Exclusive: Goldman Sachs' inside track on the U.S. oil-by-rail boom
By Jonathan Leff
NEW YORK (Reuters) - While the role of Goldman Sachs Group Inc (GS.N: Quote) in global metals markets has fallen under a harsh regulatory spotlight this summer, the bank has also quietly enjoyed a privileged front-row seat to one of the most dynamic trading trends to emerge from the U.S. shale oil boom: shipping crude by rail.
Through a previously unreported minority investment in a small, privately held Texas-based firm called U.S. Development Group (USD) in 2007, Goldman Sachs has played a leading role in financing the expansion of nearly a dozen specialized terminals that can quickly load and unload massive, mile-long trains carrying crude oil and ethanol across the United States.
Dan Borgen, president and chief executive of USD, said the firm he helped found two decades ago has benefited from a regular exchange of ideas with Goldman, as well as from its financial clout.
"It's great for someone who tends to be creative and entrepreneurial to bounce ideas off smart folks who understand the strategic nature of the business," Borgen said in an interview. "We lean on them for advice and they are some smart people. It's one of the reasons we accepted their investment years ago."
To be sure, there are important distinctions between Goldman's involvement with USD and with Metro International Trade Services, the warehousing group that is now the subject of a U.S. regulatory inquiry and lawsuits alleging it used anticompetitive practices that helped drive up the cost of aluminum. Goldman has denied the allegations.
Unlike Metro, a wholly-owned subsidiary of Goldman's J. Aron trading operation, USD was a minority-stake investment by a different part of the bank, a Goldman spokesman said in response to queries. There is no indication that Goldman played any role in USD's operations or ever benefited beyond its financial stake in USD. Both are balance sheet investments made with the bank's own capital rather than investor funds.
Still, the USD stake, which has fallen from 49 percent in 2007 to less than half that now, shows that Goldman's interests in the commodity industry run deeper than widely known, and extend beyond the Metro warehouses and its ownership of a Colombian coal mine, its two most public holdings.
In principle, its ownership stake in privately held USD could provide the bank with valuable insight as the shipping crude by rail moved from a niche play to a mainstay of the U.S. market, as booming U.S. oil production outstripped pipeline capacity in many regions. Continued...