* 210,000 terminal could make Houston a more flexible oil hub
* Big regional oil price gaps are leading to more rail transport
* Kinder Morgan, Watco Companies to operate new terminal
Feb 21 (Reuters) - Kinder Morgan and Watco said on Thursday they will team with Swiss oil trader Mercuria to build a 210,000 barrel per day crude-by-rail terminal in Houston, the latest bet on railcars to ease major bottlenecks in U.S. oil markets.
Crude-by-rail terminals are springing up as U.S. shale drilling expands and new pipelines lag behind, causing big regional oil price gaps, which allow traders like Mercuria to profit by moving crude quickly between regions.
Kinder Morgan Energy Partners and truck and rail operator Watco, which have a joint venture known as KW Express LLC, said they entered a long-term agreement with Mercuria, which will own 15 percent of the terminal on the Houston Ship Channel.
The terminal will be complete in February, 2014, said Kinder spokesman Joe Hollier.
Financial terms were not disclosed. Mercuria and Watco did not immediately respond to requests for further comment.
The terminal will allow Mercuria to bring crude to the Gulf Coast refining complex from locations including Cushing, Oklahoma -- the delivery site for U.S. crude futures contracts -- and West Texas, the Bakken Shale or western Canada.
It will also load crude and condensates onto trains or barges for shipment elsewhere, with capacity to handle three large unit trains per day, and additional barge offloading capacity of 100,000 bpd.
Hollier said "interim facilities" should be ready by August, allowing for crude arriving at the terminal to be transferred into a distribution system operated by Magellan Midstream . Barge facilities will be ready in November.
The terminal, which will also feature 500,000 barrels of tank storage for crude and condensates, will tie into a Magellan terminal that delivers crude to Houston refiners, while barge deliveries can reach other refineries around the Gulf Coast, Hollier said.
"This will be the first major crude-by-rail destination facility in the Houston area with the ability to deliver into the largest refining complex in the world," said John Schlosser, Kinder Morgan Terminals president, in a release.
Shipping crude by rail is more expensive than by pipeline, but due to logistics bottlenecks, a barrel of light crude on the Gulf Coast can fetch a premium of $20 or more per barrel versus prices in the midcontinent. The oil price gap between the Gulf and Western Canada can be $40 or more.
"They'll have unit train capacity to drop off different grades of crude along the Gulf Coast and capture those big price differentials," said Jason Stevens, an analyst who covers energy companies for Morningstar in Chicago.
"It's a very flexible way to operate. The loading capacity also means they can take light condensates from the Eagle Ford region of Texas to Canada, where it can be used as a diluent for Canadian heavy crude."
Mercuria already holds oil and gas stakes in Western Canada and the Bakken Shale of North Dakota, and controls crude storage assets in Cushing, Oklahoma, the delivery site for U.S. oil futures.
Pipeline giant Kinder and logistics firm Watco said in 2011 that they planned to build several U.S. crude-by-rail terminals around the country.
Railroads have been reporting growing profits from crude by rail, and among the other energy firms betting on it are independent U.S. oil refiners Valero and PBF Energy Inc.
PBF has been railing cheaper crude from the Northern Plains to its formerly import-dependent East Coast refineries, and.