Even as state-owned refineries recorded all-time high margins during the first quarter, gaining from inventories they hold, Reliance Industries [Get Quote], which operates the world's third largest refinery, posted a modest gain in margins, resulting in the company recording lower-than-expected profits during the quarter.

This is the first quarter during which the Mukesh Ambani promoted company recorded refinery margins lower than its state-owned competitors.

Reliance's 33-million-tonne-per-annum (mtpa) refinery, or 22 per cent of India's refining capacity, can process cheap grades of crude oil and produce the highest quality of petroleum products. This ensures higher margins for the company.

"It is strange that Reliance has recorded a lower growth in refinery margins. It is much below the market's expectations," said a Mumbai-based analyst who tracks the company.

Reliance's refinery margins rose to $15.7 per barrel in the quarter ended June 30, 2008 from $15.4 per barrel in the corresponding quarter of the previous financial year. Analysts were expecting the company to record margins of over $17 per barrel.

State-owned refiners, such as Mangalore Refinery and Petrochemicals [Get Quote], reported $18.03 per barrel margins while Indian Oil Corporation [Get Quote], which controls over a third of India's refining capacity, made $16.81 per barrel. Bharat Petroleum Corporation's [Get Quote] refinery at Kochi reported margins of $18.65 per barrel during the quarter.

This comes at a time when the Congress-led government's new-found ally, the Samajwadi Party, has been demanding a tax on windfall profits made by private sector refiners. The margins of the state-owned refiners are, however, projected to fall in the rest of the year as crude oil and petroleum product prices decline.

"Refineries with lower complexity, like the state-owned refineries, cannot sustain the high margins. It is bound to moderate to around $10 per barrel in the rest of the year," said another Delhi-based analyst, adding Reliance's refinery margins may rise to nearly $17 per barrel by year-end.

The higher margins of the government-owned refineries during the last quarter is primarily due to higher inventory gains. MRPL recorded inventory gains of $11 per barrel while IOC reported around $6 per barrel. Reliance, on the other hand, had inventory gains of a little over $1 per barrel, analysts said.

"The higher inventory gains for the state-owned refineries could be a result of them having more term contracts, where the price of the oil is fixed but the price of petroleum products the refineries sell rise in line with international prices. Reliance has fewer term contracts," a Delhi-based analyst said.

Refiners also gain from the stocks of crude oil and oil products that they can sell at higher prices as oil prices rise. Oil prices during the quarter rose to record levels due to which the margins of these companies almost doubled from a year ago.

Reliance did not respond to queries sent to the company.  MRPL and IOC hold a little above a week of stocks, similar to RIL's, analysts said.