Did the government back down on its gas reservation policy? No – most changes make sense

The Australian government has decided to modify its controversial gas reservation policy after receiving pushback from industry stakeholders. Instead of mandating a 20% minimum supply of gas to the domestic market, the government has chosen to allow exporters to supply "up to" 20%, with the exact percentage determined by annual demand.

This change is seen as a concession to the industry, but it is not a modification to the original design – the 20% figure was always intended to act as a ceiling, not a floor, accommodating fluctuations in supply and demand.

Although the scheme has been praised by Australia's gas and oil peak body as sensible, there are still significant concerns surrounding its design elements. A key issue is the minister's ability to reduce domestic gas obligations for individual companies under certain conditions. This power has been controversial because one of the three east-coast exporters, GLNG, has signed contracts to export significantly more gas than it anticipates producing until at least 2036.

The government has not yet clarified how this power will be exercised, and there are worries that it could be used to exempt certain companies from domestic gas obligations.

The government has not altered its intention to reduce gas prices by creating a "modest oversupply" of the resource. Despite initial support from domestic-only gas producers, these companies have since withdrawn their backing because they fear that an oversupply would force gas companies to sell gas below cost, rendering production unviable.

The legislation provides limited clarity on how the "oversupply" percentage will be set each year, which ranges from 0% to 10% of demand. The government should establish a cap, perhaps at 5%, and determine how this percentage will be set annually.

Another point of contention is the proposed gas reservation's structure, which will consist of two separate schemes – one for the east coast and another for the west. This is due to the physical separation of the two systems and Australia's long-standing gas schemes in Western Australia. Export obligations for each producer will be determined based on their respective system's demand, not the national average.

The government has faced pushback from the resources lobby in Western Australia, who argue that the proposed national scheme would be stricter and require WA exporters to supply more gas to the domestic market more frequently. It remains unclear whether the government will provide exemptions for Western Australia.

The gas reservation policy aims to address gas shortages and maintain low prices in Australia, where gas consumption in electricity generation has declined by two-thirds over the past decade. However, declining gas demand and abundant export supplies create challenges, as 80% of Australia's gas is exported, leaving little for domestic consumption.

The government hopes the reservation scheme will ensure sufficient gas supplies, keep prices low, and prevent further decarbonisation efforts from slowing down without undermining the phase-out of gas in Australia.