With the recent boom in domestic crude oil production along with a lack of takeaway capacity, the burgeoning St. James, Louisiana, distribution hub has become a vital crude oil logistics connection that has recently seen an immense increase in growth and activity.

Strategically located on the east bank of the Mississippi River, the hub at St. James, midway between New Orleans and Baton Rouge, has historically been used as a domestic distribution point for imported foreign oil from the Louisiana Offshore Oil Port (LOOP) and other Gulf Coast refineries. But due to decreasing dependence on foreign oil, domestic crude oil shipments have been on the uptick in the area.

According to the U.S. Energy Information Administration (EIA), in 2011, U.S. oil production reached its highest levels in 13 years.

“In 2011, the United States produced about 78 quadrillion Btu (quads) of energy, more than at any point in the nation's history. More than three-quarters of this energy production came from nonrenewable fossil fuels: coal, natural gas, crude oil, and natural gas plant liquids. Production of crude oil, which experienced a long decline from 20.4 quads in 1970 to 10.5 quads in 2008, rose to almost 12 quads in 2011,” the EIA said in a December 2012 report.

“There has been an increase in the amount of barrels that need to be handled. Pipeline, rail and other things are at capacity also,” Henry Wuertz, chief executive of Crest Energy Partners, a marketing, trading and logistics service company, tells Midstream Business.

Reaping the rewards

But, even as crude production surges, many of these areas lack adequate pipeline takeaway capacity and producers, who ship to places like St. James, which has rail, barge and storage capacity, are the beneficiaries.

“We have a terminal down in South Texas, and for a large part of the last year and a half, the barrels were discounted enough that we were able bring them to St. James,” Wuertz says. “This terminal can be used either as a domestic distribution point or an import facility through the U.S., and the terminal space is at a premium for distribution.”

Many factors have contributed to this premium, and one major factor is the recent supply glut adversely affecting the hub at Cushing, Oklahoma, which is the price settlement point for West Texas Intermediate (WTI) crude on the New York Mercantile Exchange. According to Commodity Online, the “phenomenal growth” in oil production coupled with pipeline bottlenecks has caused WTI sweet crude prices to drop substantially. And, according to Crest Energy’s Wuertz, this has helped the advancement of places like St. James.

“Everyone is trying to get to Cushing, so barrels are falling off,” Wuertz says. “If they are discounted that deeply to get into Cushing, then the arb is open to St. James because there is a premium there. Between the discounts you take at Cushing and the premium you get at St. James, the more barrels it draws in.”

According to information services provider RBN Energy, Bakken crude prices are linked to WTI crude, but Bakken crude delivered to St. James by rail has become a preferred choice of producers because it gets priced against the Gulf Coast Louisiana Light Sweet (LLS) crude, which trades significantly higher than WTI.

Both NuStar Energy LP and Plains All American LP (PAA) have taken advantage of the situation. In 2011, NuStar announced a joint venture with EOG Resources to build a 70,000- barrels (bbl.)-per-day unit train offloading facility at the company’s crude oil terminal in St. James. That same year, PAA announced the expansion of its St. James terminal facility, and, in December 2012, it announced a $500 million acquisition of four operating crude rail terminals— located in St. James—from U.S. Development Group. Both companies explained that the business decision was made to facilitate movements of crude from the Bakken, Eagle Ford and, for PAA, the Denver-Julesburg basin.

Unclogging the drain

Help is on the way for Cushing’s clog. Two crucial pipeline projects that have been in the works for some time are expected to come online this year. These projects include Trans- Canada’s 485-mile, Cushing-to-Texas portion of the Keystone XL pipeline and Enbridge and Enterprise Product Partners reversal of the Seaway Pipeline. Both projects are expected to deliver more than 1.1 million bbl. per day to the Gulf Coast. This, some forecasters say, will help alleviate Cushing of its backlog, bringing the WTI price back up to par.

But how will this affect business at the St. James terminal, which has just recently begun shine on the domestic stage? Wuertz says business at the terminal will be booming for some time due, largely, to its close proximity to Gulf Coast refineries and petrochemical plants.

“St. James is still going to be a very intricate part of the delivery in that area, mainly because of the refinery capacity,” Wuertz says. “You have to bring barrels to Houston, you have to bring barrels to Port Arthur, you have to bring barrels to Lake Charles and you have to bring barrels to the St. James, Greater New Orleans area.

“Because it has primarily been an import facility, it doesn’t quite have the infrastructure in place that the Houston area has, so there is still a demand for infrastructure. And that is why you see your biggest price differential there. But, between all of the refineries on the river and the Midcontinent system, it is still the most economical way to get to market,” he says.

Private vs. public

St. James’ boomtown-like expansion is evidence of something bigger happening around the U.S., says Daniel Kish, senior vice president for policy at the Institute for Energy Research.

“It’s exemplary of something that is going on around the country, simply because it’s all tied to this incredible expansion of oil production on private lands,” Kish tells Midstream Business.

Like many others in the industry, Kish lauds the scientific advancements in drilling that have been made in past decade. He says it was the spark that places like St. James needed to start their rapid and economical expansions. And, he adds, that spark shows no signs of fading away.

“We are seeing the most rapid increase in domestic production of oil in history,” Kish says. “It happened as a result of the combination of hydraulic fracturing with horizontal drilling. Because of this, there are a number of oil producing plays like the Bakken and Eagle Ford, and I think we are going to see more them in the future.”

It’s no secret that this rapid increase of production can also be directly attributed to the use of private lands in the U.S. In August 2012, the EIA announced that, from 2005 to 2011, natural gas production on private lands increased by 16.4 billion cubic feet (Bcf) per day and, in 2011, oil production conducted on private lands went up by 385,000 bbl. per day. At the same time, over the past eight years, production on federal lands dropped from 35% to 21%.

“To put this in perspective, in North Dakota, where 97% of the state is not owned by the federal government, the increase in oil production last year compared to the increase on federal lands on an acre-per-acre basis was north of 60 times,” says Kish. “Luckily in this country, we have a long history of private property rights, which allows a rancher, a farmer, or a person in the suburbs of San Antonio the ability to lease their back-forty to someone in return for a share of whatever commodity they are producing.”

Kish says this “incredible increase” in production on private lands has benefited the expansion at the St. James terminal because of the lack of takeaway capacity many of these areas are facing.

“Much of this production is happening in areas that had not been production areas before. Places like the Bakken and the Eagle Ford lack the takeaway capacity for oil,” Kish says. “The construction of pipelines needed to respond to the production increase has not moved at the same rate.

“So places like St. James, where you have rail capacity and storage capacity, are going to be the beneficiaries, at least until more pipeline capacity is added. It means more jobs, economic infusion of capital, and a lot more activity, which is certainly good for St. James.”

Trouble ahead?

But, Kish says, this boom in production and its subsequent benefits could be in jeopardy. “The one thing that could stop this is federal government policy with regard to hydraulic fracturing,” he says. “Regulating and managing hydraulic fracturing is a state responsibility that is clearly spelled out in the 2005 Energy Bill. If the federal government finds a way to insert itself into the permitting of hydraulic fracturing or otherwise regulate hydraulic fracturing then places like St. James, with its economic expansion could possibly be threatened.”

But for the moment, Kish says, places like St. James are safe and will continue to reap the rewards of successful, active domestic production.

“This whole increase in production in the U.S., as a result of hydraulic fracturing for shale oil is having profound impacts on the reorganization of the energy infrastructure and markets and everything else in the U.S.,” he says. “There are challenges, and, thus, opportunities that are making themselves possible right now, and it’s one of the few bright spots in our economy.”

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