Reliance Petroleum [Get Quote], a subsidiary of Reliance Industries [Get Quote], said it has completed 97 per cent work of its 5,80,000 barrels per day (bpd) refinery, which is coming up next to its existing one in Gujarat.

The refinery is likely to be commissioned before December. The commissioning comes at a time when margins in the business are falling sharply and demand for fuel across the world is dropping due to a global slowdown.

Demand for fuel from the US and Europe, two of Reliance's major markets, has slowed with US consumption falling to their lowest in the last three years.

Reliance has spent Rs 25,755 crore (Rs 257.55 billion) on the project till September-end, compared with its earlier estimate of 25,560 crore (Rs 255.6 billion), the Mukesh Ambani-led company said.

"The situation in the world has changed over the last couple of months. The financial crisis has not just eroded demand but destructed it. This could affect refinery margins throughout the world," said a Mumbai-based analyst who tracks
Reliance.

China, Asia's largest oil consumer, is increasing its refining capacity by over 9 per cent this year while fuel consumption by the world's second largest importer of crude oil is projected to grow at around 5 per cent. Import of fuel in September dropped to its lowest in four years.

"This shows that demand is not just slowing across the world. The difference in prices between crude oil and products are also narrowing," said another Delhi-based analyst.

While prices of crude oil have fallen by around 50 per cent in the last three months, prices of petroleum products such as petrol, diesel and cooking gas have dipped by 55-60 per cent.

This reduces margins of crude oil refiners.

Reliance already operates a 660,000 barrels per day (bpd) refinery in Gujarat, which along with the new refinery will become the largest refinery complex in the world.

Analysts project Reliance to record refinery margins of below $12 per barrel in the quarter ended September 2008 compared with over $15 per barrel in the June quarter.

"Refinery margins are falling more sharply than expected," said an official with a state-owned refiner.

Margins of state-owned refineries in India are also down in the September quarter.

State-owned Chennai Petroleum Corporation [Get Quote] reported refinery margins of $1.68 per barrel during the quarter compared with $6.84 per barrel in the corresponding quarter a year ago. In the June quarter, the company's refinery margins were over $15 per barrel.

However, analysts feel that a refinery that begins operations in the next two months will be better off than those to be commissioned a year later when more refining capacity comes up in China and West Asia.

"The refinery can still maintain better-than-average refinery margins. It is a very complex refinery and can process the cheapest and heaviest grades of crude oil and produce high-end products," said the Delhi-based analyst.