Back to the Delta - St. James Rail Yards End the North Dakota Crude Oil Blues

Over the past two years oil terminal operators in St. James, LA have built rail receipt facilities that handle over 150 Mb/d of crude oil – most of it from North Dakota. That crude is chasing Gulf Coast prices that can be $20/Bbl higher than the Midwest.  Today we explain how NuStar Energy has expanded their St James crude oil terminal to capitalize on those price differentials.

So far in this blog series we have described how five crude oil terminals are adapting to a changing supply position in the Gulf Coast region caused by increased domestic US and Canadian production. The first four episodes covered terminals in the Houston area (see ECHO, Nederland, Oiltanking and Magellan). The fifth and sixth episodes in the series focused on the Louisiana Offshore Oil Port (see Thrown For A Loop Part 1 and Part 2).

This time our focus turns to NuStar Energy LP that owns the largest volume of crude oil storage at St. James, LA. NuStar Energy L.P. is a publicly traded, MLP based in San Antonio, TX with 8,433 miles of pipeline; 84 terminal and storage facilities and a 50 percent share in two asphalt refineries. NuStar is a spin off from Valero midstream transportation assets. The company’s focus over the past two years has moved away from asphalt, refining and trading activities that are exposed to commodity prices towards fee based transportation and storage. In the process NuStar has built a crude oil infrastructure in the Eagle Ford and a major storage and transportation hub at St. James, LA.

We have previously described NuStar’s crude and condensate gathering and storage activity in the Eagle Ford play (see Knocking on Heaven’s Door Part III). NuStar has developed hubs in Oakville and Petus, TX connected by pipeline via Valero’s Three Rivers refinery to a marine terminal in Corpus Christi. Nustar also recently increased their Eagle Ford footprint by acquiring TexStar Midstream. The focus of this blog will be the company’s crude oil storage and distribution terminal in St. James, LA.

St. James is on the Mississippi River 60 miles upriver from New Orleans and about 60 miles Northwest of the Clovelly, LA landing point for crude imported through LOOP. The map below is reproduced from our recent LOOP terminal blog. It shows the central position that St. James occupies in the Gulf Coast crude oil refining and distribution system. St. James has long been a trading hub for crudes such as the Gulf Coast benchmark Light Louisiana Sweet (LLS) and medium sour Mars. The St. James hub feeds crude to refineries in Louisiana, Mississippi and the Midwest.

Source: LOOP and RBN Eneergy (Click to Enlarge)

Two major pipeline systems deliver inbound crude to St. James. The first is the LOCAP pipeline between Clovelly and St James that connects to the LOOP terminal storage facility. That link provides access to up to 1.2 MMb/d of foreign crude imported through LOOP by tanker and domestic crude produced by the offshore Gulf of Mexico Mars and Thunder Horse fields. That’s in addition to the 67 MMBbl of storage capacity in and around Clovelly. The second major inbound crude pipeline into St. James is the Houston to Houma (Ho-Ho) pipeline.  The Ho-Ho pipeline used to run from Houma to Houston but has just been reversed (see Oh-Ho-Ho It’s Magic - The Missing Link for Gulf Coast Crude). The Ho-Ho pipeline now delivers 350 Mb/d of crude from Houston to Houma and St. James. Another pipeline project currently being considered that would also deliver inbound crude to St. James is the Energy Transfer Trunkline Reversal. That project plans to reverse a natural gas pipeline between Patoka, IL and St. James and convert it to crude oil.

The principal outbound pipeline from St. James is Capline – that transports crude and condensates north through the Midwest to Patoka and Chicago, IL feeding several refineries along the way (see Dragging the Capline for more on Capline). St. James is also connected by pipeline and water to local Louisiana and Mississippi refineries. In 2015 Shell will complete construction of the Westward Ho pipeline planned to run from St. James to Nederland and Houston, TX. That pipeline will re-establish the eastbound flow of crude from St. James to Texas Gulf Coast refineries that was removed by the Ho-Ho reversal.

When NuStar bought their St. James crude terminal from Koch in 2006 it had 3.3 MMBbl of storage. NuStar initially used the terminal to store and blend imported crude for local refineries and to feed Midwest refiners via Capline. But that model changed for the company in the past two years as the US has become less dependent on imported crude. That is a trend we have covered extensively in RBN Energy blogs. As we explained in Part II and Part III of the Ho-Ho blog series an influx of new US domestic shale crude produced in North Dakota and Texas as well as increased Canadian production is changing the crude supply picture on the Gulf Coast. NuStar has embraced that change by expanding their St. James terminal to receive as much as 100 Mb/d of inbound crude supplies by rail from North Dakota. Today the company’s facility can store 9 million barrels of crude and Nustar expects to increase that to 11 million barrels by 2016.

The price of Bakken crude in North Dakota is linked to the inland US benchmark West Texas Intermediate (WTI) crude (see The Bakken Buck Starts Here – Crude Pricing Part II). Bakken crude delivered to St. James by rail is priced against the Gulf Coast benchmark LLS crude that is currently trading $20/Bbl higher than WTI.  That price spread is caused by a lack of available infrastructure to deliver increased supplies of domestic and Canadian crude to Gulf Coast refineries - leading to oversupply in the Midwest and discounted WTI prices. The cost of shipping crude by rail from the Bakken to St. James is currently about $11/Bbl meaning North Dakota producers can gain up to $9/Bbl ($20 - $11 /Bbl) shipping their crude by rail to St. James. NuStar has capitalized on that price differential by building a 100 Mb/d unit train receiving terminal and new crude storage to accommodate the flow of Bakken crude into St. James.

The NuStar rail receipt terminal at St. James was developed as a joint venture between the company and EOG Resources – a producer in both North Dakota and the South Texas Eagle Ford crude plays. EOG owns a dedicated rail terminal at Stanley in North Dakota that has capacity to load unit trains with up to 90 Mb/d of Bakken crude for shipment to St. James. EOG has a smaller rail terminal at Refugio, TX in the Eagle Ford that can move 20 Mb/d of crude by rail to St. James. The NuStar St. James rail terminal can unload a unit train in 12 hours. Under the NuStar/EOG joint venture the majority of the incoming crude belongs to EOG and NuStar only controls 20 Mb/d of the capacity. During the second half of 2012 NuStar sounded out customers about constructing a second rail receipt terminal at St. James that they will own outright.

In addition to pipeline links and the rail terminal, NuStar has marine facilities at St. James. These consist of two ship docks and one barge dock capable of receiving and loading crude oil. Barges can deliver crude to refineries along the Mississippi River and ships can deliver along the coastal waterways of the Gulf Coast. NuStar also has truck receipt facilities. The schema below shows the NuStar terminal layout and pipeline connections.

Source: NuStar Analyst Presentation (Click to Enlarge)

We will be watching with interest the future of Bakken crude shipments by rail to St. James in the coming year. The rail option makes a lot of sense for producers in North Dakota right now while they wait for the completion of new pipelines that can deliver their crude more directly to the Gulf Coast. Those pipelines will start to come on line this year and they will provide North Dakota producers with less expensive options to get their crude to the Gulf Coast. We expect the flow of new crude into the region to reduce the differentials between Midwest and Gulf Coast crude prices that have justified more expensive rail movements. That will surely reduce the volume of crude arriving at St. James by rail. However, the St. James terminal will still be a very well connected crude distribution hub on the Louisiana Gulf Coast. It is linked by pipeline to supplies coming from Houston (via Ho-Ho) and NuStar’s marine facility at can handle crude movements from along the Gulf Coast – including Eagle Ford shipments from their facility in Corpus Christi.

NuStar’s expansion of their St. James terminal is yet further evidence (if anybody still needs it) of the extent to which the new US domestic crude oil supply position is bringing sweeping changes through the storage and distribution infrastructure that keeps Gulf Coast refineries supplied with crude. NuStar has embodied the dynamic nature of these changes by rapidly capitalizing on crude by rail opportunities that may not last forever but have proven profitable in the short term. In the next episode in this series we will look at the crude terminal operation of NuStar’s principal competitor at St. James – Plains All American.