Australia’s Domestic Supply Obligation framework risks compounding investment uncertainty, says Wood Mackenzie

The Australian government’s proposed Domestic Supply Obligation (DSO) framework risks increasing, rather than reducing,  investment uncertainty at a critical time for the nation’s energy sector, according to a new report by Wood Mackenzie.

While designed to streamline a fragmented web of gas market regulations into a single, definitive policy, the draft framework leaves critical commercial questions unanswered and introduces substantial sovereign risk that could stall vital upstream investments.

Wood Mackenzie’s discussions with industry at the recent Australian Energy Producers conference in Adelaide made one thing clear - the federal government’s initial announcement on the DSO generated significant confusion. This consultation paper fills some of the gaps, but uncertainty remains over how the policy will work in practice.  

John Gibb, Research director upstream Australasia at Wood Mackenzie, commented, “upstream investors and international LNG buyers have long asked for policy certainty, but the draft DSO delivers the opposite. By creating an annual review cycle heavily reliant on ministerial approval, the government is trying to regulate a long-dated, capital-intensive industry via short-term fixes.”

The draft DSO mandates that from 1 July 2027, liquefied natural gas (LNG) exporters must supply gas equivalent to 20% of their export volumes to the domestic market to contain local prices. However, the policy relies heavily on future ministerial discretion, leaves many key issues unaddressed, and fails to address the physical limitations of Australia's pipeline infrastructure.

Key findings from the analysis:

The "Ministerial Factor" and sovereign risk: The system shifts long-term market dynamics onto annual planning cycles and makes government ministers the decision-makers. The new system would rely on ministers to react promptly and flexibly to market signals to ensure the domestic market is well supplied, has a surplus, and exporters get timely permission to export LNG spot cargoes when that can be facilitated. As with similar minister-level discretionary gas policies in Indonesia, a hyper-flexible "unknown" regulatory environment subject to changing political whims is an added risk that does not encourage new, long-term investment.

The illusion of grandfathering: Despite initial government assurances that existing LNG contracts would be preserved, the draft policy forces exposed exporters to take on "DSO debt", potentially requiring them to find domestic gas or purchase international spot cargoes if the local market is undersupplied, rolling unmet obligations into future years.

Infrastructure bottlenecks: The DSO risks delivering gas obligations on paper that cannot be fulfilled in practice. As southern offshore supply drops sharply in the 2030s, Queensland must shoulder the burden. However, existing pipeline capacity is insufficient on the east coast for the north to fully supply the southern states gas demand. The draft’s ambiguity leaves gas sellers guessing whether they will be forced to fund and build new pipeline infrastructure.

Meeting its goal: taking the policy at face value, applying a blanket 20% obligation across all export volumes would result in a significantly oversupplied domestic market. Under our models, the domestic market will not require the full 20% obligation to be applied across all LNG projects until at least 2040.  

Other uncertainties: the sheer volume of ambiguity within the existing policy makes it difficult to properly assess its impact. For example it remains unclear whether the DSO applies at the project level or to each individual participant – this distinction could have material consequences and has not been addressed in the draft policy. Clarity around where the DSO ring-fence sits at participant, project and state level  is required.

The report noted :hence, a further ambiguity concerns producers with a presence in both the East Coast and Western Australian markets. Can they offset East Coast DSO obligations using Western Australian supply?

Adele Long, Head of APAC upstream research at Wood Mackenzie, said, “if the government permits an Australia-wide DSO, allowing Western Australian supply to offset East Coast obligations, it dilutes the policy's intent. If it enforces a blanket 20% rule across the board, there is a danger of oversupplying the domestic market until at least 2040, killing the incentive for any new domestic gas projects. It is a catch-22 that increases Australia’s sovereign risk in the eyes of crucial trading partners like Japan and South Korea.”

The public consultation period for the DSO draft framework is open until 30 June 2026. Wood Mackenzie expects industry submissions to push heavily for further clarifications on how the policy will actually work in practice.

Notes for editors: 

About the Domestic Supply Obligation (DSO): Announced by the Australian Federal Government, the DSO is intended to replace the Australian Domestic Gas Security Mechanism (ADGSM) and the Heads of Agreement on the East Coast, consolidating existing gas market codes into a nationwide 20% domestic reservation requirement starting July 2027.