Reliance Petroleum [Get Quote], a subsidiary of Reliance Industries [Get Quote], India's largest company by market capitalisation, today commissioned its second refinery in a special economic zone (SEZ) at Jamnagar, adjacent to its existing facility, in Gujarat that will add 20 per cent to India's total crude oil refining capacity.

The Rs 25,000-crore (Rs 250 billion) refinery, with processing capacity of 580,000 barrels a day, is the sixth largest refinery in the world. Together with the existing Reliance Industries' refinery, the total capacity of the complex will go up to 1.24 million barrels a day, making it the largest at a single location.

The refinery, with a Nelson complexity index of 14, is capable of refining low quality crude oil and producing high quality fuels, which will boost its margins.

The refinery, however, will not start selling the fuel immediately. "It takes a few days for fuel production to begin. Since this refinery will mainly export its products, and export consignments are typically large, we will store the fuels till we are ready to export it," said a Reliance executive.

Reliance Petroleum can claim depreciation of 7.5 per cent on plant and machinery, if the refinery is commercially operational for less than six months this financial year. The cost of plant and machinery is around 80 per cent of the total project costs, an analyst said.

The refinery is being commissioned at a time when demand for fuels has dipped across the world as a result of a financial crisis.

World oil-consumption next year will drop by 0.2 per cent to 85.68 million barrels a day, Opec said on December 15. The US Energy Department said on December 9 that global demand will decline 0.5 per cent to 85.3 million barrels a day, the steepest decline in demand in over a decade.

Currently, the refinery will operate at only half of its capacity and produce fuels like petrol, diesel and naphtha. The entire refinery, along with a polypropylene plant, is expected to be fully-operational shortly, the company said in a statement.

A sharp drop in prices of petroleum products such as naphtha and petrol have driven down the refinery margins in Singapore, the regional benchmark, to between $1 and $4 a barrel this quarter from around $6 a barrel in the second quarter ended September 2008.

The Reliance refinery's proximity to West Asia will help its margins as it can buy cheaper oil as a result of shorter distances and ship turnaround time. It will also be easier to export its products to Europe, the US and Africa, the primary market for petrol and diesel.

"We will leverage our competitive advantages of scale, complexity and capability to process a wide range of crude oils and flexibility to produce high quality transportation fuels and create significant value for all its stakeholders," said Mukesh Ambani, chairman of Reliance Industries.