A proposed overhaul of Australia’s gas market rules could heighten investment uncertainty rather than resolve it, according to new analysis from Wood Mackenzie, raising concerns for a sector already navigating complex regulatory pressures.
The federal government’s draft Domestic Supply Obligation framework aims to consolidate existing gas policies into a single nationwide mechanism, requiring liquefied natural gas exporters to reserve 20 per cent of export volumes for domestic use from July 2027.
The policy is intended to stabilise local supply and prices, replacing current arrangements such as the Australian Domestic Gas Security Mechanism and east coast agreements.
However, Wood Mackenzie’s report finds the draft framework leaves major commercial and operational questions unresolved.
Industry feedback gathered at the recent Australian Energy Producers conference in Adelaide indicates the initial policy announcement generated widespread confusion, with the consultation paper only partially addressing those concerns.
Central to the report is the risk associated with increased ministerial discretion.
The proposed system would rely on annual reviews and government approvals to balance domestic supply and export permissions.
According to Wood Mackenzie, this approach shifts long-term investment decisions into short-term political cycles, creating a level of regulatory unpredictability that may deter capital-intensive upstream projects.
The analysis also highlights what it describes as an illusion of grandfathering.
While the government has indicated existing LNG contracts would be protected, exporters could still accumulate so-called DSO debt if domestic supply obligations are not met.
This may force companies to source additional gas domestically or purchase spot cargoes internationally, with any shortfall carried forward.
Infrastructure constraints present another significant challenge.
As offshore gas supply in southern Australia declines in the 2030s, Queensland is expected to play a larger role in meeting demand.
Yet current East Coast pipeline capacity is insufficient to fully transport northern gas to southern markets.
The report notes uncertainty over whether companies would be required to fund and develop new infrastructure to meet obligations.
Wood Mackenzie’s modelling suggests the blanket 20 per cent requirement could oversupply the domestic market for years.
The analysis indicates demand may not justify the full obligation across all LNG projects until at least 2040, raising the risk of suppressed prices and reduced incentives for new domestic gas developments.
Additional ambiguities remain unresolved, including whether the obligation applies at the project or participant level, a distinction that could significantly affect compliance strategies.
Questions also persist about how obligations would be managed across different regions, particularly for producers operating in both eastern Australia and Western Australia.
The report warns that allowing Western Australian supply to offset east coast obligations could undermine the policy’s intent, while enforcing a uniform rule nationwide risks oversupply and weakened investment signals.
This tension underscores what analysts describe as a policy catch-22, with potential implications for Australia’s reputation among key LNG trading partners such as Japan and South Korea.
The consultation period for the draft framework remains open until 30 June 2026.
Wood Mackenzie expects industry submissions to focus heavily on the need for clearer definitions and practical implementation details before the policy is finalised.
