The workaround is so-called "minimum volume commitments" (MVC). A feature of pipeline deals is that buyers usually get a certain baseline level of throughput tariffs whether the oil flows through or not: for EIG’s Aramco deal the MVC was 75% of maximum throughput volume, according to financing disclosure. While neither buyers nor sellers have revealed the level of Project Peregrine’s volume-based tariff or the guarantees associated with it, it would make sense if the latter were more generous than previous deals.
That, however, creates the risk that Kuwait pays out too much of its new cash pile without the oil revenues to back it up. If current hostilities end soon and the seller can hit its 2035 output target, that won’t be a problem. Even so, the Gulf’s latest pipeline M&A looks dicier than previous ones.
Context news
Kuwait Petroleum Corporation (KPC) has signed a $16 billion deal to lease and lease back its crude oil pipeline network with a consortium comprising global funds Blackstone, Brookfield and KKR, the state-owned Gulf firm said on Saturday.
Under the investment called Project Peregrine, KPC's unit Kuwait Oil Company (KOC) is establishing a joint venture with the three global investors in a lease and leaseback structure for a 20.5-year period that includes a volume-based tariff, KPC said in a statement.
"This transaction sends a powerful signal that Kuwait continues to rise as an attractive destination for global capital, even amid a challenging regional environment," KPC Deputy Chairman and CEO Shaikh Nawaf Saud Al-Sabah said in the statement.
“This transaction is part of KPC’s long-term strategy to fund future growth and support our ambition of reaching 4 million barrels per day of crude oil production capacity by 2035. It was launched before the recent hostilities in the Gulf and its execution remained on schedule throughout," a spokesperson for KPC said in response to Breakingviews' requests for comment.
"The transaction reinforces Kuwait’s position as an attractive destination for international investment and, because investors’ returns are contingent upon KPC’s oil production, the transaction confirms investors' trust in KPC’s ability to reach its production targets. While the commercial terms remain confidential, the transaction followed a highly competitive process and reflects the confidence global investors place in KPC and the State of Kuwait." they added.
JPMorgan and HSBC, which advised KPC on the transaction, declined to comment.
Kuwait joins the Gulf pipeline M&A wave
Kuwait has joined the Gulf's pipeline M&A wave. Following a path trodden by Saudi Arabia and Abu Dhabi, the country's national oil company on Saturday said it would sell a 49% stake in its domestic and export oil network to Blackstone, Brookfield and KKR. While the deals look similar, the Iran war makes the context tangibly different.
Dubbed Project Peregrine, the deal values Kuwait Oil Company's 320-kilometres of pipelines at roughly $16 billion. That sounds similar to Saudi Aramco’s $12.4 billion deal in 2021 to sell a 49% stake in its equivalent assets to a consortium featuring EIG and Mubadala, and Abu Dhabi National Oil Company’s $4 billion sale of a 40% stake in its own ones to Blackstone and KKR in 2019. Those were the epitome of safe infrastructure plays. The petrostates got upfront cash to diversify their economies away from oil, while the Western investors got tariffs that hinged on how much oil went through the pipelines - a flow the Gulf countries were obviously keen to maintain.
Regional conflict changes the risk profile
But while Kuwait’s stated use of its cash windfall is to hike crude production capacity to 4 million barrels a day by 2035, its neighbourhood is now a lot less safe. The United States may have paused its latest strikes on Iran, but Kuwait has been among the Gulf states hardest hit by Iranian drones and missiles, and lacks a major export route around the Strait of Hormuz. It also faces the prospect of further disruptions that could cut July output down to 1.2 million barrels per day from roughly 2.5 million before the conflict, while war damages may leave a repair bill of up to $2 billion, according to Rahul Choudhary, vice president for oil and gas research at Rystad Energy.
Given all that, Kuwait’s largest ever foreign direct investment would seem to represent a considerable risk for its Western buyers. The last four months have seen Gulf producers shut in oil production, as a blocked Hormuz means there’s nowhere to store their crude. Without any throughput, the producers would struggle to attain a normal 10%-plus infrastructure return.
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