(Adds details on construction, Plains blending)
By Kristen Hays
HOUSTON Aug 21 (Reuters) - Plains All American Pipeline LP will build a crude oil pipeline from its terminal at the U.S. futures hub in Cushing, Oklahoma, to Valero Energy Corp's Tennessee refinery, helping the largest U.S. refiner cut transportation costs to tap cheap inland oil.
Plains said on Thursday it will build the 440-mile (708 km), 200,000 barrels per day (bpd) Diamond Pipeline to the 180,000 bpd refinery, which is configured to process light crudes. The $900 million project is expected to be completed in late 2016, Plains said, adding startup would come after that.
The two companies have been evaluating the project for several months as Valero considered ways to cut its crude procurement costs.
The refinery typically runs Light Louisiana Sweet WTC-LLS, but last year received up to 100,000 bpd of North Dakota Bakken crude that was moved via rail to Louisiana, then transported to the refinery via the Capline pipeline, operated by Marathon Petroleum Corp.
Those Bakken volumes have declined as more of the North Dakota crude flows to the U.S. East and West Coasts via rail, Dan Collier, vice president of commercial optimization for Valero, said at a recent energy conference in Houston. He declined, however, to disclose current volumes.
The Diamond pipeline will connect Valero's Memphis refinery with domestic sweet crude from Plains' terminal that receives crude from various U.S. oilfields, cutting transportation costs and the distance covered to receive Bakken crude via rail and the Capline. Plains is a major blender of crudes at its Cushing facility.
Valero agreed to a long-term shipping contract with Plains as well as related storage and terminal services.
Valero also holds an option until January 2016 to buy a half interest in the Diamond Pipeline. (Reporting by Kristen Hays; editing by Chris Reese, G Crosse)