policy is designed to force a 10 per cent domestic oversupply each year to push down the cost of the fuel.

However, federal ministers on Thursday made key concessions to ensure the oversupply would be “modest” and provide critical assurances to Australia’s Asian LNG buyers that their long-term contracts will be honoured.

Among the changes is the possibility of lowering of the reservation level when forecast domestic demand is weak, while also giving ministers the discretion to reduce how much gas each producer must supply the local market when they are constrained by pre-existing contracts and pipeline capacity.

The concessions come after consultations with local gas producers and buyers and officials from Japan, South Korea and Malaysia, whose state-backed energy companies are among the largest customers of Australian LNG.

Over the past four months, officials from the three nations have lodged appeals through the Department of Foreign Affairs and Trade seeking certainty over contract protections.

Energy Minister Chris Bowen said trading partners had engaged constructively with the government. “What they were looking for was reassurance that existing contracts would be honoured,” he said.

Under the policy, the national energy regulator would set the overall reservation volume annually, based on a rolling five-year demand forecast, plus an extra 10 per cent buffer, Bowen said.

“I think the demand-calibration measure that we’ve put in place … provides reassurance that we’re not seeking a massive oversupply, which would then require contracts to be threatened,” he said. “The modest oversupply is able to be done without threatening existing contracts.”

Bowen described the changes as a “sensible calibration”, taking on board feedback from across the industry, and pointed out that the government had declined demands from the gas sector to drop a requirement for exporters to physically supply gas into the domestic market, rather than just offer it. “We thought about that. We’re not doing it,” he said.

The incoming gas reservation policy is an attempt to address long-held concerns that excessive LNG exports from Queensland are leaving local households and factories on the eastern seaboard more exposed to the risk of gas shortfalls and high prices. Despite Australia’s position as the world’s second-largest LNG supplier, consumers in nation’s southern states, including Victoria and NSW, are at risk of shortfalls in coming years as output from legacy fields in Bass Strait continue rapidly drying up.

Without additional gas becoming available, the crunch threatens to worsen cost-of-living stresses for consumers who still use gas for cooking and heating, add to the price of electricity, and threaten the future of factories that need gas to fire kilns and furnaces or as a feedstock in plastics, chemicals and fertilisers.

The government’s draft plan won strong support from major gas users in the manufacturing sector, which have hailed it as an essential intervention to mend a “broken” market following a threefold surge in domestic gas prices over the past decade. Without it, manufacturing bosses said, more Australian factories would have to close.

“Draft gas reservation rules, released today, uphold the simple principle that one of the world’s largest gas exporting nations should ensure adequate gas supply for its own customers,” Manufacturing Australia chief executive Ben Eade said. “These are necessary, long-overdue reforms that are overwhelmingly in the national interest.”

Steel giant BlueScope, which uses gas in its Australian steel mills, said the draft had maintained many of the critical design features that manufacturers had been fighting for. “It keeps the gas companies honest,” BlueScope chief executive Tania Archibald said. “We will review the draft legislation in detail including to better understand how calibration of domestic supply obligations against demand will work – we will want to ensure the surplus of gas the government is targeting is delivered.”

However, the success of the scheme would not be measured simply by the volume of gas reserved, warned the Energy Users Association of Australia, another manufacturing industry body.

“For Australian gas users, the critical questions are: what price will that gas be offered at, on what terms, and will producers be required to actually sell it?” the group’s acting chief executive, Leigh Clemow, said.

“The test for this policy is whether Australian businesses can actually contract gas at internationally competitive prices and on workable commercial terms.”

The new scheme will mainly apply to the three LNG joint ventures on Queensland’s Curtis Island, led by Shell, Origin Energy and Santos. Unlike Western Australia’s LNG industry, which is required to hold back 15 per cent of export volumes, there were never such rules imposed on Queensland’s terminals when they were launched a decade ago.

Industry representatives for the Australian oil and gas sector said the government had made a number of “sensible changes” on Thursday. However, they warned the proposed 110 per cent oversupply of the east-coast gas market would threaten to “destroy investment signals and crowd out smaller, domestic-focused producers”.

“Forcing around 50 petajoules of additional gas into the domestic market is not a ‘moderate oversupply’; it is equivalent to almost all industrial gas use in Victoria,” said Samantha McCulloch, chief executive of industry body Australian Energy Producers.

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