Australia's proposed Domestic Supply Obligation framework could increase investment uncertainty and heighten sovereign risk for the country's gas sector, Wood Mackenzie analysts said in a note on Thursday.
The draft policy, intended to consolidate multiple gas market regulations into a single framework, would require liquefied natural gas exporters to supply gas equivalent to 20% of export volumes to the domestic market from July 1, 2027.
However, Wood Mackenzie said the proposal leaves key commercial questions unresolved and relies heavily on ministerial discretion, creating uncertainty for long-term investors.
"Upstream investors and international LNG buyers have long asked for policy certainty, but the draft DSO delivers the opposite," said John Gibb, the consultancy's research director for upstream Australasia. He said the framework attempts to regulate a capital-intensive industry through annual reviews and short-term policy adjustments.
The report identified several concerns, including the risk that exporters could accumulate "DSO debt" if domestic supply obligations are unmet, despite earlier government assurances that existing LNG contracts would be protected.
Wood Mackenzie also warned that pipeline constraints on Australia's east coast could, in practice, limit the industry's ability to meet domestic supply requirements, particularly as southern offshore gas production declines in the 2030s and Queensland becomes increasingly important as a supply source.
The consultancy said applying a blanket 20% obligation across all LNG exports could oversupply the domestic market for years. Its modeling suggests the full obligation may not be required until at least 2040.
Additional uncertainty remains over whether obligations would apply at the project or participant level and whether producers could use Western Australian supply to offset east coast requirements.
Adele Long, Wood Mackenzie's head of Asia-Pacific upstream research, said either approach could undermine policy objectives while increasing perceived sovereign risk among key LNG customers, including Japan and South Korea.
Public consultation on the draft framework remains open until June 30, 2026. Industry submissions are expected to focus on clarifying how the policy would operate in practice.