Domestic gas reservation policies – are they a good thing or a bad thing?

In 2006, the Western Australian Domestic Gas Policy (the WA DomGas Policy) was formally adopted by the WA State Government. Under it, liquified natural gas (or LNG) projects that fall within State jurisdiction (lands or waters) must commit to making gas available for the domestic market by reserving the equivalent of 15% of LNG production for the domestic market. Its purpose is to secure WA’s energy needs and ongoing economic development.

In August 2020, the WA DomGas Policy was further tightened to prevent the export of onshore gas other than in exceptional circumstances.

So far, neither the Federal Government nor any other State or Territory in Australia has a domestic gas reservation policy. The WA DomGas Policy has not been without controversy and there have been numerous reviews of the policy since it was formally adopted. Most recently, in February 2024, the Economic and Industry Standing Committee of the WA Parliament's Legislative Assembly published an interim report following its inquiry into the WA DomGas Policy (Interim Report).

In this article we'll examine how the policy works, what the Interim Report has uncovered about its operation, and whether the policy provides a useful model for the rest of the country, particularly in light of the Federal Government's recent announcement of its Future Gas Strategy.

The agreements underpinning the WA DomGas Policy

The WA DomGas Policy is primarily implemented by way of domestic gas agreements with the State Government under which LNG participants must (among other obligations) individually market their share of domestic gas.

The policy is also implemented by including gas marketing obligations in State Agreements (being contracts between the State and a company seeking to develop a major project that are ratified in Parliament) such as the Barrow Island Act 2003 which was entered into with the Gorgon joint venture parties.

The arguments for the WA DomGas Policy

Those in favour of a domestic gas reservation policy argue that, without the policy, exporters of LNG will favour international export markets where higher prices can be realised over the domestic market. A domestic gas reservation policy is therefore necessary to ensure the State's domestic gas requirements will be met and in turn to safeguard the energy security and prosperity of the State.

In support of their position, they point to the significant investment in Western Australia's LNG industry, with the LNG export capacity of the State increasing significantly during the life of the WA DomGas Policy. That is proof, they say, that a strong LNG industry, and corresponding international export of LNG, can co-exist with a domestic gas policy to support domestic gas consumers.

The relatively affordable and plentiful domestic gas market that WA has benefited from in recent years, which they argue is a direct result of the WA DomGas Policy, is also used as proof of its value. By contrast, the significant increases in gas prices on the east coast during the same period are claimed to be a direct result of the lack of a similar policy there.

Finally, supporters of the WA DomGas Policy argue it is consistent with the social licence that gas producers hold to extract and export the State's natural gas reserves.

…and the arguments against the WA DomGas Policy

The primary argument against a domestic reservation policy is that it acts as a tax on the export of gas that discourages development of new resources. The lower rates of return arising from domestic gas policies will lead to reduced investments in gas resources and, as a result, a reduction (rather than an increase) in the total supply of domestic gas in the long run.

Taking this argument a step further, those against the WA DomGas Policy contend any benefits gained from the development of LNG projects (including higher tax receipts, increased employment opportunities and higher wages) will be lost as a result of reduced investment.

Not only does it act as a tax, according to its detractors; the policy they say essentially acts as a subsidy on gas consumption. They point to economic theory which has established that subsidies (coupled with taxes) result in inefficient decision-making and ultimately economic loss.

It can also be argued that the policy misdirects government efforts. Instead of imposing domestic gas restrictions on LNG projects, government policy should be focused on encouraging faster development of gas resources (which in turn may result in more domestic gas production). For example, measures such as tax/royalty reform and improving approval timeframes will promote gas development and ensure governments can capture the benefits of gas resources, including increased domestic gas supply over the long term, without the need for reservation policies.

Where did the Interim Report land?

The Interim Report notes that WA has not experienced a shortfall in domestic gas since the WA DomGas Policy has been in place. It warns however that WA faces a substantial gas supply shortfall in the near future, referring to forecasts from the Australian Energy Market Operator that the State will face shortfalls from as early as this year, and continuing well into the next decade.

The Interim Report concludes that the WA DomGas Policy has provided a framework that encourages market responses to gas surpluses or shortfalls but is no longer fit for purpose. It points to the policy's deficiencies, including a lack of consistency, transparency and enforceability.

The Interim Report has identified measures that could be taken to mitigate the risk of a domestic gas shortfall, including:

• facilitating new gas projects;
• bringing greater volumes of gas online faster;
• improving the market effectiveness;
• regulating prices and contract terms; and
• reducing demand for natural gas.