By Kristen Hays
HOUSTON, Aug 21 (Reuters) - Plains All American 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 U.S. 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 targeted to start up in late 2016, Plains said.
The two companies have been evaluating the project for several months as Valero considered ways to cut 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 in the Marathon Petroleum Corp -operated Capline pipeline.
Those Bakken volumes have declined as more of the North Dakota crude flows to the 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 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.
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)