By Jonathan Leff
NEW YORK, Aug 20 (Reuters) - While the role of Goldman Sachs
Group Inc 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
"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
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.
For a story on U.S. Development Group see:
HOW PHYSICAL TO GET
While private sector investments have long been a common
part of merchant banking, the stakes may attract additional
scrutiny at a time of unprecedented public and political
pressure on Wall Street investments in commodities markets,
particularly ownership of infrastructure such as metals
warehouses and trading of physical commodities.
Lawmakers have questioned whether commercial banks,
guaranteed by the Federal Reserve, should own oil tankers or run
power plants - activities that may expose them to massive
financial risk in the event of a spill or meltdown.
While the bank isn't obliged to reveal every investment it
makes with its own money, lawmakers on the Senate Banking
Committee have complained it is almost impossible to know how
deeply involved banks are in the industry, due to the lack of
The Federal Reserve must make a decision by September that
will determine whether former investment banks like Goldman will
be allowed to continue owning and operating physical commodity
assets. More broadly, it is also reviewing a landmark 2003
decision that first allowed commercial banks to trade physical
Some banks, including JPMorgan Chase & Co, are
opting to withdraw from physical trading, because of the
regulatory pressure and several years of diminished margins.
The Goldman unit with an interest in USD, GSFS Investments I
Corp, has also cut its holding in USD, although the reduction
pre-dates the current debate over how deeply Fed-backed banks
should be allowed into commerce. As a "merchant" investment held
at arm's length from the bank, the stake must divested by
Goldman by 2017, according to Federal Reserve rules.
GSFS cut its roughly 49 percent shareholding to about 33
percent in 2011, according to Texas Franchise Tax Public
Information reports. Its share has fallen further since then,
according to a person familiar with the matter.
Neither Goldman nor USD's Borgen would comment on the exact
size of the current stake, nor why the bank was reducing it. USD
is an employee-owned business, Borgen said. He declined to talk
about the ownership structure in more detail.
U.S. Development Group has been in business for two decades,
but it has only gained a high profile recently as it shifted
from building up ethanol-related rail terminals to tapping into
the shale crude oil boom.
Borgen said the initial deal with Goldman came about after
USD had turned down other would-be investors. The company had
already made its mark in the industry with a series of projects
including small-scale rail projects, large-scale "storage in
transit" for the petrochemicals industry and some wholesale
oil-by-rail diesel fuel arbitrage.
"Because we're not public we're able to get out there early
and put our stake in the ground before others identify the
market opportunities that are there," said Borgen. "We start
things and hopefully they become industry solutions."
At the time of Goldman's investment in 2007, well before the
surge in North Dakota crude production had begun, USD was in the
midst of building ethanol terminals across the United States,
including one in the New York Harbor trading hub, where prices
for benchmark U.S. gasoline and heating oil are set. It sold
three of those terminals to Kinder Morgan in 2010.
It later shifted to crude oil facilities, building up five
such oil-by-rail terminals - which it sold to Plains All
American Pipeline for $500 million in late 2012, leaving
the company cash-rich and asset light.
Understanding the trading flows through such lynchpin oil
facilities can provide valuable insight for oil traders, who
scour the market for information that may help them predict how
much oil is being shipped to different parts of the country.
Large price discounts for oil in locations poorly served by
pipelines have offered traders attractive opportunities if they
can figure out how to get the crude to higher-priced markets.
Data on crude-by-rail shipments is particularly opaque, with
government figures only available months after.
It is not clear what - if any - information about the USD
investment found its way to Goldman's J. Aron arm. A person
familiar with the business said J. Aron traders had never
chartered oil through the USD terminals, nor did they have
direct access to information from the company. Borgen declined
to comment on USD's customers.
Borgen said he did not know if Goldman had benefited from
the conversations with USD in the same way that USD had learned
from Goldman's bankers: "You'd have to ask them," he said.
A bank spokesman declined to comment beyond saying that
Goldman viewed USD as purely a financial investment.
Unlike rivals at Morgan Stanley, J. Aron traders have
not been big players in the U.S. physical oil market for years.
The bank has an agreement with refiner Alon Energy USA
to supply crude and sell products for several small
plants in California, plus one in Texas and one in Louisiana.
Borgen said the investment by Goldman had been good for his
company, allowing it to expand and draw on their expertise.
"Their investment has allowed us to grow at a more rapid
pace than we otherwise would have," Borgen said of Goldman. "We
have similar cultures, and they're some of the smartest in the
(Additional reporting by David Sheppard in New York; Editing by