Australian Gas Reservation Draft Criticized for Creating 'Exemption Backdoor' for Santos; Chinese Embassy in Australia Makes Rare Statement

The Australian federal government's gas reservation policy draft published last month has been criticized by industry observers and labor organizations as "opening a backdoor for Santos," allowing the Gladstone LNG (GLNG) project operated by this Adelaide energy giant to significantly reduce or even completely evade its obligation to supply the domestic market. According to ABC News, Paul Farrow, national secretary of the Australian Workers' Union (AWU), pointed out that the "Santos-style exemption clauses" included in the draft could render this policy aimed at lowering domestic gas prices a mere façade.

An ABC News investigation found that over the past decade, the volume of gas drawn away and exported by GLNG is equivalent to 20% of Australia's east coast domestic demand. The facility, located on Curtis Island in Queensland, has an annual production capacity of 7.8 million tonnes, but the project's own gas reserves are far from sufficient to fill this plant. By contrast, Shell's Queensland Curtis LNG (QCLNG) project and the Australia Pacific LNG (APLNG) project, a joint venture between Origin and ConocoPhillips, serve mostly the domestic market in terms of net exports.

Under the draft, gas exporters are required to set aside up to 20% of their production for the domestic market, but the Australian Energy Regulator can reduce a single exporter's supply obligation to below 20%, and the Resources Minister can cut it to zero. Critics point out that the draft also allows GLNG to extend its existing contract with Korea's KOGAS beyond 2030, thereby falling within the exemption scope. This contract for 3.5 million tonnes of LNG per year is equivalent to about 40% of annual east coast demand.

Farrow bluntly said that the draft has clearly been "diluted" compared to earlier versions, with many clauses apparently tailor-made for GLNG. "Australia's industries and consumers should benefit from our gas because this is our sovereign wealth," he said. "The government is very close to getting it right. But the current draft contains a bunch of 'Santos-style exemptions.' This is an extremely concerning issue."

The controversy surrounding the draft has gone public. Last month, APLNG project head Dan Clark unusually published an article publicly, directing his criticism at an exporter widely interpreted as GLNG, saying operators who "only take, don't contribute" should "first contribute domestically and enjoy no exemptions, free passes, or exceptions." Santos CEO Kevin Gallagher immediately fired back: "Apparently I'm now living rent-free in the minds of several Gladstone competitors."

Geopolitical economic dimensions have also surfaced. The Chinese Embassy in Australia has submitted comments to Canberra on the reservation plan, calling for "fair treatment of trading partners and foreign investors." Chinese state-owned enterprises Sinopec and CNOOC are respectively shareholders and major customers of APLNG and QCLNG; financial backers of GLNG also include Korea's KOGAS and Malaysia's PETRONAS. Saul Kavonic, oil and gas analyst at MST Financial, described the Chinese Embassy's intervention as "extraordinary and unprecedented," and noted that Beijing had not previously opposed the reservation policy itself.

Farrow warned that the test regarding "additional gas" in the draft could be abused — exporters would only need to acquire a local supplier to count its production as "additional," and could even use gas originally reserved for the domestic market for exports. Furthermore, production cuts are not carried over to subsequent years, meaning annual supply gaps could simply be erased. He argued that if GLNG claims its own reserves are insufficient to supply the domestic market, it must prove it has exhausted all feasible options, including purchasing gas from other suppliers, deploying internationally operated LNG cargoes, or using contractual flexibility to cut overseas sales. "These options may impose some costs on Santos shareholders, and that's fine," Farrow said. "I don't understand why ordinary Australians should be scapegoated."

Kavonic pointed out that the draft has deviated from a true reservation policy and become closer to the "spot cargo restriction policy" advocated by the opposition during the last federal election campaign. He warned that whether Queensland's LNG projects are allowed to equally share reservation obligations, or whether one is given special treatment, will "profoundly affect whether this policy will work" — "special treatment will make the policy more like a spot cargo restriction, and no longer a true reservation policy in the proper sense."

According to ABC News, Resources Minister Madeleine King and Santos both declined to comment on the exemption clauses. The draft has not yet been finalized, and whether the final legislative text will retain existing exemptions remains uncertain.