India's Reliance Industries Ltd. (500325.BY) on Thursday started operations at its new 580,000-barrel-a-day refinery in western India, likely raising the pressure on refining margins globally.

The refinery began crude processing Thursday, and Reliance said it's in the process of synchronizing and commissioning secondary units.

The new refinery, along with Reliance's neighboring 660,000-barrel-a-day refinery, will form the world's largest refining complex in Jamnagar in western India with a capacity of 1.24 million barrels a day.

Reliance said it expects the refinery to reach full capacity shortly, but chances are the company will go slow on the ramp up because of a slump in the global demand for oil products and relatively weaker refining margins. Margins - the difference between the cost of crude oil a refinery buys and the price of the products it sells - have fallen from their highs in recent years on softening global demand, which have caused complex refining margins in Singapore last month to sink to the lowest level in nearly two years, according to Merrill Lynch data.

As Reliance floods the international market with products from the new unit, other refiners are likely to face a squeeze on margins, especially those who don't have the complexity to process the cheaper, heavy crude oil grades.

"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," Chairman Mukesh Ambani, India's wealthiest man, said in a statement.

Reliance could still manage better margins with its highly complex refinery that can process some of the toughest crude oil in the world, but finding a market could still be a problem - as some of its key target markets like the U.S. and Europe are facing falling demand because of a slowing economy.

Because of its only-for-exports status, the new Reliance refinery isn't allowed to sell products locally where the demand for gasoline and diesel is still growing strong.

Reliance has been looking at the U.S. market to export gasoline from its new refinery and the European market for selling diesel. It has already set up trading desks in oil trading hubs like Singapore and London to market its products and has been planning to open one in Houston. "We, at Reliance, continue to be committed to the long term potential of the refining sector," Ambani said.

The new refinery is owned by Reliance Industries' Reliance Petroleum Ltd. ( 532743.BY) unit, in which U.S. oil major Chevron Corp. (CVX) has a 5% stake.

Slow Commissioning Likely

Reliance was expected to commission the refinery months ahead of its year-end schedule but delayed the startup as global economic slowdown reduced demand for oil products and refining margins crashed.

The company could still bring the refinery to full capacity slower than its existing refinery commissioning back in 2009.

Reliance Industries set records for the speed at which it built and started its first refinery at Jamnagar in July 1999. The project's startup, six months ahead of schedule, was an anomaly in the sector.

After key units like the crude distillation tower started, it took only three weeks for Reliance to produce commercial volumes of some types of fuel to the state-owned marketing companies which sell its products.

The company may now use a slower commissioning to tide over the slump in global demand and also benefit from local tax laws.

Because the Reliance refinery is located in a Special Economic Zone - established to encourage exports - it will get a 100% income tax exemption for the first five years after declaring commercial production. Consequently, Reliance may start substantial exports only in the beginning of the next fiscal year that starts April 1 to get full five years of tax benefits.