Shell Warns Australia Gas Reservation Plan Could Hurt Future Supply

MONTREAL (Oil Monster): Shell has warned that Australia's planned domestic gas reservation scheme could discourage investment in new supply even as the government moves ahead with rules requiring LNG exporters to direct more gas to local buyers.

The proposed framework would require exporters to meet annual domestic supply obligations equivalent to as much as 20% of export volumes, with the requirement calibrated to maintain supply at approximately 110% of forecast domestic demand.

Domestic supply obligations are expected to begin on January 1, 2028, under the government's latest implementation timetable.

Shell Calls Gas Reservation Design Too Aggressive

Shell Australia Country Chair Cecile Wake said she does not oppose the principle of maintaining adequate domestic gas supply but criticized the proposed structure of the reservation policy.

Speaking at an industry conference in Sydney, Wake described the current design as an unusually heavy intervention in the east-coast gas market.

Her principal concern is that deliberately maintaining supply above forecast demand could push prices below the level required to justify investment in new gas production.

Shell argues that such an outcome could ultimately reduce future supply even if the policy lowers prices in the near term.

Australia Plans Up to 20% Domestic Gas Obligation

The Domestic Gas Reservation Scheme would require LNG exporters to supply a proportion of their export production to Australian customers before or alongside export commitments.

The government's current framework allows a domestic supply obligation of up to 20% of export-equivalent volumes.

However, the requirement would not necessarily remain fixed at 20% every year.

The Australian Energy Regulator is expected to help calibrate the obligation against forecast demand so the domestic market maintains approximately 110% of the gas required.

ALSO READ: Australia Softens Gas Reserve Rule for LNG Exporters

Domestic Supply Obligations Expected From 2028

The latest government timetable separates establishment of the scheme from the start of mandatory supply obligations.

The broader reservation framework is intended to commence in 2027, while domestic supply obligations are expected to take effect from January 1, 2028.

The delayed obligation is intended to give LNG exporters, domestic buyers and regulators additional time to adjust contracts and cargo planning.

Government Wants Domestic Market Modestly Oversupplied

The Australian government says the purpose of the scheme is to avoid domestic shortages and place downward pressure on gas prices.

The policy is designed around a target of approximately 110% of forecast demand, creating what the government describes as a modest domestic supply surplus.

Officials estimate exporters could provide up to approximately 200 petajoules of additional gas annually under the framework.

The government argues that this would provide sufficient supply for households, industry, manufacturing and gas-fired electricity generation while Australia continues exporting LNG.

Shell Warns Oversupply Could Undermine New Projects

Shell's concern centers on the economics of future production.

Wake said a system designed to force supply materially above actual demand could depress domestic prices below the long-run marginal cost of developing new gas resources.

If producers cannot earn an adequate return from incremental supply, Shell argues they could delay or cancel investments needed to replace declining production from mature fields.

The company therefore supports maintaining domestic supply but wants the reservation mechanism designed so it does not undermine investment incentives.

Current East-Coast Gas Market Is Better Supplied

Recent Australian Competition and Consumer Commission data show that near-term conditions have improved.

The ACCC reported on October 9 that east-coast buyers contracted 51 petajoules of gas during the first half of 2026 for delivery in 2027, more than double the volume contracted at the same point a year earlier.

Buyers also contracted 43 petajoules for 2028 supply.

Average prices under longer-term contracts remained around A$12 to A$13 per gigajoule during the first half of 2026.

The ACCC said east-coast wholesale gas prices appeared largely unaffected by the sharp rise in international gas prices.

Longer-Term Supply Investment Is Still Needed

Improved near-term conditions do not eliminate Australia's longer-term gas challenge.

The Australian Energy Market Operator said in its 2026 Gas Statement of Opportunities that near-term gas adequacy has improved through 2029, but new supply and infrastructure investment will still be required from 2030 onward.

Production from mature southern gas fields continues to decline, increasing reliance on gas transported from Queensland and on storage during high-demand periods.

This longer-term requirement for new investment sits at the center of the disagreement between government and producers over how aggressively the reservation scheme should influence prices.

Shell QGC Is a Major East-Coast Gas Supplier

Shell is directly exposed to the new policy through its Queensland gas and LNG operations.

The Shell-operated QGC venture produces natural gas from Queensland's Surat Basin for both Australian customers and export through the Queensland Curtis LNG facility on Curtis Island.

Shell says QGC supplies approximately 15% of Australia's east-coast gas market.

The venture includes more than 3,500 production wells, 25 field compression stations, six central processing plants and a two-train LNG export facility.

Shell Is Also Investing in New Queensland Gas Supply

Shell's criticism comes as the company continues investing in additional Australian production.

In August, Shell announced another phase of development at QGC involving 137 new wells in existing Surat Basin permit areas.

The project is expected to begin delivering additional gas in 2027 for both domestic customers and the QCLNG export project.

Shell has argued that continued upstream investment is necessary to support both domestic energy security and Australia's LNG export commitments.

Three East-Coast LNG Exporters Face the Largest Impact

Reuters identified Shell, Origin Energy and Santos as among the companies most directly exposed to the reservation scheme because of their roles in the three major LNG export ventures operating from Australia's east coast.

These projects connect Queensland gas production with international LNG markets while also interacting extensively with the domestic gas system.

The reservation policy is intended to ensure domestic requirements take priority when supply conditions tighten.

Australia Is a Major LNG Exporter but Has Regional Supply Constraints

Australia exports substantially more natural gas than it consumes domestically, but its gas system is geographically divided.

Many of the country's largest gas resources and LNG developments are located in Western Australia and the northwest.

Major population centers and industrial gas demand are concentrated in the eastern and southeastern states.

The eastern and western gas markets are not connected by a national pipeline system, which means large reserves in Western Australia cannot simply be redirected to Sydney, Melbourne or other eastern markets when shortages emerge.

East and West Will Be Treated as Separate Gas Markets

The latest policy framework recognizes Australia's physical gas-market divide.

Domestic supply obligations will generally need to be satisfied within the market connected to the relevant LNG export facility.

An exporter operating in the east therefore cannot normally satisfy its eastern domestic obligation by supplying gas into Western Australia.

The government says this approach is necessary to ensure reserved gas is physically available where demand exists.

Policy Has Been Softened Since Earlier Proposal

The current design is less rigid than the government's earlier proposal.

Australia initially proposed a fixed obligation equivalent to 20% of LNG export volumes.

The revised framework instead allows the requirement to be adjusted annually according to forecast domestic demand, with 20% functioning as the upper level rather than an automatic requirement in every year.

ALSO READ: Australia Revises Gas Reservation Rule for LNG Exporters

Shell Has Raised Similar Concerns Before

Shell has previously warned that poorly designed export restrictions could discourage the development of new gas resources.

In 2025, the company argued that requiring exporters to divert additional volumes without addressing the economics of new supply could eventually worsen shortages rather than solve them.

The latest comments continue that argument but come as the reservation scheme moves significantly closer to becoming law.

ALSO READ: Shell Previously Warned Australian Gas Reservation Could Worsen Shortages

Government Says Scheme Will Lower Prices and Improve Security

The Australian government takes a different view of the policy's likely effect.

Officials argue that requiring exporters to commit sufficient supply to domestic customers will prevent projected shortages, improve bargaining power for industrial buyers and reduce exposure to international gas-price volatility.

The government has also narrowed ministerial discretion and introduced annual demand calibration in response to consultation with producers, consumers and other stakeholders.

The final market outcome will depend on how the regulator sets annual obligations and how producers respond with new investment.

What Happens Next

Australia is moving the legislative package through parliament following several rounds of industry consultation.

Once the legislation is enacted, additional regulations and implementation guidelines will determine how annual domestic supply obligations are calculated, monitored and enforced.

The most important commercial questions will be how much gas exporters are required to supply in 2028, what price domestic buyers are willing to pay and whether producers continue sanctioning new east-coast gas developments.

Frequently Asked Questions

What is Australia's Domestic Gas Reservation Scheme?
It is a proposed national system requiring LNG exporters to supply a proportion of their export-equivalent gas production to Australian domestic customers.

How much gas could exporters have to reserve?
The obligation can be as high as 20% of export volumes but is expected to be calibrated annually so domestic supply equals approximately 110% of forecast demand.

When will Australia's gas reservation obligation begin?
The latest government timetable expects mandatory domestic supply obligations to begin January 1, 2028.

Why does Shell oppose the current design?
Shell argues that deliberately oversupplying the market could push prices below the cost required to justify new production, potentially reducing future investment.

Why does the Australian government support the policy?
The government says it will improve domestic energy security, reduce the risk of shortages and put downward pressure on gas prices for households and industry.

Which LNG companies are most affected?
Shell, Origin Energy and Santos are among the east-coast producers most directly exposed because of their involvement in Queensland LNG export projects.

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Sources: Reuters; Australian Government; ACCC; AEMO; Shell Australia.

Courtesy: www.reuters.com