The gas reservation bill, which faced a committee hearing in Canberra on Friday, would require liquefied natural gas exporters to set aside up to 20 per cent of production for the domestic market before it can be sold overseas.
The reservation would create a modest oversupply in the east coast gas market, which Resources Minister Madeleine King has said would bring down prices.
Greens senator Steph Hodgins-May, a vocal supporter of a gas export tax and a member of the committee, said she wasn't convinced the policy would succeed in reducing future costs.
"This proposed gas reservation is Labor's giant and complex distraction from making gas exporters actually pay what they owe in tax," Senator Hodgins-May said.
"But now we learn it is going to make it easier to open up new gas fields and infrastructure.
"This is the worst of both worlds."
Gas industry lobby group Australian Energy Producers went into the inquiry warning the reservation would drive the domestic industry into the ground and ultimately increase prices.
Chief executive Samantha McCulloch reiterated she did not support measures which forced producers to sell to the domestic market, let alone for it to facilitate a 10 per cent oversupply.
"When that gas is not demanded by the market, it should be free to be exported," Ms McCulloch said.
"This would align with the approach of the Western Australian scheme and would help to avoid some of those outcomes on domestic-focused producers, but also on the broader investment environment."
The West Australian stakeholders sitting next to Ms McCulloch wanted no part of the new reservation scheme, having worked with a state system for the past 20 years.
"We don't begrudge the government acting on the east coast ... but Western Australia doesn't have those problems," Chamber of Minerals and Energy WA chief Aaron Morey told the inquiry.
"Our gas reservation policy has delivered a balanced market with lower and more stable prices.
"In our view, the national scheme doesn't get that balance right, but even if it did, we'd want WA fully exempt."
Developments in Western Australia should receive an explicit carve-out for at least 40 years and be left to existing regulations unless something drastic happens in the market, Mr Morey said.
Labor agreed to water down its original pledge of a fixed 20 per cent baseline reservation to a cap instead.
This means producers would be allowed to set aside less gas at the discretion of the minister and on the back of advice from the Australian Energy Market Operator and the Australian Energy Regulator.
But the 20 per cent cap goes far beyond the "modest oversupply" spoken of by the minister, according to Tony Woods from the Grattan Institute.
"Something closer to two to five per cent of the total domestic demand ... would be appropriate," Mr Woods said.
"It would deliver most likely what the government is looking for in terms of producing modest pressure on prices, and ... far less likely to have the sort of impact that many have been concerned about."
Mr Woods also downplayed the impact of the proposed legislation on future investment, instead pointing to decreasing demand as Australia moves away from fossil fuels.
Households should have access to competitive gas prices during this transition, Annika Reynolds from the Australian Conservation Foundation said.
"A reservation scheme that becomes a fig leaf for the drilling and fracking of major new gas basins like Beetaloo or Narrabri, would be a terrible, terrible outcome," they told the inquiry.
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