The project–the first new investment Valero has made in the refinery outside San Francisco since 2011–is the latest example of refiners trying to cut costs by using domestically produced crude oil. Drilling innovations such as hydraulic fracturing, or fracking, have led to a massive increase in North American oil production, bringing down the cost of oil for refineries able to transport the crude to their gates.

The 70,000-barrel-a-day Benicia terminal will help Valero cut costs in a market where environmental regulations make the cost of refining high. Valero plans to bring domestic crude oil to Benicia at much lower prices than the oil it currently imports into the refinery from overseas, Valero spokesman Bill Day said.

“Right now, our California refineries have the lowest operating income of our system but the highest operating cost–that needs to change,” Mr. Day said. “Crude by rail is a relatively low-cost project that can significantly improve that refinery’s competitiveness.”
Valero expects to complete the project in 2014, Mr. Day said.

Valero last year enlisted Citigroup Inc. (C) to help find a buyer for the 170,000-barrel-a-day Benicia refinery (Terminal I, Terminal II) and its 78,000-barrel-a-day Wilmington refinery outside Los Angeles. The company since then hasn’t announced any potential buyers.