Santos-backed GLNG exposed as Labor tightens gas reservation plan

Labor has confirmed it will force Australia’s LNG exporters to reserve gas for the domestic market from 2027 under a sweeping intervention that sets up a potential clash with the Santos-backed Gladstone LNG project over whether fully contracted exporters can still be compelled to divert supply back into Australia.

The Albanese government on Monday released the draft framework for its long-awaited domestic gas reservation scheme, confirming earlier reporting by The Australian on the broad shape of the proposal.

Beach Energy boss Brett Woods said the gas reservation scheme, as released on Monday, risked causing material harm to an east coast domestic gas market.

“If it’s the governments ambition to negatively affect the availability and investability of natural gas and fuel supply within Australia and drive all capital investment overseas, I think this plan succeeds,” he said.

“As CEO of one of Australia’s leading domestically focussed energy companies, I am again imploring the Australian Government to engage with the domestic energy companies to recognise the potential consequences of what this plan delivers.”

The proposal shifts Australia towards a permanent national reservation regime where continued LNG exports increasingly depend on how much gas producers are willing – or compelled – to keep at home.

Under the proposal, LNG exporters would require commonwealth export approvals tied directly to a new domestic supply obligation, or DSO, requiring producers to supply the local market with gas equivalent to 20 per cent of LNG exports.

Critically, the obligation would still apply even where export volumes are tied to long-term contracts.

This undercuts previous commitments made by federal Energy Minister Chris Bowen when he announced the scheme earlier this month.

While Labor insists existing LNG contracts signed before December 22, 2025, will be respected, exporters seeking relief from the DSO would need to prove they had exhausted virtually every other alternative before receiving concessions from ministers and regulators.

That includes buying gas from third parties, sourcing LNG internationally, undertaking swaps, redirecting discretionary cargoes or ultimately reducing exports.

The proposal pushes Canberra deeper into commercial portfolio decisions that have historically been left to LNG operators and their customers, marking a sharp break from the relatively light-touch regulatory approach that underpinned Australia’s emergence as one of the world’s largest LNG exporters.

The implications are particularly acute for Gladstone LNG, or GLNG, the Santos-operated Queensland export venture that has maintained it has no spare gas to supply domestically because its LNG output is fully contracted.

Santos chief executive Kevin Gallagher has repeatedly warned excessive intervention risks undermining GLNG’s ability to meet export commitments to allies such as Japan and South Korea – countries Australia relies on for refined fuel imports including petrol and diesel.

Sources close to GLNG have previously insisted the project has limited ability to restructure supply arrangements to satisfy any DSO requirement. But industry figures and sources familiar with the government’s thinking are sceptical, setting up a potential stoush over how much flexibility exporters genuinely possess.

A Santos spokeswoman said the company expected Labor to honour repeated commitments that existing LNG export contracts would be protected under the reservation scheme, arguing any requirement forcing GLNG to buy replacement gas, restructure cargoes or absorb additional costs would amount to interference in those agreements.

“The design framework very clearly states that existing contracts will be respected. Therefore, we anticipate no interference with the performance of our existing contracts. Santos and our export partners fully expect that Ministers will do what they say,” the spokeswoman said.

“We will apply for export permits to fully meet our minimum contract commitments from the resources developed to meet them – without any additional financial or other penalty, which would amount to interference in the performance of those existing contracts.”

That interpretation is not universally shared across the market, and rivals argue that offering GLNG an exemption would be at odds with the objective of oversupplying the market.

But should Labor reject GLNG application for an exemption it would stoke frustration from the facility’s partner, large companies from regional allies.

Labor appears particularly focused on capturing GLNG within the scheme after the project drew criticism for buying domestic gas supplies to support LNG exports – a practice some producers and industrial users argue worsened east coast shortages.

Energy analyst Saul Kavonic said the framework appeared squarely aimed at GLNG, arguing the Santos-backed exporter would struggle to convince regulators it could not source additional gas from rival Queensland LNG producers to meet its domestic supply obligations.

“The policy clearly has GLNG in its cross hairs, as GLNG will need to show it has been unable to buy gas from neighbouring LNG projects to meet its DSO before it can get its DSO reduced. [Australia Pacific LNG] and [Queensland Curtis LNG] will make open offers available to GLNG to secure that offset, leaving any GLNG claim it has been unable to do so as untenable,” Mr Kavonic said.

APLNG is part-owned by Origin Energy, while Shell owns the QCLNG facility. All three facilities are based in Gladstone, Queensland.

The framework effectively establishes a hierarchy for gas allocation: domestic buyers first, legacy export contracts second and discretionary LNG exports last.

Contracts signed before December 22, 2025, can qualify for regulatory relief. However, exporters would still need to demonstrate there was “no viable alternative” to meeting both export and domestic obligations before regulators agreed to reduce an individual project’s DSO.

The government explicitly states exporters seeking relief must show they cannot buy additional gas domestically, source replacement LNG from global portfolios, undertake swaps or flex down cargoes before receiving concessions.

For projects with international LNG trading operations, the message is effectively that global portfolio flexibility should be used before restricting Australian supply.

The framework also suggests the scheme would apply nationally, creating fresh uncertainty for exporters in Western Australia and the Northern Territory.

While the paper says existing state-based reservation arrangements would be recognised, it provides little detail on how the federal scheme would interact with Western Australia’s long-standing domestic gas policy, creating uncertainty for exporters including Woodside.

Questions also loom over how the regime would apply to Northern Territory exporters such as Japan’s INPEX, whose Darwin LNG operations export substantially more gas than could realistically be absorbed by the relatively small local market.

Shadow Resources Minister Susan McDonald said an improper framework brought risk to Australia.

“One of the many missing pieces is a lack of key infrastructure to get gas from export fields in Western Australia, Northern Territory or Queensland to interstate manufacturing. There is no plan to store or distribute gas domestically and Labor’s ruled out funding this requirement. So, how will Victorians get gas,” Ms McDonald said.

The framework also introduces a so-called “release valve” mechanism designed to manage periods of oversupply. LNG exporters that satisfy minimum liquidity requirements and demonstrate the domestic market is adequately supplied could be permitted to export gas volumes that would otherwise be reserved for local buyers.

However, those exports would not amount to a permanent waiver. Any gas exported through the mechanism would accrue as a future domestic obligation that producers would need to repay in later years.

Exporters would also face a “minimum liquidity requirement” compelling them to make uncontracted gas available to domestic buyers through spot trading arrangements and potentially new Australian Energy Market Operator-facilitated auctions.

The Australian Energy Regulator would oversee compliance, while ministers would retain powers to vary, suspend or revoke export approvals for serious breaches.

Penalties for major breaches could reach $100m, three times the value of any benefit obtained or 30 per cent of adjusted turnover.