Federal election energy policies: could a new east coast gas policy trigger foreign investor claims?

With the public focus on cost-of-living pressures dominating the political cycle, energy costs and energy security have become key topics of political debate in advance of the Australian federal election. There is recognition among the political parties that Australia needs reliable and affordable clean energy, but that the transition to clean energy sources and a reliable infrastructure to support this will take more time and significant investment.

The Australian Competition & Consumer Commission (ACCC) has forecast that the east coast of Australia will experience a nine petajoule shortfall in the period July to September 2025 and a structural gas supply shortfall from 2027 onwards. With limited new supply to address the structural shortfall, it is possible that domestic industrial and residential consumers will experience increased gas prices over the coming years.

Against that backdrop, Australia’s major political parties have put forward policies seeking to address the forecasted short-term supply shortfall. Reinforcing the role of gas as a transition fuel, these policies intend to supplement, rather than replace, the parties’ divergent approaches to transitioning to a low emissions energy supply mix.

A key feature of the Coalition’s federal election energy policy is the introduction of an east coast gas reservation policy. The Coalition has announced this policy as part of a suite of proposed measures to increase domestic gas supply on the east coast. Other measures include establishing a $1 billion critical gas infrastructure fund and increasing gas pipeline and storage capacity.

In contrast, the Australian Labor Party does not support the Coalition’s proposed reservation policy. Rather, the Prime Minister has suggested it will use the existing Australian Domestic Gas Security Mechanism (ADGSM) as the primary mechanism for ensuring any forecast supply shortfall is covered.

Under the ADGSM, export gas can be diverted to the domestic market as a measure of last resort where there is a forecast gas supply shortfall. The ADGSM has not been formally activated to date, although it has arguably served its purpose by promoting domestic supply obligations. Its objectives are also underpinned by a Heads of Agreement entered into by the federal government and the east coast’s three major gas exporters (APLNG, QCLNG and Gladstone LNG) (LNG Exporters) on 29 September 2022, which prioritises uncontracted gas for sale in the domestic market. This agreement is effective until 1 January 2026.

A proposed east coast gas policy

The Coalition proposed a new east coast gas reservation policy^[1] as part of the Opposition Leader’s Budget Reply speech on 27 March 2025. While details are limited, the Coalition’s reservation policy is based on a two-fold approach to securing more local gas supply at lower prices.

Firstly, the east coast gas reservation policy will impose an obligation on gas producers to reserve an additional determined volume of gas for the domestic market. The reservation policy would only apply to uncontracted gas production, meaning international long-term LNG supply contracts are unlikely to be affected by this policy. The amount of gas to be reserved under the Coalition’s policy is yet to be finalised, however it has flagged that an ‘additional 50-100 petajoules of gas’ will be reserved for the domestic market in the first year of the policy. The reservation policy is to apply to the LNG Exporters. However, it is not yet clear whether it is to apply equally across the projects.

Secondly, the east coast gas reservation policy will feature a ‘Gas Security Incentive’ (a charge levied on gas exports). This is intended to incentivise producers to lower domestic gas prices, and eventually de-couple domestic pricing from international markets. Under the policy, any gas to be exported beyond the current long-term contracts, and any amounts reserved in future for the domestic market, will be subject to a charge/rebate scheme (modelling commissioned by the Coalition is based on a $4/GJ charge). The ‘Gas Security Incentive’ would be levied on producers on gas exports (not under existing long-term contracts) up to the quantity of gas reserved for the domestic market. The charge will be rebated if the producer meets their domestic gas supply obligation.

The Coalition’s reservation policy differs from other policies. It combines an express volume reservation requirement, albeit one that is yet to be announced, with a pricing intervention designed to lower domestic gas prices and eventually establish a market with pricing that is distinct from international markets. Further detail is required to understand the full extent of this divergence as well as the likely impact for gas producers and consumers on Australia’s east coast.

Could the introduction of an east coast gas policy trigger foreign investor claims?

A question that has been posed in the past, and arises again now, is whether a gas market intervention contravenes Australia’s international obligations under investment treaties it has concluded with countries in the region.

Foreign investor protections

Investment treaties grant foreign investors certain protections when investing in Australia. In some cases, they enable claims for compensation for breaches of those protections being pursued by arbitration. Australia is a signatory to a number of investment treaties with states where the ultimate parent companies of international participants in the Australian LNG projects are incorporated, who in turn benefit from treaty protections. These include treaties with China (Free Trade Agreement between the Government of Australia and the Government of the People’s Republic of China and Agreement between the Government of Australia and the Government of the People’s Republic of China on the Reciprocal Encouragement and Protection of Investments), Malaysia (Agreement Establishing the ASEAN-Australian-New Zealand Free Trade Area (AANZFTA) and Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)), Korea (Free Trade Agreement between Australia and the Republic of Korea) and Japan (CPTPP), granting protections to participants such as Sinopec, CNOOC, Petronas, and Tokyo Gas.

While the scope of protections is treaty-specific, investment treaties typically prohibit expropriation other than for a public purpose, on a non-discriminatory basis, and against the payment of prompt, adequate, and effective compensation. Also prohibited are measures tantamount to expropriation (or ‘indirect expropriation’), which can occur without formal seizure of assets, by the introduction of regulatory or other measures that result in substantial deprivation or total destruction of the value of the foreign investment. Among other protections, most investment treaties require foreign investors to be accorded fair and equitable treatment (FET), which obligation prohibits discriminatory or arbitrary treatment of foreign investors. In some cases, this protects the investor’s legitimate expectations arising from specific undertakings given to the investor that the investor relied upon when investing in the country.

Could the policy trigger the right to claim under an investment treaty?

Government intervention in the gas market in the form of export restrictions, be it quantitative restrictions or export levies such as the proposed Gas Security Incentive could, depending on manner of implementation and impact, breach Australia’s obligations under its investment treaties and give rise to the foreign investors’ right to claim damages.

By way of example, tribunals have recognised that indirect expropriation can arise where government measures result in ‘covert or incidental interference’ that deprives the investor of the ‘reasonably-to-be-expected economic benefit’ of their investment.^[2] Measures affecting natural resources or extractive industries may be particularly vulnerable to expropriation claims where they undermine the core business model of the investor. In the context of LNG projects, where investors have structured their operations around long-term export strategies, significant interference with those expectations may raise concerns of indirect expropriation. While the analysis is necessarily fact specific, it is possible that the introduction of domestic reservation schemes and export restrictions may amount to indirect expropriation where it substantially impairs the economic return of an investment. As the proposed policy appears only to apply to uncontracted gas, however, it is questionable whether there would be a sufficiently material impact on the value of the investment as a whole to give rise to a claim for indirect expropriation.

The FET obligation is another treaty standard with particular relevance in the LNG sector, given the typically large up-front capital expenditure and long investment horizons. In making investment decisions, investors commonly rely on a stable and predictable regulatory environment, including the ability to export. Conduct by the host state, including statements or assurances made by government officials, may give rise to legitimate expectations that such conditions will not be unreasonably altered.

Tribunals have found that legitimate expectations may arise from the legal and regulatory framework in place at the time of investment;^[3] specific representations or assurances made by government officials;^[4] or contractual arrangements between the state and the investor.^[5]

While this again depends on the specific provisions contained in an applicable treaty, a sudden shift in policy that frustrates these expectations, even absent bad faith, may breach the FET obligation and give rise to the right to claim loss and damage occasioned by the policy shift.

Potential hurdles to claims

However, investment treaty protections do have limits. Most treaties safeguard the state parties’ sovereign right to implement non-discriminatory measures that regulate in the public interest. Some contain carve-outs for certain measures, such as taxation. States also have defenses under customary international law, including the defense of necessity, which excludes state liability for certain measures designed to safeguard an essential security interest against grave and imminent peril.^[6]

As a consequence, states are generally not liable for expropriation where regulatory measures constitute a legitimate exercise of their ‘police powers’—that is, their ‘inherent right to regulate in protection of the public interest’.^[7] Some tribunals have held that bona fide, non-discriminatory measures adopted for a legitimate public welfare objective may not amount to expropriation, even if a measure significantly affects an investment.^[8]

The question of whether the Australian export restrictions on LNG amount to indirect expropriation or a non-compensable exercise of ‘police powers’ will be pivotal. The government may argue that the proposed east coast gas reservation policy is necessary to respond to domestic gas shortages and rising energy prices—objectives that could qualify as a legitimate public interest. At the same time, it may be contested whether such measures fall within the traditional scope of police powers, which tribunals have typically linked to public health, safety, and environmental protection. Whether a treaty breach has occurred will ultimately depend on a case-specific assessment, often involving a proportionality analysis. This entails weighing the legitimacy and necessity of the policy objective against the severity of the measure’s interference with the investment and the investor’s expectations.

The FET standard does not provide a blanket protection either. For example, the CPTPP (Article 9.6(4)) provides that ‘the mere fact that a Party takes or fails to take an action that may be inconsistent with an investor’s expectations does not constitute a breach of [the FET standard], even if there is loss or damage to the covered investment as a result’. This language signifies that breaches of investors’ legitimate expectations (by way of a policy shift or otherwise) alone will not violate the FET standard.

Balancing domestic market needs with international investment and trade commitments

It is too early to tell whether the imposition of Gas Security Incentive to incentivise domestic supply or a similar measure will provide a legal basis for a claim of compensation to foreign investors. What can be said is that, while they may be justified in certain circumstances, measures that operate as an export restriction may be liable to an investment treaty challenge. The government needs to be cognisant not only of bolstering the domestic market but of the reasonable expectations of foreign investors and its own international investment and trade commitments.

^{[1]  The proposed policy would not apply to Western Australia’s gas production with the existing WA Domestic Gas Policy remaining in effect.}

^{[2]  Metalclad Corporation v Mexico (Award) (ICSID Arbitral Tribunal, Case No ARB(AF)97/1), 30 August 2000) [103].}

^{[3]  Cube Infrastructure Fund SICAV and others v. Kingdom of Spain, ICSID Case No. ARB/15/20, Decision on Jurisdiction, Liability and a Partial Decision on Quantum, 19 February 2019 [388].}

^{[4]  Etrak İnşaat Taahut ve Ticaret Anonim Sirketi v. The State of Libya, ICC Case No. 22236/ZF/AYZ, Final Award, 22 July 2019 [315].}

^{[5]  Glamis Gold Ltd v United States of America, Award, 8 June 2009 [766].}

^{[6]  See LG&E Energy Corp., LG&E Capital Corp. and LG&E International Inc. v. Argentine Republic, ICSID Case No. ARB/02/1, Decision on Liability, 3 October 2006.}

^{[7]  G Bucheler, Proportionality in Investor-State Arbitration, 2015, Oxford Scholarship Online, 31 fn 11.}

^{[8]  Prabhash Ranjan, “Police Powers, Indirect Expropriation in International Investment Law, and Article 31(3)(c) of the VCLT: A Critique of Philip Morris v Uruguay” (2019) 9(1) Asian Journal of International Law 98, 114–115, citing Saluka Investments BV v Czech Republic (Partial Award) (Ad Hoc Tribunal under the UNCITRAL Arbitration Rules, 17 March 2006).}