Plains All American is Buying US Dev Group's Eagle Ford Crude Terminal

Gardendale Rail Map
Gardendale Rail Map

Plains All American Pipeline (PAA) has reached a $500 million deal to buy four rail facilities from U.S. Development Group. One of those facilities is part of the Gardendale Rail System near Cotulla, TX.

The four facilities are rail terminals:

The three crude terminals have daily loading capacity of 85,000 b/d and the rail terminal at St. James has unloading capacity of 140,000 b/d. An unloading facility is also planned for Bakersfield California.

“Plains has proven to be a great terminal and pipeline partner for USD, and we believe that this transaction will provide for the most efficient optimization of the assets involved.”
— Dan Borgen, U.S. Dev. Group CEO

The Eagle Ford Crude Terminal receives oil by truck near Cotulla, TX, in the community of Gardendale. It's just off I-35 80 miles south of San Antonio. The facility has capacity for 200 loaded rail cars, and can move as much as 40,000 b/d. The terminal is serviced by Union Pacific Railroad and the Gardendale Railroad. Crude moving from the terminal ends up in St. James, LA, where the facility can handle 300 loaded railcars at one time or 130,000 b/d. The St. James Rail Terminal also ties into several pipelines, including one owned by PAA.

"These assets represent a very attractive addition to our existing North American rail activities...." said Greg L. Armstrong, Chairman and CEO of PAA. "Given recent and projected increases in North American crude oil production and volumetric and quality imbalances expected to occur in certain regions over the next several years, we believe that strategically located rail loading and unloading assets will continue to play an important role in the transportation of crude oil in North America."

Crude oil pricing is as dynamic as ever across the U.S. Growing production in the Bakken and West Texas have put downward pressure on WTI (priced at Cushing, OK). On December 10, 2012, WTI was trading at ~ $86.50 / bbl and Brent crude was trading a little over $108 / bbl. That's a wide spread that creates attractive crude by rail economics. Plains also has an extensive NGL rail network and expects to have as many as 6,700 rail cars under lease by year-end 2013.

Plains All American Pipeline's company wide crude oil loading capacity is now 250,000 b/d and unloading capacity is 335,000 b/d on the East Coast, Gulf Coast, and West Coast.

Read the full press release at paalp.com

Not Enough Pipelines, Railcars, or Trucks for U.S. Crude

West Texas Intermediate (WTI) crude is trading at a more than $25 discount to Brent Crude. Brent prices are used as the benchmark for two-thirds of the international crude trade. WTI is used as the U.S. benchmark. More than $25 per barrel is an amazing spread when you consider WTI is priced in Cushing Oklahoma and the U.S. accounts for almost 25% of worldwide oil demand. How can oil be cheapest where demand is the highest? When you have a moment, look at Bakken and Eagle Ford drilling levels.

Shale Plays Adding Production Outside of the Gulf Coast

Shale plays like the Bakken and growing plays in West Texas along with an influx of Canadian oilsands production in the midwest have pushed a surplus of oil all the way to Oklahoma. In a perfect market, we could move oil quickly and easily to take advantage of the arbitrage or "free money". Oil needs to penetrate the Gulf Coast refining market to recognize higher prices. Sounds simple.

Pipelines, Railroads, and Trucks are Stressed

We need more pipelines delivering crude in the Gulf Coast. We don't have capacity, so oil marketers resort to railroad agreements. When rail terminals and railcars run at capacity, trucking becomes the last option. For you guys with a truck and trailer, there's a margin waiting to be made between Cushing, OK, and the Gulf Coast.

The idea of trucking crude sounds great, but no one is doing it because they are already working in the shale plays. Trucks are making as much as $5 a barrel to move crude from tanks to pipelines or storage facilities and those are short hauls. If you can make $5 a barrel three to four times in a day ($3,000-4,000 per day) , there is no incentive to make long hauls that would only pay $7.50-10.00 per barrel ($1,500-2,000 per day). The math is simple, so don't expect truckers to fill the gap as long as there is high demand for short haul trips.

The shortage of pipelines, rail facilities, and now trucks has led to the historic spread between foreign brent crude and WTI (the futures spread was $27 on October 14). As the Bakken and other oil plays continue to grow, the problem will only be answered by major pipeline expansions. Some of those are already in the works, but more are likely on the way.

R.T. Signature]