NEW YORK After a major $500 million deal late last year, Texas-based oil-by-rail pioneer Dan Borgen might be forgiven for packing it in.
The sale of five crude oil terminals to Plains All American Pipeline was a landmark for U.S. Development Group, the Pasadena, Texas-company Borgen helped found two decades ago, initially to invest in the rail industry. It came just months before a dramatic collapse in the spread between U.S. inland crude and global benchmarks this year, a shift that has slowed the burgeoning trend of shipping oil by rail.
Not so fast, says Borgen, 52, who along with a team of 40 core USD employees has helped introduce the energy markets to specialized terminals that can quickly load mile-long oil tank trains heading to the same destination - facilities that have revolutionized the U.S. oil market.
Instead, USD is shifting its attention away from the best-known U.S. shale oil plays toward Canada, announcing plans two weeks ago to help build what might be the biggest oil-by-rail terminal to serve the northern oil sands patch.
And although USD has now sold off 10 of the 14 terminals it built over the past decade or so, it has several other irons in the fire such as an offloading terminal in Washington state, inland facilities in Ohio or Alabama and possibly a Texas coast terminal.
"People have asked whether USD is finished after the deal with Plains," Borgen told Reuters in an interview. "We're by no means done."
While a host of other companies have rushed into the business of shipping crude oil by rail, including rail operators such as Warren Buffett's BNSF Railway CoBNISF.UL and refiner Tesoro Corp (TSO.N), USD has a reputation for being a leader of the pack.
"We are on a growth trajectory and continue to expand," says Borgen, who declined to provide any profit or revenue figures.
USD is an employee-owned enterprise, Borgen says, although Goldman Sachs Group Inc (GS.N) has held a large investment. The bank bought a near 50 percent share in 2007, but that has now fallen by more than half, according to people familiar with the matter.
RAIL SYSTEMS INITIALLY
U.S. Development Group put down roots in the oil-by-rail business long before Goldman Sachs came to the scene in 2007.
In the early 1990s, Borgen returned from Europe where he had worked as an investment banker, and began buying and selling small rail networks.
He had noticed the efficiency of Europe's rail system and saw an opportunity in "storage in transit" (SIT) facilities, which store feedstock and plastics inventories between rail shipments.
Soon, USD had built the nation's largest such privately held facility in Bayport, Texas, near Houston, and was developing another similar project adjacent to Royal Dutch Shell Plc's (RDSa.L) Deer Park, Texas, refinery.
There, USD noticed an opportunity to ship surplus refined fuel such as diesel in the Gulf Coast refining hub to more remote regions served only by pipelines or tanker trucks, where the higher price would more than cover the cost of transport.
"We felt we could do that and be more efficient for time and cost," Borgen said.
So in the late 1990s, they built a "rack," or wholesale fuelling depot, to ship fuel by rail.
The next move was in the biofuel business, first targeting California, which had just issued stringent fuel regulations that required gasoline to be blended with ethanol.
Ethanol is mostly produced in the Midwest and cannot easily be shipped in pipelines over long distances. So in 2003, USD worked with the railroads to build the first terminal capable of high-speed ethanol offloading near Carson, southern California's refining hub. It handled about 80 percent of the region's demand for blended fuel.
In 2006, USD made the first of several signature deals, selling its Deer Park rack and California ethanol terminal to Kinder Morgan Energy Partners LP KMP.N. Four years later, Kinder Morgan would buy three more ethanol terminals in New Jersey, Maryland and Texas for around $200 million.
PIVOT TO CRUDE
Borgen says he spotted opportunities in the shale oil boom five years ago, when many U.S. energy companies were still grappling with the sudden growth in natural gas production caused by hydraulic fracturing, and when few conceived that renewed drilling would also spur a resurgence in oil output.
"I was thinking it was just a matter of time before this thing moves from gas to crude, and when it does, there won't be enough (pipeline) capacity to handle this," he said.
The timing was good. It had been cheap to lease rail cars ever since the biofuel boom fizzled in 2008, and the U.S. shale oil revolution was still in its infancy in North Dakota. By early the following year, USD had leased as many as 5,000 tank cars.
"When you create something new, you have to bring rail cars to transport it, especially since we were coming to an industry that may not have used rail cars much," he said.
Emboldened by the early success, the company ramped up its investments in the crude-by-rail business, reckoning - wrongly - that the best bet would be in Canada, where producers were grappling with how to ship viscous oil sands by pipeline.
"The timing was not right. They were all about Keystone and pipeline growth," he said of early talks with producers.
Instead, USD built a receiving terminal in St. James, Louisiana, the trading point for the Gulf Coast's main light, sweet crude, eventually expanding it to one of the country's biggest, capable of unloading two unit trains at 130,000 bpd.
It went on to build up a stake in nearly every major shale play, including North Dakota, where it helped to break BNSF's early advantage, and Colorado's Niobrara and Texas' Eagle Ford.
It was a good bet because the volume of U.S. crude oil shipped by rail has surged from next to nothing in 2010 to as much as 750,000 barrels per day (bpd), equivalent to about a tenth of the country's production. Total U.S. oil production has reached the highest in over two decades.
To be clear, Borgen notes that, unlike some other logistics groups that also trade in the commodities they help to ship, U.S. Development Group is not a trading enterprise.
"We don't want to be viewed as a competitors to our customers," he said.
FULL STEAM AHEAD
The company's latest foray is into the crude-by-rail business in Hardisty, Alberta, where together with Gibson Energy Inc (GEI.TO) USD will build one of three terminals capable of handling unit trains.
Producers are slowly warming to the benefits of shipping raw Bitumen in specially made 'coiled and insulated rail cars that can reheat the viscous crude for offloading, avoiding the need to blend it with costly diluent for shipments by pipeline.
Here too Borgen moved early, avoiding an industry backlog more than two-and-a-half years long for new C&I cars.
"We were talking about C&I cars one or two years ago," says Borgen.
USD has already taken delivery of some 2,500 cars.
"We view rail car leasing as one of our competitive advantages," he added.
UP NEXT, FROM COAST TO COAST
USD has an option to lease property in the Washington port of Grays Harbor, although it has not applied for the permits to build a terminal yet, according to Kayla Dunlap, a spokeswoman for the port. The project would be a 50,000 bpd crude offloading terminal, according to USD filings.
Borgen says the project is "moving forward." But he faces stiff competition. Two other companies, Imperium Terminal Services and Westway Terminal Company, are farther along in their permit applications, according to records from the nearby city of Hoquiam.
USD has also taken "certain options" for a possible ethanol and crude oil rail terminal in Boligee, Alabama, about 200 miles north of big Gulf Coast refineries, according to Borgen. A June 2012 filing with the Alabama Department of Environmental Management shows plans to build eight 130,000-barrel ethanol and crude oil tanks with a turnover rate of up to 150,000 bpd.
The company also has property options in Stuebenville, Ohio, 40 miles west of Pittsburg in the Utica shale oil patch, where it already helps deliver the specialized sand used in the hydraulic fracturing process, according to Borgen.
And since 2012, USD's tax filings have listed a subsidiary named "Galveston Bay Terminal," a reference to the Texas City area south of Houston near several major refineries. Asked about the location, Borgen said only that the firm was "interested in the Gulf Coast and looking at development opportunities."
So although the collapse in crude oil spreads threatens to sap some of the enthusiasm for oil-by-rail, Borgen says the trend will not go bust now that producers, refiners and traders have discovered the flexibility offered by crude.
"Part of my job is to help communicate to folks that this appears to have some longevity," says Borgen. "If I wake up at midnight and wonder if I'm wrong, I rest better thinking about our customers who are making this part of their portfolio."