Corporate Report 2016[Year ended December 31, 2015 ... · Corporate Report 2016[Year ended December...

Corporate Report [Year ended December 31, 2015]2016

ENERGIZING THE FUTURE

Showa Shell Sekiyu K.K.

Business Model

Procurement

Allocation of Resources

Oil Business

In the oil business, we refi ne imported crude oil at our Group refi neries and sell oil products. Our highly competitive Group refi neries, local contract dealers, and business partners including transportation companies are all playing critical roles to provide the oil products that customers need in a safe and stable manner.

Solar Business

Electric Power Business

Business Model

Management Strategies

Corporate Governance

Synergies between assets

Byproduct fuel

Former business facility sites

ProcurementEnergy Solutions Business

In the solar business, we produce and sell our proprietary CIS thin-fi lm solar modules. At the same time, we also construct and sell solar power plants that use these modules. In the electric power business, we leverage synergies with our other businesses to construct and operate power stations as well as sell electricity.

Management Resources and Stakeholders

CONTENTS 2 Our History

4 Group CEO Interview

12 Corporate Governance

20 Business Activities

20 Special Feature:

TO THE NEXT GROWTH STAGE

22 Oil Business

28 Energy Solutions Business

Refi ningGasoline, kerosene, diesel oil, heavy fuel oil, petrochemicals, and LPG

The wholly owned subsidiary Solar Frontier K.K. operates the solar business.

emicals,

Technologies and expertise Networks of the ShellGroup and Saudi Aramco

Manufacturing facilities Business partners

Oil product transportation

Returns from Business Activities

ManufacturingLubricants and asphalt

Storage Salese

Manufacturing

Development, maintenance, operation, and sale of solar power plants

Power plant operation Electricity sales

Solar module sales

operation

Customers

Synergies between technologies

S

Manufactured solar modules

36 Management Resources

36 Safe Operation and

Stable Supply

38 Environmental Preservation and

R&D Ventures

43 Strengthening of Human Resources

46 Community and Social Contribution

Activities

47 Financial Section and Corporate Data

CSR Book 2016 (available as PDF only)CSR Book 2016 contains detailed non-fi nancial data and information

on the corporate social responsibility (CSR) activities conducted to the

benefi t of Showa Shell’s various stakeholders, some of which are not

included in Corporate Report 2016.

http://www.showa-shell.co.jp/english/csr/index.html

The Showa Shell Group aims to increase corporate value by providing society with the energy

that it needs. Based on this recognition and to provide a more comprehensive view of the

Group’s management and business activities, Corporate Report 2016 includes a full range of

information regarding management policies and strategies, business conditions and risks, and

the Group’s management resources and stakeholders. The Company referenced guidelines in

compiling this report, such as the International Integrated Reporting Framework Ver. 1.0 released

by the International Integrated Reporting Council.

Editorial Policy

Export

Human resources Financial base Global environmentShareholdersCommunities and society

Sales synergies

Leveraging our service stations and LPG business network

1Showa Shell Sekiyu K.K. Corporate Report 2016

1965 1970 1980

Our History

Industry and Social Environment

1910sMotorization driven by imported automobiles

1950s–1960s• Postwar recovery, rapid economic growth• 1962: Deregulation of crude oil imports• 1964: Opening of the Tokaido Shinkansen (bullet train) in

conjunction with the Tokyo Olympics• 1969: Full opening of the Tokyo–Nagoya Expressway• Rapid increase in vehicle ownership in Japan

1970s• First and second oil shocks• Establishment of the Agency for Natural

Resources and Energy and implementation of the Petroleum Stockpiling Law as part of efforts to reinforce Japan’s energy security

• Full-fl edged arrival of an automobile society

1940sWartime era. End of World War II in 1945 following the conclusion of the Pacifi c War

Foundation 1985–2004

1900: Rising Sun Petroleum Co. Ltd. established by Samuel Company

1942: Showa Oil Co., Ltd. established through the merger of Hayama Petroleum, Niitsu Petroleum, and Asahi Petroleum

1948: Rising Sun Petroleum was renamed Shell Sekiyu K.K.

1951: Shell Group and Showa Oil entered into capital alliance

1961: Shell Sekiyu commenced asphalt sales

1967: Entered into capital alliance with Seibu Oil Co., Ltd.

1973: Commenced an advanced POS management system

1978: Began research on solar cell in support of a stable energy supply for Japan

Sale of lamp oil, wax candles, and benzene (1900)

Sale of Red Shell Symbol and Black Shell Symbol brand gasoline for automobiles (1917)

1985: Shell Sekiyu and Showa Oil merged to become Showa Shell Sekiyu K.K.

1993: Commenced research on CIS thin-fi lm solar modules

Launch of the groundbreaking high-octane gasoline Formula Shell Super X (1987)

1996–Jump 21 Reconstruction PeriodTo stay ahead of the intensifying competition, Showa Shell concentrated its management resources in oil refi ning and sales through streamlining measures, in addition to reconstructing its business portfolio.

1996: Launched Yokkaichi Refi nery’s heavy oil cracking center, which is equipped with high-performance facilities, shifting to a refi ning structure that can produce even more high-value-added products

1999: Closed Niigata Refi nery

2000: Integrated Group refi neries in the Kawasaki area

Launch of new high-octane gasoline Shell Pura (2002)

Launch of the new X Card, with a points back system, an industry fi rst (1995)

Trends in Domestic Demand for Fuel Oil

1980s1986: Act on Designated Petroleum Products,* which encouraged the import of gasoline, kerosene, and diesel oil under certain conditions. The act effectively limited importers to oil companies.

* Act on Designated Petroleum Products is short for the Act on Interim Measures concerning the Importation of Designated Petroleum Products. The act regulated the import of oil products. The act prescribed regulations for reserves, quality adjustments, and alternative supplies, and effectively limited importers to oil companies. This act was abolished on March 31, 1996, as part of efforts to promote deregulation and globalization in Japan.

2 Showa Shell Sekiyu K.K. Corporate Report 2016

1990 2000 2010

2000s• Peak of demand for

domestic oil products• Partial deregulation of the

retail electricity market

2014Enactment of the second round of the Sophisticated Methods of Energy Supply Structures Law, which required further upgrading of refi ning facilities

1990s• 1996: Abolishment of the Act on Designated

Petroleum Products, which signifi cantly eased conditions for the import of oil products

• Increase in domestic gasoline demand 1998: Lifting of the ban on self-service gas stations

• Advancement of full-scale initiatives to mitigate global warming, establishment of targets to reduce greenhouse gases under the Kyoto Treaty

2010Enactment of the fi rst round of the Sophisticated Methods of Energy Supply Structures Law, which required oil companies to upgrade refi ning facilities

2016Complete deregulation of the retail electricity market

2012Commencement of feed-in tariff scheme for renewable energy in Japan

2013–Medium-Term Business Action Plan (through to 2017)Aiming to become an integrated energy company that is overwhelmingly competitive, Showa Shell has launched strategies to maximize value in each business.

2013: Began partnership with TonenGeneral Sekiyu K.K. for the supply of oil products

2015: • Established Gyxis Corporation, integrating the LPG businesses of Cosmo Oil Co., Ltd., Sumitomo Corporation, and TonenGeneral Sekiyu

• Completed Tohoku Plant, a CIS thin-fi lm solar module manufacturing plant

• Reached an agreement on business partnership with Cosmo Oil at refi neries in the Yokkaichi region, Mie Prefecture

• Entered into a memorandum of understanding with Idemitsu Kosan Co., Ltd., regarding business integration

• Commenced commercial operations at Keihin Biomass Power Plant

2016: • Commenced commercial operations at the third unit of Ohgishima Power Station

• Commenced retail sales of low-voltage electricity

Launch of new high-octane gasoline Shell V-Power (2014)

2005–New Foundation PeriodIn addition to further structural cost reductions, Showa Shell promoted the growth of its core businesses and established a foundation for new businesses.

2005: • Decided on the commercialization of the solar business• Entered into a purchasing agreement for oil products

with Fuji Oil Co., Ltd.2008: Established Enessance Holdings Co., Ltd., by merging

the LPG business with that of Sumitomo Corporation

2010–Medium-Term Business Vision, Conquer the Change, Pioneer the FutureTo conquer the change in the business environment, Showa Shell enhanced the competitiveness of its oil business and developed new energy businesses.

2010: Commenced commercial operations at the fi rst and second units of Ohgishima Power Station

2011: • Closed Ohgimachi Factory, which was part of Keihin Refi nery of Toa Oil Co., Ltd.

• Commenced operations at Kunitomi Plant, a CIS thin-fi lm solar module manufacturing plant

Introduction of the joint pointprogram Ponta (2010)

Introduction of the new payment service Shell EasyPay at service stations (2012)

2005–2012 2013–

Introduction of the Shell-Ponta credit card (2015)

Source: Resources and Energy Statistics, Ministry of Economy, Trade and Industry

250

200

150

100

50

0

(Million KL)


Group CEO Interview

Entering the fi nal stage of our transformational journey to be a

truly competitive global energy company—business integration

Tsuyoshi KameokaRepresentative Director,President, Group CEO

Brief career history

After joining Showa Shell in 1979, Tsuyoshi Kameoka

served in divisions including domestic fuel sales, human

resources, and oil product trading. He also worked in

oil product trading at Shell International Trading and

Shipping Company Limited in the United Kingdom. He

has assumed a number of senior roles over the years,

including Oil Products Division Manager in 2003,

Senior Offi cer and Kinki Area Manager in 2005,

Executive Offi cer and Kinki Area Manager in 2006,

Executive Offi cer and General Manager of the Sales

Division in 2008, and Corporate Executive Offi cer

overseeing all sales divisions in 2009. He subsequently

rose to the position of Oil Business Chief Operating

Offi cer (COO) in 2013. In March 2015, he was

appointed Representative Director, President, and

Group CEO.


In 2015, Showa Shell recorded an increase in profi ts compared to the previous year.

Can you give us an overview of the factors behind this achievement? Q1

We achieved an increase in profi ts as a Group in a tough business environment.

In 2015, environmental changes continued to affect our performance.

In the oil business, the environment was severe throughout the year

as the drop in crude oil prices caused a time-lag effect in which oil

product prices declined earlier than the cost of processed crude

oil, and as a result, our product margins decreased. Under these

circumstances, the oil business managed to record a solid

performance with a year-on-year increase in profi ts on a CCS

basis,* which the Company positions as an important management

indicator to measure substantial profi tability. I believe that this

strong performance resulted from our continuous efforts to reinforce

our earnings base under the Medium-Term Business Action Plan.

As for the solar business, the purchase price for solar power

electricity under the feed-in-tariff scheme fell substantially, and

certain electric power companies introduced free output control in

Japan, our primary market. Consequently, investments in new solar

power projects were somewhat more sluggish than our initial

expectations, causing the solar panel selling price to decline. To

respond to the changes in the domestic environment, we further

focused on the residential market, where stable demand is

expected to continue. In addition, we tried to further develop our

sales foundation in overseas markets, as global demand is

expected to grow in the future. However, as our average selling

price declined because of the rapid expansion of overseas sales,

where the unit sales price is relatively lower, profi ts decreased

signifi cantly year on year. On the other hand, 2015 was a year in

which we made great strides toward realizing medium-term growth,

particularly in such ways as launching a new plant to introduce

new technologies as well as developing new business models.

In the electric power business, the market environment was

extremely challenging as power prices in the exchange market fell

following the decline in crude oil prices. We maintained steady

profi ts, however, due to effi cient and safe operations at our power

plants, expansion of retail sales and wholesale according to a

medium- to long-term strategy, and the commencement of

operations at Keihin Biomass Power Plant ahead of schedule.

I believe we demonstrated the strengths of the Showa Shell

Group by adapting well to the severe business environment in

each business and steadily implementing our medium-term

strategies, which resulted in a year-on-year increase in profi ts.

The Medium-Term Business Action Plan has been progressing well for three years.

Could you tell us about the details of this progress as well as the transformation of Showa Shell’s

corporate culture, which you positioned as an important issue?

Q2

Oil business: We steadily moved forward with our strategies to become the most profi table oil business in Japan.

We are improving competitiveness throughout our whole supply

chain to realize the highest level of profi tability in the domestic oil

industry, even under a tough business environment.

In refi ning and supply, we are strengthening our

competitiveness by region and business area beyond the Group’s

boundaries. In April 2015, we reached an agreement with Cosmo

Oil for collaboration between refi neries in Yokkaichi. This

collaboration will satisfy our mandate under the second round of

the Sophisticated Methods of Energy Supply Structures Law.* We

also commenced another collaboration in asphalt distribution with

Cosmo Oil. In petrochemicals, we launched a new production

facility in 2016 to increase the production of petrochemical

products, in response to declining gasoline demand in Japan and

increasing petrochemical demand in Asia.

In regard to sales, we have been conducting strategies for

product and service differentiation to maintain our domestic sales

volume of oil products amid declining demand. In addition to

initiatives for service stations, we are also bolstering the

development and sale of products that meet customer needs in the

fi eld of high-value-added products, such as lubricants and asphalt.

These efforts resulted in a solid sales performance for 2015.

Furthermore, as a strategy that pursues synergies within the Group,

we commenced electricity sales to households leveraging the sales

network of our service stations and LPG business in April 2016.

Overall, I believe we are making sound progress in strategies

that pursue improvement in both effi ciency and added value,

thereby steadily enhancing the profi tability of the oil business.

(Yen Billion)

Operating Income (Loss) by Business

2011

–28.8 –15.4

17.5

55.426.6

–10.1

51.021.7 13.817.6

2012 2013 2014 2015

120

80

40

0

–40

Oil Business (CCS operating income*) Energy Solutions Business

* CCS operating income (operating income on a Current Cost of Supply basis): This is an operating income fi gure based on costs excluding inventory valuation effects, and is an important management indicator for the Company that refl ects substantive underlying earnings.

* For details on the Sophisticated Methods of Energy Supply Structures Law, please refer to page 22.


Solar business: Aiming to become a global leader, we are leveraging our technology to further improve

added value.

As the Paris Agreement (signed at COP21 in 2015) indicates,

countries around the world are working together to substantially

reduce greenhouse gas emissions. In the meantime, Showa Shell is

committed to promoting the spread of renewable energy with its

highly competitive solar power systems.

In order to do so, it is absolutely necessary to reduce the

overall costs for solar power systems to a level that meets the

economic requirement around the world. Accordingly, we are

leveraging our proprietary technologies to reduce costs and

strengthen product development. One major step was the

commencement of operations at our new Tohoku Plant. We

position this plant as a model plant for future overseas deployment

and plan to achieve best-in-class production costs by adopting

state-of-the-art mass production technology. We advanced startup

processes, verifying our new technologies on real production lines,

and started commercial production in June 2016.

In sales, we are focusing our efforts on high-value-added

offerings. For residential panel sales in Japan, we are intensifying

our efforts to offer a one-stop service, from installation proposal to

after-sales care, as well as a total system to promote the spread of

energy-saving houses. For the development and sale of solar

power plants, in addition to our business in Japan, we have

commenced operations in the United States. This business offers

signifi cant added value by drawing on the special properties of

CIS, which generates a larger amount of electricity, and managing

the entire development process of large-scale solar power plants

from start to fi nish. As such, we plan to expand this business both

in Japan and overseas. Moreover, we made solid progress in

2015 in entering new markets overseas to accelerate full-scale

global business expansion.

In technology development—the key to promoting solar

power and achieving our long-term business growth—we are

advancing R&D activities to enhance the energy conversion

effi ciency of our solar panels. We have made solid progress in

these activities, including achieving a world record with our

small-scale solar cell prototype.

As the business environment changes signifi cantly, we will

continue to implement these strategies from a medium-term strategic

prospective. In 2016, we will enter a stage in which we will

achieve further results. We aim to once again realize profi tability

in the solar business as soon as possible.

Electric power business: We are rapidly expanding business scale and establishing long-term profi t stability.

Anticipating changes in the business environment, including the

future restart of nuclear power plants, the increase of new market

entrants, and extremely volatile oil prices, we are expanding our

business, aiming to establish profi tability that has little vulnerability

to these external factors. Accordingly, we are rapidly developing

the electric power business both in power generation and sales.

We have expanded overall power generation capacity by

adding competitive and eco-friendly power plants, effectively

utilizing our oil business assets, as well as collaborating with other

companies. From late 2015 to 2016, we launched two new

power plants. Preparing for the launch of these plants, we worked

on expanding retail sales and wholesale, and we have successfully

reinforced a stable business foundation and profi t base. As one of

these efforts, we began retail electricity sales to households in April

2016, when the retail market was completely deregulated, by

leveraging synergies with the oil business’s service stations as well

as our LPG sales network. By adding to our portfolio general

household customers, who have a different pattern of energy

consumption compared to our existing corporate customers, we

aim to establish an even more stable earnings foundation.

A corporate culture for Group-based value has taken root.

In our Medium-Term Business Action Plan, we have worked to

reinforce structural cost competitiveness. While cost reductions can

increase profi ts in the short term, sustainable growth essentially

requires enhancing business value. Thus, it is necessary to have a

corporate culture that can lead the Company to this goal.

As I stated last year, we defi ned the three worst items in our

annual employee opinion survey conducted in 2012 as indicators

for corporate culture transformation. The worst of the three was

“collaboration beyond departmental boundaries.” This result

indicates, for example, that thinking only about cost reductions for

one’s own department will not produce the optimal outcome for the

entire Company. Based on this idea, we made efforts to seriously

improve in this area.

One signifi cant accomplishment was Shell V-Power, a

high-octane gasoline that was launched in 2014. The predecessor

to Shell V-Power was Shell Pura, which was sold in limited regions

instead of nationwide as shipping costs would have increased in

doing so. For the Shell V-Power launch, we closely examined ways

to deliver our high-value-added product to people across Japan.

Through tireless discussions between shipping and sales departments,

we came to the conclusion that even if the Company spent more

on shipping costs, overall business profi ts throughout the value

chain, which includes our contract dealers, would also increase as

long as the sales volume for this high-value-added product

increases. While seeking the support from a great number of

business partners, we succeeded in the nationwide delivery of

Shell V-Power.

We also made efforts in BPR* while appointing a BPR supervisor


for each department. Even slightly expanding the scope of work for

one department can signifi cantly reduce the workload for another

department. As such, we have continued to improve workfl ow and

effi ciency beyond departmental boundaries Groupwide. Furthermore,

we saw positive results from sharing best practices regarding

improvements in effi ciency across the entire Company. These efforts

have led to an improvement in the results of the employee opinion

survey year by year. With these results, I truly believe a culture of

pursuing optimization Groupwide has taken root.

* BPR: Business Process Re-engineering

What kind of company are you aiming for through this business integration?Q4

We aim to fi rst establish a strong business foundation and a high level of competitiveness in our oil business,

and then become an entirely new energy company.

The Company’s supply chain consists of contract dealers and a

great number of other partner companies. Through the business

integration, we will create an earnings base with even more

stability by establishing an even stronger supply chain together with

our partner companies, as well as through pursuing synergies. In

doing so, I believe we can support Japan’s energy security in a

sustainable manner going forward.

In addition, this business integration allows us to invest new

resources generated from the relentless pursuit of effi ciency in

growth opportunities that the expansion of our business scope will

bring. Also, we will aggressively promote global expansion

supported by a stable domestic earnings base. At the same time,

we will leverage the experience and know-how that both

companies have cultivated over the years to create a Japan-

originated model for a new energy company that can contribute to

solving social and environmental issues.

The Showa Shell Group is said to be highly competitive within the oil industry. While there was

an option for the Group to grow on its own, what were the reasons behind the decision for

business integration?

Q3

We spent several years determining how we could manage both sustainable growth and a stable supply of

energy to society.

The domestic demand for oil products peaked out in the early

2000s, after which the resulting supply glut across the industry

started to weigh on profi tability. And although the supply-demand

balance improved due to the reduction in domestic refi ning

capacity via the Sophisticated Methods of Energy Supply Structures

Law, it is still clear that domestic demand for oil products will

continue to decline as social needs for energy change due to

changes in people’s lifestyles and increasingly stringent

environmental regulations.

Even before the importation of oil products was substantially

deregulated through the abolishment of the Japan Special

Petroleum Law* in 1996, we have been trying to structurally

reduce costs. In 2010, we decided to close a refi nery on our own

initiative before the Sophisticated Methods of Energy Supply

Structures Law required refi ning companies to reduce their refi ning

capacities. As this example shows, we have always led the

industry in terms of business transformation. In addition, we have

been promoting the Medium-Term Business Action Plan since 2013

to establish industry-leading profi tability regardless of the business

environment. In doing so, we established robust earnings and a

strong fi nancial foundation. However, to support Japan’s energy

supply over the long term, as well as realize growth as an

integrated energy company that can provide new kinds of energy

for today’s society, what the Company alone can do or what a

partial business partnership can do is limited. Therefore, we

considered it necessary to let business integration further improve

our effi ciency as well as re-establish both a strong business base

and a stable earnings foundation.

After reviewing every possibility, we recognized Idemitsu

Kosan as the best candidate for business integration. Like Showa

Shell, Idemitsu Kosan has been actively making efforts to optimize

facilities in its domestic oil business and pursuing the development

of an effi cient and sustainable supply foundation. With the mutually

shared goal of creating a truly leading company with unrivaled

competitiveness, we reached an agreement for business

integration with Idemitsu Kosan and, subsequently, concluded a

Basic Memorandum of Understanding in November 2015 in

which the companies set a merger as the basic structure of

business integration.

* “Japan Special Petroleum Law” is short for the “Act on Interim Measures concerning the Importation of Designated Oil Products.” The Japan Special Petroleum Law pertained to the importation of oil products. The law required importers to have emergency reserves, conduct quality adjustments, and provide alternative supplies, which effectively limited importers to oil companies. Amid a shift toward deregulation and internationalization, the law was abolished on March 31, 1996.

Our Medium-Term Business Action Plan covers the fi ve-year period

from 2013 to 2017. However, as we prepare for the business

integration with Idemitsu Kosan, we have positioned 2016 as the

year we complete the plan, one year ahead of schedule. We

hope that this early fi nish will ensure a good start for the new

company.

Making 2016 the year in which we will complete our Medium-Term Business Action Plan


Could you tell us about the basic strategy and expected synergies in oil and petrochemical

businesses after the integration?Q5

Could you tell us the progress you are making in your preparations for the business integration?Q6

We are accelerating our mutual discussions so that the new company can make a good start from the

very fi rst day.

In October 2015, both companies established the Integration

Preparation Committee and related subcommittees in each division,

and are gradually advancing integration discussions to the extent

that fair competition laws allow. Mr. Takashi Tsukioka, president of

Idemitsu Kosan, and I have meetings periodically where we

repeatedly discuss the items that top management should decide

upon. After reviews based on fair competition laws and due

diligence are successfully completed, we will reach a defi nitive

Through improved effi ciency and disciplined growth investments, we will make these businesses further

capable of generating stable cash fl ow.

First of all, we will thoroughly enhance the effective use of both

companies’ assets. When it comes to business integration in

manufacturing industries in general, the main focus tends to be on

the rationalization of key production facilities. In our case, both

companies share the same enthusiasm for refi nery effi ciency and

have proactively closed low-competitive refi neries ahead of their

competitors. The group refi neries of both companies lead the

industry in terms of value-added production capacity, and they

both maintain high utilization rates. Accordingly, we do not have

plans at this moment to close or consolidate refi neries following the

business integration. Rather, we plan to generate synergistic effects

by optimizing operations across both companies’ highly competitive

refi neries. Furthermore, in the fi elds where numerous growth

opportunities exist, such as in petrochemicals, we intend to invest,

carefully analyzing the future business environment and emphasizing

fi nancial discipline.

Meanwhile, regarding sales, the new company will result in

having a vast service station network of approximately 7,000 outlets.

While Showa Shell has abundant service stations in urban areas,

Idemitsu Kosan has a well-balanced nationwide network. After the

integration, we will be able to deliver products and services on an even

wider scale as well as enhance effi ciency in shipping and other areas.

These improvements in effi ciency and added value will bring

in ¥50 billion of annual synergies by the integration’s fi fth anniversary.

This is the minimum fi gure calculated from the limited information

we could access before assessing both companies’ businesses in

detail. Once we start the actual operational integration, I am

confi dent that we will not only exceed this fi gure but reach this

fi gure sooner than fi ve years. Going forward, we will establish

a stable cash fl ow structure as quickly as possible.

Overview of MoUMethod of the Business Integration Merger as the basic structure, subject to further consideration and discussion

Location of the Head Offi ceA different location from the current head offi ces of the Companies is to be found on the effective date of the Business Integration or as soon as possible thereafter

Corporate Governance The ideas proposed in the Corporate Governance Code including the appointment of two or more independent outside directors are to be actively adopted

Structure of the Board of Directors

For the time being, an equal number of nominees for New Company’s representative directors and executive directors are to be appointed by each Company

BrandsThe Companies are to continue to use existing brands for a certain period after the Business IntegrationAfter a certain period, the introduction of a new service station brand in Japan is to be proactively discussed by New Company’s management

Integration Preparation Committee

Further discussions and deliberations are to be conducted by the Integration Preparation Committee, co-chaired by the presidentsof the CompaniesDetailed matters are to be discussed by the subcommittees

SynergyApprox. ¥50 billion per year by the fi fth anniversary of the Business Integration through (1) optimization of supply and demand, and production plans, (2) optimization of logistics, and (3) streamlining of sales and corporate functions, etc.

* The schedule might be changed upon consultation between the Companies for certain reasons such as delays in the review process by the relevant competition law authorities, delays in the progress of post-merger integration preparation required for a smooth start of operations on the effective date, and for other reasons.

Discussions in the Integration Preparation Committeeand subcommitteesSchedule

Announcement on July 30, 2015 Announcement on November 12, 2015 April 1, 2017*• Commencement of a full-scale

discussion

• Execution of a Share Purchase Agreement between Royal Dutch Shell and Idemitsu

• Execution of MoU • Business Integration effective date

Next Steps• Due diligence• Execution of a binding defi nitive agreement• Approval at respective shareholders’ meetings


agreement. After this agreement is approved at both companies’

General Shareholders’ Meetings, we will launch the new company

on April 1, 2017.

Because of fair competition laws, we have not yet been able

to hold in-depth discussions related to businesses. However, we

have been communicating with each other so that we are able to

understand each company’s culture and values. Before creating a

new culture that maintains the superior aspects of both companies,

I believe it is extremely important for both companies’ employees to

learn the background behind these values from a historical context

and to discuss what kind of relationship they want to have with

their customers and society at the new company. Through these

efforts, we are advancing preparations so that we can promptly

integrate our businesses upon completing legal procedures, and

the new company can start smoothly with a strong sense of

solidarity from the fi rst day.

A fl at organization and active discussions are required to be able to promptly respond to the needs of

customers and society.

The needs of customers and society change very rapidly.

Therefore, I believe we need an organization that can make

decisions quickly; in other words, a management execution

structure with clear responsibilities and an appropriate empowerment

system. A fl at organization is also crucial. Having each employee

express his or her opinion from their own individual values and

engage in active discussions gives rise to excellent ideas. This is

extremely important for meeting the diverse needs of customers.

Furthermore, I believe the efforts in optimizing the operations

of the entire value chain that Showa Shell has pursued are

extremely important. By creating value beyond departmental and

business boundaries, business opportunities for the new company

will increase even further.

My vision for the new company is for all employees, contract dealers, and partner companies to feel positive

after the business integration.

I think it is very important for employees to work with spirit and

energy and to be proud of their company. I would like to create a

working environment where employees feel that it is possible to

suffi ciently demonstrate their strengths and work together to create

signifi cant value in response to the needs of society.

I have a strong desire to create a new company in which our

employees, contract dealers, and partner companies feel positive

about the business integration. In addition, I want our new, young

employees to feel confi dent that they made the right choice in

joining the new company.

Could you tell us what kind of culture and organization the new company needs?Q7

The mindset and spirit that both companies have valued over the years will be important management assets

for the new company.

At Showa Shell, our Group Management Philosophy “With our energy,

we energize the future,” was created involving all Group

employees. The words “our energy” are the essence of this

philosophy, meaning we will provide society with not only the

energy we supply through our business, but also the energy

generated by each and every employee. Even if society changes

or customers’ needs change, we believe that, if we maintain the

mindset that this philosophy instills, we can supply energy that

meets the needs of society and continue to grow. The basic philosophy

of Idemitsu Kosan also places emphasis on the ideas of each

employee as well as leadership. While the wording may be different,

I believe that both philosophies derive from the same mindset.

Conversely, some may say there are differences in origin:

Showa Shell is a foreign-based company and Idemitsu Kosan is a

Japan-originated company. But I believe we have many things in

common. With a strong commitment to providing a stable supply

of energy to Japan, Idemitsu Kosan has been competing with

global oil companies. On the other hand, although we are a

company affi liated with the Shell Group, we are rooted in Japan

and have a history of discussing and negotiating with the Shell

Group to develop our business independently, as a company

needed by Japanese customers and Japanese society. I believe that

the spirit of both companies fi ghting to fulfi ll our mission is a

management asset that is required to make the new company a

“Japan-originated energy company.”

Group Management Philosophy

“With our energy, we energize the future.”

Five Corporate Principles

Social Responsi-

bility

Customer Focus Innovation Vitality Sustainable

Growth


Could you talk about the contributions that the outside directors are making?Q9

Active discussions are critically important for improving corporate value.

Outside directors not only offer a disciplined approach in overseeing

management, they also provide input from perspectives that differ

from our commonly accepted values. While our foreign outside

directors offer opinions from international perspectives, our Japanese

outside directors counter with their own opinions, stating whether

or not such international ideas will work in Japan. The ideas I

propose as CEO are discussed in this fashion and are put into

practice after gaining the support of the outside directors. We

proceed in this manner because our shareholders will not accept

ideas that are opposed by the outside directors. In this sense, I

believe we have established a very sound Board of Directors.

In addition to the Board of Directors’ meetings, our outside

directors and auditors also participate in meetings held only for

outside executives. In this way, they are focusing on their strengths

and commitment to improving our corporate value. Furthermore,

regarding the business integration, we established the Special

Committee, consisting of four independent outside executives, as

an advisory body to the Board of Directors to ensure transparency

and fairness in the decision-making process.

Idemitsu Kosan and Showa Shell agreed to appoint two or

more independent outside directors after the business integration.

We have set out our numerical target for women in managerial

positions and are accelerating internal efforts to promote the active

role of women in the workplace. In general, our basic way of

thinking on this issue has not changed signifi cantly. In saying that,

Showa Shell has never dealt with any employee differently based

on gender or nationality, and I am repeatedly saying that diversity

and inclusiveness are essential for the Company to grow. I believe

that it makes the Company more competitive and allows us to

produce better output by exchanging diverse ideas among people

with various senses of values. Diversity also helps generate new

Could you elaborate on the newly reinforced corporate governance systems?Q8

We have separated the business execution and management oversight functions and enhanced transpar-

ency in director nominations.

Even before the introduction of Japan’s Corporate Governance

Code, we have been making efforts to improve management

oversight functions and transparency as well as to protect the

interests of minority shareholders. As part of these efforts, we have

been appointing independent outside directors, and three years

ago, we established the Compensation Advisory Committee,

which comprises primarily independent directors.

In addition, we have decided on medium- to long-term

business strategies and carried out control functions at the Board

of Directors, while authority related to business execution was

delegated to operating divisions. However, the chairman of the

Board of Directors was also the CEO. So in 2015, to further

enhance management quality by separating business execution

and management oversight, we appointed an outside director as

the Board chairman, thereby clearly separating that role from the

role of CEO. Furthermore, to decide on the right people for top

management through an objective evaluation, we transformed the

Compensation Advisory Committee into the Nomination and

Compensation Advisory Committee, aiming to improve management

transparency. While executives obviously set plans to develop

candidates to succeed them, we now share those plans with the

Nomination and Compensation Advisory Committee, which

consists mainly of outside executives, and have the Committee

members evaluate the plans from an outside perspective. In doing

so, we have established a highly transparent nomination process.

I believe that the reinforcement of corporate governance

systems promotes self-discipline among executives and, as a result,

earns the trust of stakeholders.

It seems that Showa Shell has been intensively promoting the active role of female employees.

Could you elaborate on this issue?Q10

Diversity is absolutely essential in making a strong company.


ideas by listening to minority opinions and understanding diverse

points of view. In other words, what is important is not gender

itself, but rather diversity. This is the culture Showa Shell maintains

for the long term. My job as CEO is to create an environment

where Group employees can openly and freely express their

opinions regardless of their nationality, gender, age, or responsibility.

As for the systems we have in place, we are improving these

frameworks and support for women, particularly when giving birth,

a major life event, so that female employees can return to work

after childbirth. Many of our female employees are making use of

these systems according to their individual circumstances, and there

are very few female employees who retire because of childbirth.

However, the active role of women in our corporate culture

has not been at a satisfactory level, and we need to improve both

the Companywide mindset to accept the active role of women in

the workplace and female employees’ mindset to pursue such a

role. Yuri Inoue, a female corporate executive offi cer, assembled a

group of women in managerial positions and asked them if they

were satisfi ed with their current positions. Many of the women

were startled when asked this question. To better promote the

active role of women, it is necessary for us to change the mindset

of women in managerial positions and improve their leadership

ability going forward. As one effort to accomplish this, we train our

female employees in management positions by appointing executive

offi cers as their mentors. This often leads to changes in the mindset

of the executive offi cers, creating synergistic effects. We also have

in place the Showa Shell Women’s Network, which was established

primarily by women in managerial positions to promote the active

role of female employees. However, as we are shifting back to the

basic idea that diversity, which includes the active role of female

employees, makes a company more competitive, we are currently

spending our efforts to focus on activities for all employees to play

active roles.

After the integration, the scope of our business and the regions

where we operate will expand. Naturally, our sense of values will

become more diverse. I would like to forge a corporate culture

where these diverse values are naturally accepted and where all

the employees can positively demonstrate their own strengths

without feeling any constraint from their company origin or

personal attributes.

Could you tell us about your policies on cash allocation and shareholder return?Q11

We allocate cash in a well-balanced manner and provide stable and attractive dividends.

Under our Medium-Term Business Action Plan, we have a basic

policy for the well-balanced allocation of funds into the following

three areas: (1) capital investment to maintain our operations and

implement our future growth strategies; (2) maintaining a strong

balance sheet; and (3) providing returns to shareholders. Since the

implementation of the Medium-Term Business Action Plan, we have

realized robust operating cash fl ows and have been carrying out

strategic growth investments.

We emphasize sound investment discipline when making

investment decisions. Even for projects planned under the Medium-

Term Business Action Plan, we carefully evaluate their strategic

value, risks, and expected returns in accordance with our internal

guidelines before we actually decide to invest.

Our shareholder return policy is to provide stable and

attractive dividends, and we have realized this policy through

disciplined fi nancial management. Going forward, we are

forecasting steady cash fl ows from operating activities and are

expecting to maintain a sound fi nancial structure even after

carrying out our planned growth investments under the Medium-

Term Business Action Plan. Accordingly, we plan to provide

dividends at ¥38 per share in fi scal 2016, the same amount as in

the previous year.

Dividends per Share(Yen)

20112010 2012 2013 2014 2015 2016(Forecast)

48

36

24

12

0

38383836

181818

Operating cashflow from EnergySolutions Business

Operating cashflow from Oil

Business Dividends

Care & maintenance

Strategic investmentfor future growth

Additional dividends,further strengtheningfinancial position,additional strategic

investment

500

400

300

200

100

0Cash in Cash out

(Yen Billion)

Five-Year Operating Cash Flow Forecast and Fund Allocation Plan under the Medium-Term Business Action Plan


CORPORATE GOVERNANCE

A B

GCID

KL M

E

J

FH

Our Basic Stance on Corporate GovernanceAspiring to continuously grow and to enhance corporate value, the Company promotes separation of the business

supervision and the business execution functions, and endeavors to disclose information in a right and timely

manner for even greater managerial transparency and effi ciency.

The Company strives to further enhance its reliability through fair and equitable treatment of all stakeholders and

proactively take objective, outside perspectives into its management. The Company will also create an ideal corporate

governance system in line with its corporate goals and characteristics as well as changes in the social and legal

environments. Furthermore, it will continuously verify and improve the effectiveness of the functions of the system.

We have posted our “Basic Policy on Corporate Governance” on the Company website.

http://www.showa-shell.co.jp/english/profi le/mp/corporate_governance.html


Independence StandardsThe Company has formulated Independence Standards* to bolster

its management transparency and ensure objectivity. Two or more

Independent Outside Directors satisfy these requirements. In

addition, all external Audit & Supervisory Board members satisfy

the requirements to be independent external Audit & Supervisory

Board Members.

* http://www.showa-shell.co.jp/english/profi le/mp/corporate_

governance.html

Outside DirectorsName Position / background Reason for appointment

C Minoru TakedaOutside Director since March 2013Attended 12/12 Board of Directors meetings in fi scal 2015

Chairman of the Board of DirectorsResigned from positions as President and Representative Director of Shell Japan K.K. and Representative Director of Shell Chemicals Japan Ltd. in May 2015

Mr. Takeda was selected for his extensive operational experience and knowledge in global business management that he had developed when working at oil companies in Japan and overseas, as well as his experience as the Chairman of the Board of Directors to appropriately manage the Board of Directors, reinforce the management supervisory function and corporate governance, and offer business strategic advice. For these reasons, the Company believes that he will execute the duties of Outside Director appropriately.

D Yukio MasudaOutside Director since March 2009Attended 12/12 Board of Directors meetings in fi scal 2015

Independent DirectorAdvisor, Mitsubishi Corporation

Mr. Masuda has abundant experience gained through his long-time career in the energy business sector of Mitsubishi Corporation and extensive knowledge in the energy business in Japan and overseas. Based on this background, he has demonstrated appropriate supervision of the management of the Company by proactively expressing his opinions to enhance the transparency and fairness in managing the Company while serving as a member of the Nomination and Compensation Advisory Committee. In light of these efforts, the Company believes that he will execute the duties of Outside Director appropriately.

E Takashi NakamuraOutside Director since March 2014 Attended 12/12 Board of Directors meetings in fi scal 2015

Independent DirectorFormer Director and Deputy President, Ricoh Company, Ltd. (resigned in June 2012)

Mr. Nakamura has experience in managing the human resource division at Ricoh and in managing the company’s domestic and European subsidiaries. Based on this background, his extensive knowledge of global management at Japanese companies, his appropriate management supervision, and his track record of contributing proactively to enhancing management transparency and fairness as Chairman of the Company’s Nomination and Compensation Advisory Committee, the Company believes that he will execute the duties of Outside Director appropriately.

F Ahmed M. AlkhunainiOutside Director since March 2014 Attended 12/12 Board of Directors meetings in fi scal 2015

Representative Director, Aramco Asia Japan K.K. Mr. Alkhunaini has extensive knowledge of oil markets around the world. He has worked in various assignments in the oil business in the United States, Saudi Arabia, and Japan, and these assignments have included both strategic and operational leadership roles. Given this management experience and his track record of providing advice to management of the Company and implementing appropriate supervision for the execution of business, the Company believes that he will execute the duties of Outside Director appropriately.

G Nabil A. Al-NuaimOutside Director since March 2014 Attended 10/12 Board of Directors meetings in fi scal 2015

President and CEO, Aramco Far East (Beijing) Business Services Co., Ltd. (China)

Mr. Al-Nuaim has knowledge in the downstream oil and power generation business sectors, including strategy development, policy-oriented business analysis, and operations. Given this background and his track record of providing advice to management of the Company and implementing appropriate supervision for the execution of business, the Company believes that he will execute the duties of Outside Director appropriately.

H Christopher K. GunnerNon-Executive Director since March 2015, Outside Director since March 2016Attended 10/10 Board of Directors meetings in fi scal 2015

President and Representative Director, Shell Japan K.K.; President and Representative Director, Shell Chemicals Japan Ltd.

Mr. Gunner has broad knowledge on both the upstream and downstream sectors of the oil and gas business, including extensive management experience in Japan, South Korea, Malaysia, Australia, and the United Kingdom. Given this background and his track record of providing advice to management of the Company and implementing appropriate supervision for the execution of business as Non-Executive Director, the Company believes that he will execute the duties of Outside Director appropriately.

I Philip ChoiOutside Director since March 2016(newly appointed)

President, Shell International Eastern Trading Company (Singapore); Director, Shell Eastern Trading (Pte) Ltd. (Singapore); Director, Shell Chemicals Japan Ltd.

Mr. Choi has broad experience and sophisticated management knowledge covering both the upstream and downstream sectors of the oil and gas businesses, as well as knowledge of the oil business in Japan. Given this background, the Company believes that he will be able to provide advice to management of the Company and will exercise appropriate supervision for the execution of business.

Board of Directors and Audit & Supervisory Board Members (As of May 31, 2016)

Representative DirectorsName Position / background

A Tsuyoshi Kameoka Representative Director, President, Group CEOAfter joining Showa Shell, Mr. Kameoka served in several divisions including domestic fuel sales, human resources, and oil product trading. He also worked in oil product trading in the United Kingdom. He has played a number of senior roles over the years, including Oil Products Division Manager, Executive Offi cer and Branch Manager, and Corporate Executive Offi cer overseeing all sales divisions. He was subsequently appointed to Oil Business Chief Operating Offi cer (COO), before assigned to his current position in March 2015.

B Tomonori Okada(newly appointed)

Representative Director, Vice PresidentSince he joined the Company, Mr. Okada had been engaged mainly in the production, supply, and logistics segments. He was involved in managing research and development, research laboratories, and the corporate planning division as Corporate Executive Offi cer and Senior Corporate Executive Offi cer, as well as Director and President at Seibu Oil Co., Ltd. He took his current position in March 2016.

Audit & Supervisory Board MembersName Position / background

J Kiyotaka Yamada Audit & Supervisory Board MemberAfter joining the Company, Mr. Yamada worked mainly in the Distribution, Secretariat, Finance & Control Department, and HSSE divisions. After his experience as Branch Manager and then as Manager of the Finance & Control Department, he played the roles of Executive Director and Corporate Executive Offi cer, before his current position.

K Kenji Takahashi(newly appointed)

Audit & Supervisory Board MemberSince joining the Company, Mr. Takahashi has worked mainly in human resources, general affairs, and procurement. He was Chief of Industrial Relations, the General Affairs Division, and the Internal Audit Division before his current position.

Overview of Liability Limitation AgreementsOutside Directors (Minoru Takeda, Yukio Masuda, Takashi Nakamura, Ahmed M. Alkhunaini, Nabil A. Al-Nuaim, Christopher K. Gunner, and Philip Choi) and external Audit & Supervisory Board Members (Midori Miyazaki and Kenji Yamagishi) entered into a liability limitation agreement with the Company in relation to the limitation of liability specifi ed in Clause 1, Article 423, of the Companies Act. Amounts of liability under this agreement shall be the higher amount of ¥10 million and the amount designated by the Companies Act.

External Audit & Supervisory Board MembersName Position / background Reason for appointment

L Midori MiyazakiExternal Audit & Supervisory Board Member since March 2006Attended 11/12 Board of Directors meetings and 11/13 Audit & Supervisory Board meetings in fi scal 2015

Independent Audit & Supervisory Board MemberProfessor and Dean, Faculty of Global Studies, Chiba University of Commerce

Ms. Miyazaki was selected for her broad insights obtained from her careers at Chiba University of Commerce as a professor and in policy making as a member of a tax system research commission, with the expectation that her perspective from outside the oil industry would help strengthen the auditing function. Given this background, coupled with her track record on the Nomination and Compensation Advisory Committee in proactively expressing her opinion to enhance transparency and fairness in management of the Company, the Company believes that she will execute the duties of external Audit & Supervisory Board Member appropriately.

M Kenji YamagishiExternal Audit & Supervisory Board Member since March 2008Attended 12/12 Board of Directors meetings and 13/13 Audit & Supervisory Board meetings in fi scal 2015

Independent Audit & Supervisory Board MemberAttorney

In addition to his activities as an attorney, Mr. Yamagishi has held important posts at the Bar Association and has deep understanding in a broad range of fi elds. He has also exercised his auditing capabilities to assist in the sound development of the Group and has a track record on the Nomination and Compensation Advisory Committee in proactively expressing his opinion to enhance transparency and fairness in management of the Company. For these reasons, the Company believes that he will execute the duties of external Audit & Supervisory Board Member appropriately.


Interview with Minoru Takeda, Outside Director

Q. Could you please tell us about Showa Shell’s initiatives to strengthen its governance systems?

By welcoming directors who have a relationship with major shareholders the Shell Group and Saudi Aramco as well as multiple independent outside directors with an even stronger awareness of the interests of general shareholders to the Board of Directors, Showa Shell has worked to continuously improve governance-related issues while always maintaining a focus on balanced shareholder returns. In 2015, from the perspective of realizing even higher quality governance, Showa Shell separated the roles of Chairman of the Board of Directors, who conducts management oversight, and CEO, who has the ultimate authority over business execution, and subsequently implemented a system where an outside director, who does not participate in business execution, serves as Chairman of the Board of Directors. After establishing this system, the Company held workshops for the Board of Directors to reaffi rm the importance of directors’ responsibilities pertaining to management oversight as well as enhance the Board’s effectiveness. In addition, the Company enhanced transparency in processes for determining director remuneration and nomination. For example, in the Nomination and Compensation Advisory Committee, which comprises primarily independent outside directors, the Company holds objective debate regarding director remuneration and nomination as well as the development of successors. Meanwhile, the Company changed the number of Japanese executive directors to two and assigned a full-time executive offi cer and COO to the Energy Solutions Business, which serves as a major pillar of the Showa Shell Group’s business. In these ways, I feel the Company has secured sound swiftness in its business execution.

Q. How do you evaluate Showa Shell’s governance?While there are a variety of governance systems that exist, what is important for a company is not establishing numerous systems but rather creating optimal systems that suit that company and operating them effectively. In this regard, I get a strong sense that the Company has an awareness toward effectively leveraging the systems it has in place, through its own initiative, to developmentally advance internal innovations in its governance. Amid the fi erce changes that surround the global environment for the energy business, Showa Shell’s Board of Directors has a well-balanced structure that ensures transparency and incorporates executive and outside perspectives as well as domestic and overseas perspectives. I believe that the independent outside director Mr. Masuda draws upon his vast personal network and experience in the global energy business to their full extent for the sake of the Company. I also believe that Mr. Nakamura, another independent director, excels when it comes to corporate governance. In addition, with his experience in the manufacturing industry, where technological innovations happen rapidly, Mr. Nakamura is actively involving himself in improving the value of the Company’s solar business in such ways as providing advice for on-site production. Furthermore, outside directors who are members of the Shell Group and Saudi Aramco engage in debate as Showa Shell directors, offering an international point of view. From an operational perspective, the Company carries out suffi cient information exchange and communication among directors to allow for more meaningful debate by the Board of Directors. In addition, the Company conforms to the requests of Japan’s Corporate Governance Code and implements surveys regarding the Board of Directors’ effectiveness. The results of these surveys are disclosed and deliberated by the Board of Directors in order to further improve the Board’s functions. Through these activities, I believe that the Company’s advanced governance systems are being operated effectively.

Q. What do you feel is necessary in order for the new company to generate synergies and realize sustainable growth?

The environment surrounding the energy business is facing major changes, including environmental issues, technological innovations, and an increasingly borderless market. Regarding these changes as threat, the Board of Directors debated for many years on reorganizing the industry and concluded that Idemitsu Kosan was the best possible business partner from the perspective of business scale and synergy. As such, the Company is moving forward with discussions on integrating its business with them. When it comes to realizing this integration, as the scope of the new company’s business expands, it will become more and more important for Showa Shell to more strategically consider the business portfolio and the investment stance. After thoroughly debating the vision of both companies, as well as the strategy needed to realize that vision, it is necessary to draw a clear picture of the strategy for the new company and the returns that will come after the strategy is executed. This will allow employees of both companies to work enthusiastically, feeling satisfi ed, thereby promptly generating synergistic effects. In order to carry out this kind of strategic approach, it is extremely important to establish a solid governance structure at the new company and operate it in an effi cient manner.

Minoru TakedaOutside Director, Chairman of the

Board of DirectorsOutside Director of Showa Shell

since March 2013

1999 Number of directors reduced from 18 to 11, executive offi cer system introduced

2003 Executive offi cer system revised, Management

Executive Committee established, number of outside directors increased by 1

2005 Number of outside directors increased by 1

2007 Retirement allowance system for directors abolished

2009 Number of outside directors increased by 1 (4 of 8 directors became outside directors)

Efforts to Build a Corporate Governance System


Interview with Midori Miyazaki, External Audit & Supervisory Board Member

Q. How would you evaluate the changes in Showa Shell’s governance systems?

Firstly, I would like to give Showa Shell high praise for its tireless efforts to develop fair governance systems that can meet the expectations of its various stakeholders. The Company has proactively introduced outside directors to strengthen management oversight functions and transparency, leading to a Board of Directors comprising globally diverse members. Moreover, the Company further separated functions between management oversight and business execution to fully utilize the strengths of the Board of Directors. I believe that the quality of its governance systems has progressively improved.

Q. Since your last interview two years ago, have you seen changes in the Company’s management or whatever?

I feel that Showa Shell has enhanced its ability to proactively adapt itself to an ever-changing business environment, not just in terms of governance but in every other aspect of business. In particular, while external pressure for industrial reform has been mounting, the Company has prepared well and is ready to play a leading role in that regard as a result of its efforts to increase its competitiveness. Showa Shell employees freely voice their opinions from their own perspectives and are proactive in their actions without being infl uenced by the opinions of others or feeling pressured in any way. These actions are quite visible—for example, in the meetings between mid-level employees of Idemitsu Kosan Co., Ltd. and the Company to deepen mutual understanding in the lead-up to the business integration, or in the establishment of the Showa Shell Women’s Network aimed to promote the active role of women in the workplace. I believe these examples prove that Showa Shell values such efforts to encourage mutual communication.

Q. Could you please give us your opinion on the role of women in Showa Shell?In my conversation with Margaret Thatcher in the 1980s, the former prime minister of the United Kingdom, we discussed the active role of women. I believe this will truly be achieved when it becomes quite common to promote women based on their abilities rather than simply achieving numerical targets. In this sense, Japan clearly lags behind Europe and the United States. However, looking back at Showa Shell over the years, at least since my involvement with the Company, I have seen no instance where an employee has been judged based on gender. This is because Showa Shell’s approach to diversity, believing in the idea that a different sense of value creates new value without overly emphasizing the mere concept of “women in the workplace,” has been instilled throughout the Company. By continuing such fair evaluation and efforts to raise women’s awareness with regard to their careers through in-house career promotion activities and the ongoing cultural changes in society, I am confi dent that the number of women who play an active role in the Company will naturally increase.

Q. What kind of expectations do you have for Showa Shell as well as the new company going forward?

I believe that corporations have a mission to shape the future. In other words, they have a mission to create new value to establish new lifestyles. Showa Shell is making efforts to accomplish this mission. The Company’s Energy Solutions Business is the most representative in these efforts, and I hope that the Company further clarifi es the role of this business in the Company as well as its intention to be an integrated energy company going forward. I believe this approach is important even after the business integration. The new company will be bigger in size, and its business domains and regions will be broader in scope. I would like to see the Company maintain active communication with all stakeholders to properly convey the message that it is creating new value in answering the needs of society, while incorporating outside resources as it shapes the next generation. The business integration presents an opportunity for both companies to rethink their identity. If the employees of the new company move forward with this fresh new approach while steadfastly working to create new value for the world, regardless of the differences in their personal attributes or in the companies from where they came, I believe the new company will be an excellent organization with high social value.

Midori MiyazakiExternal Audit & Supervisory

Board MemberProfessor and Dean

Faculty of Global Studies, Chiba University of Commerce

External Audit & Supervisory Board Member at Showa Shell

since 2006


Directors’ term shortened from 2 years to 1 year

Compensation Advisory Committee established


2015 Positions of chief executive offi cer (Group CEO) and chairman of the Board of Directors separated

2016 Number of outside directors increased by 1 (7 of 9 directors became outside directors)

Nomination and Compensation Advisory Committee established


Advice

Reports

Corporate Governance System and Internal Control System

Reports Reports

Reports

Nomination andCompensation Advisory

Committee

[Management Supervision]Chairman of the Board of Directors

7 Outside Directors (Including 2 Independent Directors)

[Business Execution]Representative Director,

Group CEO, Executive Directors

VOPinternal consulting

service

VOPexternal consulting

service

Board of Directors

Nominations

ReportsReports

Information Disclosure Sub-Committee

Reports

Reports

Reports

Auditing Reports

Notice Notice Notice

Reports

ReportsAuditing Instructions

Group Executive Committee

Group CEO

Vice President

Compliance Committee

Executive Offi cer,Oil Business COO

Oil BusinessExecutive Offi cers

Reports

Reports

Showa Shell Group HSSE Conference

Harassment consulting service

General Shareholders’ Meeting

Business Divisions and Affi liated Companies

Risk Management Committee

Risk Management CommitteeChaired by the Group CEO, this

committee assesses the

effectiveness of activities with

regard to compliance and risk

management, based on the Basic

Policy on Internal Control System

and the Group’s Basic Policy for

Health, Safety, Security and

Environment (HSSE). The results of

discussions by this committee are

provided as suggestions or

reported to the Board of Directors,

as necessary.

Board of DirectorsIn June 2015, the Company separated the roles of chief executive offi cer (CEO) and the chairman of the

Board of Directors in the aim of further enhancing the effectiveness of management supervision and

achieving more timely and more aggressive business execution. Recognizing the role that the chairman of

the Board of Directors must play in supervising management, Minoru Takeda, a non-executive outside

director, was selected for this position.

The Board of Directors consists of nine directors, seven of whom are outside directors. Board meetings

are also attended by the four Audit & Supervisory Board members, of whom two are the external Audit &

Supervisory Board members. The outside executives, who have international business experience and

extensive knowledge in a variety of fi elds, offer suggestions and advice for maximizing corporate value

based on their diverse and objective viewpoints.

To ensure that the outside executives can fully participate in discussions at meetings of the Board of

Directors, materials used at these meetings are distributed in advance, and pre-meetings are held to brief

on the content of the agenda.

Nomination and Compensation Advisory CommitteeTo ensure objectivity and transparency in the process of nominating and determining the

compensation for the executives, the Company has established the Nomination and

Compensation Advisory Committee, which mainly comprises outside executives. This

committee submits reports to the Board of Directors on the basic policies and the standards

related to the executive candidates and the remuneration decisions.

Compliance CommitteeThis committee receives compliance-related reports and consultation requests

from Group companies, the “Voice of People (VOP)” employee help line, and

the harassment hotline. Based on the reported content, the committee decides on

how to handle and process this information, and reports to the Risk Management

Committee, as necessary.

Information Disclosure Sub-CommitteeThis committee, which serves beneath the Risk Management

Committee, conducts deliberations aimed at ensuring timely

and appropriate information disclosure by the Group.


Reports

Auditing

Reports

Audit & Supervisory Board

4 Audit & Supervisory Board Members (Including 2 Audit & Supervisory Board Members)

NominationsNominations

Auditing

Coordination Accounting Auditor

[Business Execution]

Reports

Reports

Coordination

Planning approval

Instructions Auditing

Executive Offi cer, Energy Solutions Business COO

Energy Solutions BusinessExecutive Offi cers

Internal Audit Division

Audit Committee Group Executive CommitteeThe Company has introduced the

executive offi cer system and has

established the Group Executive

Committee to serve as the highest

decision-making body for business

execution. In addition to approving

business execution policies for each

business, the committee seeks to

maximize inter-business synergies.

Committee members include the heads

of the business segments—the Executive

Offi cer and Oil Business COO, the

Executive Offi cer and Energy Solutions

Business COO, and the executive

offi cers responsible for each of their

business areas.

Accounting AuditorThe Company has appointed PricewaterhouseCoopers

Aarata as its accounting auditor to perform auditing, and

pays compensation for their work.

Audit Compensation(Year Ended December 31, 2015)

Compensation based on audit certifi cation activities

Showa Shell (Yen million) Consolidated subsidiaries(Yen million)

116 54

Compensation based on non-audit activitiesShowa Shell (Yen million) Consolidated subsidiaries

(Yen million)

— 2

Audit & Supervisory BoardThe Company has adopted the Audit & Supervisory Board system. The board is

made up of two standing Audit & Supervisory Board members and two external

Audit & Supervisory Board members (independent Audit & Supervisory Board

members). External Audit & Supervisory Board members in particular are selected

for their broad-based knowledge, as well as the objectivity, neutrality, and

specialized expertise that the auditing process requires. Audit & Supervisory

Board members attend meetings of the Board of Directors and other important

meetings, and receive reports on the status of operations from directors and

executive offi cers, as well as from audit divisions, offi ces, subsidiaries, and other

organizations. Audit & Supervisory Board members also receive reports from the

accounting auditor with regard to the progress of the fulfi llment of its duties. In this

manner, they conduct business audits related to business execution by directors as

well as accounting audits. They also monitor and consider the establishment and

operational status of internal controls for the Group, including subsidiaries.

To ensure that external Audit & Supervisory Board members can suffi ciently

fulfi ll their supervisory function, materials on important meetings are distributed to

them beforehand. Furthermore, a support structure is in place to provide them with

any necessary briefi ngs before and after meetings.

Special CommitteeIn relation to the business integration with Idemitsu Kosan Co., Ltd., this committee was established in February 2015

as an advisory body to the Board of Directors to ensure transparency and fairness in the Company’s decision-making

process. The Special Committee has four members who are independent directors or independent Audit & Supervisory

Board members of the Company: Yukio Masuda, Takashi Nakamura, Midori Miyazaki, and Kenji Yamagishi.


The Nomination and Compensation Advisory Committee is

composed of independent outside offi cers and others. The objective,

transparent, and performance-based Basic Policy for Directors

Compensation was formulated based on reports by this committee,

and this policy was adopted following approval by the Board of

Directors at a meeting held on November 5, 2013. This policy

called for the portion of director remuneration linked to business

performance to be increased and the fi xed payment portion to be

reduced in order to clearly link director performance with remuneration.

In accordance with this basic policy, the upper limit for total

fi xed remuneration paid to directors was reduced from ¥65 million

to ¥45 million per month by a resolution at the General Shareholders’

Meeting held on March 27, 2014. Within the limit of the total

amount, monthly base remuneration to each director is determined

using a remuneration table by rank, except for Douglas Wood

(who stepped down on March 29, 2016), for whom base

remuneration was determined by a secondment contract with the

Shell Group. Performance-linked bonuses for directors are to be

determined each year by resolution at the General Shareholders’

Meeting in consideration of the operating environment and

performance during the applicable fi scal year.

The total remuneration to all Audit & Supervisory Board

members decided by the resolution of the General Shareholders’

Meeting held on March 28, 2008, was ¥10 million or less per

month. Within the limit of the total amount, remuneration to each

auditor is determined by the mutual agreement among all Audit &

Supervisory Board members. Bonuses for Audit & Supervisory

Board members were abolished in 2013.

Retirement allowances to directors and Audit & Supervisory

Board members were abolished as of the General Shareholders’

Meeting held on March 29, 2007.

Director and Audit & Supervisory Board Member Remuneration

The Company has established the Basic Policy on Internal Control*

to confi gure an effective internal control system for the Group and

increase management transparency and effi ciency. Based on

partial revisions to the Companies Act of Japan in 2015, the

Company, as well as its subsidiaries, revised this policy, thereby

putting in place an even more effective internal control system and

ensuring its operation throughout the Group.

To ensure the system’s effectiveness, the Risk Management

Committee, chaired by the Group CEO, meets quarterly to

improve and strengthen the internal control system by discussing

corporate risks and other issues.

ComplianceThe Showa Shell Group recognizes that compliance, together with

corporate ethics, is essential to achieving sustainable growth while

fulfi lling its social responsibility. Accordingly, we work to entrench

compliance throughout all areas of the Group.

The Group has formulated its Code of Conduct* as a

universal code covering the development of corporate activities. In

addition to legal compliance, this code clarifi es the high degree of

ethics required of the Group to fulfi ll its social responsibilities. The

Group has established other compliance-related regulations, as

well, including the Compliance Rules for the Antitrust Law,

Government Anticorruption Rules, Insider Trading Control Rule,

Environmental Preservation Guidelines, and Export Control Rule.

In order to enhance employees’ understanding of compliance,

top management takes various

opportunities to communicate the

importance of compliance, and we

distribute our Compliance Book to all

employees and post its content on

our website so that they can access it

at any time.

To foster awareness and

enhance knowledge of compliance,

we conduct compliance training for

each employee grade and worksite

and operate e-learning programs. In addition, through the “Room

of Compliance” intranet site for providing information to Group

companies we regularly post examples of violations that have

occurred at other companies and share cases of violations at

Group companies to prevent their recurrence and similar violations

from occurring. Furthermore, we seek to ensure fairness and

transparency in our procurement activities. To this end, we have

established the General Rule for Procurement,* which highlights

legal and corporate ethical compliance, as well as resource

protection, environmental preservation, and other social and

environmental considerations, and we seek to promote an

understanding of these guidelines among our suppliers.

As a whistle-blowing system, we have introduced an

employee consultation service, “Voice of People (VOP),” which

encourages Company and Group employees to raise concerns

Internal Control System

Director and Audit & Supervisory Board Member Remuneration (Year Ended December 31, 2015)

Executive category Total remuneration(Yen million)

Total remuneration by category (Yen million)

Number of executives subject to bonuses(People)

Fixed remuneration

Bonuses

Directors (excluding outside directors) 273 235 38 3

Audit & Supervisory Board members (excluding external Audit & Supervisory Board members)

72 72 — 4

Outside directors and Audit & Supervisory Board members 112 110 2 7

Compliance book


about legal and Code of Conduct violations; this system enables

employee input both within and outside the Company. After

investigating and considering any information employees have

shared, we take whatever measures are deemed necessary in

accordance with our internal regulations. We have formulated

Rules of the Group Companies’ Help Line, “Voice of People,”

covering the system’s operation, and systems are in place to protect

the confi dentiality of people undergoing consultation and to

prevent them from adverse impacts.

Showa Shell’s policy with regard to criminal organizations is

to handle them through a Companywide approach. The

departments in charge of related matters have been designated,

and contact is maintained with the police and other external

specialist institutions.

Risk ManagementTo address risk characteristics of individual departments and

subsidiaries that could affect the Group’s corporate and business

value, each year Showa Shell prepares a business control matrix

(BCM). We use the BCM to identify the risks associated with

business targets and ascertain the level of impact and control status

of these risks. We promote control activities, introduce improvements,

and perform monitoring to ensure that the BCM is functioning

consistently and effectively. In 2015, we addressed legal violations

and misconduct discovered at subsidiaries since 2014. Subsidiaries

and related departments together worked to clarify and analyze risks

specifi c to subsidiaries and revised their operational manual and

operational fl ow concerning the control of risks.

With regard to risks that need to be checked from a

Companywide perspective, such as the compliance and HSSE

promotion structures and the business control structure, we have

established business control checklists (BCCs) to enable

comprehensive monitoring. Relevant executives and division heads

use these BCCs to evaluate the risk management systems of their

divisions on a yearly basis, creating a uniform management

system. In 2015, we concentrated on measures targeting

subsidiaries, such as the Board of Directors sharing information

about risk evaluation. With regard to information management, in

order to better instill at the workplace level the handling of

intellectual property and compliance with regulations, we

introduced new department-wide discussion and evaluation

processes, in addition to evaluations by executives and

departmental heads.

The results of BCM and BCC evaluations and analyses are

reported to the Risk Management Committee.

For details on HSSE risk management, please refer to pages 36–37.

The Company has formulated the Basic Policy for Information

Disclosure.* Based on this policy, to promote an understanding

and fair evaluation of the Group among various stakeholders, we

work to ensure that important information is disclosed equitably,

accurately, and in a timely manner. We also make a proactive

effort to disclose other information. The Information Disclosure

Sub-Committee deliberates on the handling of information for

disclosure.

With regard to IR activities targeting shareholders and

investors, we aim to fulfi ll our accountability to our shareholders

and sustainably increase our corporate value by engaging in

active and constructive dialogue with our shareholders and

investors. Therefore, we have formulated the Policy on Constructive

Dialogue with Shareholders under the Basic Policy on Corporate

Governance.* We disclose these policies on our website and

conduct IR activities based on them.

When announcing business performance each quarter, the

Company holds large meetings and telephone conferences for

securities analysts and institutional investors in Japan. We provide

audio recordings of these sessions on our website along with

presentation materials. We communicate proactively with

institutional investors in Japan and overseas, visiting investors and

participating in conferences held by securities companies. For

individual investors, we are working toward providing more

information, mainly on our website. Furthermore, we publish a

semi-annual business report booklet entitled To Our Shareholders,

and we conduct shareholder questionnaires to enhance the

dialogue. The shareholder and investor opinions obtained through

such communications are reported to directors and Audit &

Supervisory Board members, which are incorporated into

management activities in the aim of enhancing corporate value.

Information Disclosure and Dialogue with Shareholders and Investors

* The Basic Policy on Internal Control, Code of Conduct, General Rule for Procurement, Basic Policy for Information Disclosure, and Basic Policy on Corporate Governance are posted on our website. http://www.showa-shell.co.jp/english/profi le/mp-index.html


New Facilities on Stream

SPECIAL FEATURE

We have started operations at new facilities in each business as part of our We have started operations at new facilities in each business as part of our Medium-Term Business Action Plan.Medium-Term Business Action Plan.

TO THE NEXT GROWTH STAGE

Overview of the Toluene Disproportionation Process (TDP) Unit• With an annual production capacity (mixed xylene)

of 200,000 tons, the TDP unit increases the production capacity for mixed xylene at Group refi neries by about 30%.

• The TDP unit effectively utilizes existing facilities, allowing this investment to be effi cient by limiting initial investment.

40,000

30,000

20,000

10,000

02009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 202520242023

(Thousand tons/Year)

Forecast of Northeast Asian Demand for Paraxylene

Forecast

Role within the Medium-Term Business Action PlanWhile the domestic gasoline demand is declining, the demand for

petrochemical products such as paraxylene, a raw material used

for PET bottles and polyester fi bers, is expected to increase as

economies in Asia continue to grow. Identifying this structural

change in product demand, the TDP unit at Yokkaichi Refi nery was

established to reinforce the Company’s earnings base in the

petrochemical business.

Capabilities of the TDP unitThe TDP unit has enabled the refi nery to increase the production

volume of petrochemical products such as mixed xylene, a main

feedstock of paraxylene, converting a gasoline component into

petrochemical feedstock. Under the rapidly changing business

environment, the TDP unit provides a highly profi table production

structure that can respond more fl exibly to changes in market

conditions in Japan and overseas.

TDP Unit (Yokkaichi Refi nery)

OIL BUSINESS

Source: Showa Shell Sekiyu K.K. (based on think-tank data)

Showa Shell Sekiyu K.K. Corporate Report 201620

Role within the Medium-Term Business Action PlanStriving to become a global leader in the solar business, Solar

Frontier is aiming to expand its production capacity in Japan and

overseas to 2 GW. Tohoku Plant, a model plant for future overseas

factories, is a vital step toward achieving this goal.

Capabilities of Tohoku PlantTohoku Plant integrates the latest and most advanced technologies

developed at Atsugi Research Center, enabling it to achieve global

best-in-class cost. The new factory will serve as the technological

foundation on which Solar Frontier will expand into global markets.

Tohoku Plant

SOLAR BUSINESS

Role within the Medium-Term Business Action PlanThe additions of these two power plants, which are highly competitive

and use eco-friendly fuels, bring the power generation capacity of the

Company up by 30% to 600,000 kW. These facilities represent a major

step forward for the Company toward expansion of its power generation

capacity and diversifi cation of power sources.

Capabilities of the two facilitiesThese two power plants expand the scale of the Company’s power

generation, further ensuring a stable supply and allowing more profi t

opportunities. While the Company has been striving to expand retail sales

of high-voltage electricity as well as wholesale, the Company started retail

sales to households to pursue synergies with the oil business, fully

capitalizing on the competitiveness of these facilities. These efforts will help

the Company establish a sales portfolio with even more stable earnings

over the medium to long term.

Keihin Biomass Power PlantThird Unit of Ohgishima Power Station

ELECTRIC POWER BUSINESS

Overview of Tohoku Plant

• Annual production capacity of 150 MW

• Signifi cantly improved production line and equipment

compared to Kunitomi Plant, and applied new module design> Three times faster production > Improved module conversion effi ciency > Production cost per unit reduced by about 30%,

enabling global best-in-class cost

Overview of Keihin Biomass Power Plant• Generation capacity: 49,000 kW• Fuel: Wood pellets and palm kernel shells• Constructed on the former site of Ohgimachi Factory

of Keihin Refi nery, which was closed in 2011• The largest power plant in Japan exclusively using

woody biomass

Overview of Ohgishima Power Station (left)• Generation capacity: Approximately 1.2 million kW (roughly 400,000 kW x 3 units; the

Company’s stake in the facility: 25%)• Fuel: Natural gas (supplied by the adjacent natural gas terminal belonging to Tokyo Gas Co., Ltd.)• Constructed and operated together with Tokyo Gas on the Company’s former crude oil storage site• A highly cost-competitive power plant backed by its top-class energy conversion effi ciency

(approximately 58%) and one of the largest power generation capacities among non-conventional power suppliers


OIL BUSINESS

As the state-owned oil company of Saudi Arabia, one of

the world’s most dominant oil producers, Saudi Aramco

is able to supply Showa Shell with a wide variety of

crude oil at a single loading port, thus realizing the

effi cient transport of oil. Showa Shell imports crude oil

that best suits its Group refi neries’ confi guration and

market trends, mainly from the Middle East.

While maintaining a stable supply of oil products

for the domestic market, Showa Shell is also

engaged in exports. In cooperation with the Shell

Group, one of the world’s largest trading networks,

Showa Shell fl exibly exports its oil products relative

to both domestic and overseas market environments

in order to maximize its profi ts.

At its three Group refi neries,* the Showa Shell Group refi nes crude oil

to produce fuels such as gasoline, kerosene, diesel oil, heavy fuel oil,

and jet and marine fuels, as well as petrochemical products such as

mixed xylene, benzene, and propylene. In addition, we purchase oil

products from Fuji Oil Co., Ltd., a business alliance partner.

By pursuing both effi ciency and safety

when transporting oil products over land

and by sea, as well as at our storage

facilities, we provide a stable supply of

products to customers throughout Japan.

Crude oil procurement

Refi ningGasoline, kerosene, diesel oil, heavy fuel oil, petrochemicals, and LPG

Export

Transportation

op

* Showa Shell Group Refi neriesKeihin Refi nery of Toa Oil Co., Ltd. (Kawasaki, Kanagawa Prefecture; capacity of 70,000 barrels per day)Yokkaichi Refi nery of Showa Yokkaichi Sekiyu Co., Ltd. (Yokkaichi, Mie Prefecture; capacity of 255,000 barrels per day)Yamaguchi Refi nery of Seibu Oil Co., Ltd. (Sanyo Onoda, Yamaguchi Prefecture; capacity of 120,000 barrels per day)

oil, and LPG

E

* Sophisticated Methods of Energy Supply Structures Law (translated name in full: Law for Promoting Use of Non-Fossil Energy Resources and More Effective Use of Fossil Energy Resources by Energy Providers): In 2010, this law required oil companies in Japan to improve the installment ratio of heavy oil cracking units, and oil companies thereby responded mainly by reducing refi ning capacity. In light of the law’s new obligations issued in 2014 to be met by 2017, oil companies are again expected to respond by reducing refi ning capacity. These new obligations also included a revised defi nition of the installment ratio, expanding the targeted facilities from heavy oil cracking units to residual oil processing units.


Due to a declining population and the increasing trend toward energy conservation, the demand for oil products in Japan has declined from its peak levels in the 1990s. On the other hand, as there has been little progress in refi ning capacity reduction in Japan, the supply glut has long been a problem for the oil industry. In light of this, each oil company was required to make its refi ning facilities more effi cient in 2010 under the Sophisticated Methods of Energy Supply Structures Law.* As a result of each company’s efforts to reduce its refi ning capacity in accordance with this law, the refi ning capacity of the industry in 2014 declined roughly 20% compared to 2008. Moreover, oil companies are required to further enhance the effi ciency of their facilities by March 2017 in an attempt to continue to improve the supply glut situation. However, depending on the pace of the decline in demand, the supply glut may once again become an issue. On the other hand, global oil demand is increasing, especially in Asia where the overall economy is rapidly growing. In light of this development, Japanese oil companies are increasing their exports of oil products to improve the domestic supply glut. Although competition is forecast to be tougher due to the newly built, state-of-the-art, large-scale refi neries, the Asian market is expected to continue to grow in the future. Accordingly, having a business foundation that can fl exibly and promptly respond to such changes in supply-demand as well as in crude prices is indispensable for us to ensure a stable supply and sustainable growth.

Showa Shell sells fuels, lubricants, asphalt, and other products primarily through its contract dealers.

At the 3,212* service stations affi liated with the Company across Japan, we sell gasoline, kerosene,

and diesel oil to general customers. In addition, through our contract dealers, we sell fuel oil to commercial

customers from such industries as manufacturing, transportation, electric power, agriculture, fi shing,

aviation, and maritime transportation. Through collaboration with these contract dealers, who act as our

important business partners, we are working to develop new customers and expand sales channels.

In addition, we sell petrochemicals to petrochemical manufacturers both in Japan and overseas.

ManufacturingLubricants and asphalt

Storage

Customers

2008 2014 2017 (Forecast)

6,000

4,500

3,000

1,500

0

2013 2020 (Forecast) 2025 (Forecast)

1,600

1,200

800

400

0

Domestic Refi ning Capacity and Fuel Demand

Asian Oil Demand Forecast

Refi ning capacity (Thousand barrels/Day)

(Million tons)

Refi ning capacity Fuel demand

Source: Showa Shell Sekiyu K.K. (based on documents disclosed by the Agency for Natural Resources and Energy, Ministry of Economy, Trade and Industry)

Source: International Energy Agency (IEA), World Energy Outlook Special Report 2015

Sales

Business Environment

*As of December 31, 2015


Sales synergies


Business Strategy and Progress of the Medium-TermBusiness Action Plan

Organic Growth—Growing Existing Businesses• Sustaining domestic sales size• Increasing margins through value creation• Cost reduction including supply chain improvements

Step Change—Growing through Structural Business Transformations• Expand petrochemical business• Partnerships with other companies

Goal: Become the most profi table oil company in Japan

As a pioneer in the industry, Showa Shell has been making efforts

since the late 1990s to increase its business effi ciency according to

changes in the business environment. For example, in refi ning, we

closed Niigata Refi nery in 1999 as well as Keihin Refi nery’s

Ohgimachi Factory in 2011. We have achieved strong

competitiveness by optimizing refi ning capacity against the size

of demand, and now have the most sophisticated facilities in the

industry. In order to fl exibly and quickly respond to the rapidly

changing business environment, maintain a solid supply system, and

boast one of the highest profi tabilities, we are implementing a

strategy to bolster our competitiveness across the supply chain by

leveraging our strengths to their fullest extent.

Our highly sophisticated refi neries can allow us great fl exibility

in crude oil selection. Our challenge is to secure the best crude oil

in the world from numerous sources in terms of both cost and profi t.

In addition, at Group refi neries, we are working to improve

productivity while maintaining safe and stable operations. We are

also working to maximize profi tability by reducing our energy

consumption and leveraging the Group’s world-leading trading

network for product export, quickly and fl exibly responding to the

market dynamics between Japan and overseas. The Toluene

Disproportionation Process (TDP) unit that commenced operations

in 2016 at Yokkaichi Refi nery will help further enhance the

fl exibility in our production.

Furthermore, we are working to optimize our supply structure

by region in the form of alliances with partners beyond Group

boundaries. From 2013, we have been promoting a business

alliance with TonenGeneral Sekiyu K.K. for refi ning and product

supply in Kawasaki, Kanagawa Prefecture. In addition, in 2015

we reached an agreement with Cosmo Oil for an alliance between

the refi neries in Yokkaichi, Mie Prefecture, and preparations are

currently under way. This alliance will also satisfy our mandate for

compliance with the second round of the Sophisticated Methods of

Energy Supply Structures Law. For more effi cient logistics, we have

continued to introduce large product trucks while pursuing alliances

with other companies. In 2015, we began collaborative asphalt

Leveraging Strengths to Bolster Competitiveness across Supply Chain Amid Rapidly Changing


Bolstering Competitiveness across Supply Chain

Strategic crude oil procurement

• Flexible crude oil procurement

• Diversifi cation of suppliers

Improvement of refi nery productivity

• Improvement of cost and energy effi ciency

• Maximization of profi ts through nimble response to market conditions

Masayuki KobayashiExecutive Offi cerOil Business COO


Progress of Major Projects

Project 2013 2014 2015 2016 2017

Structural cost competitiveness improvements(target of ¥26.0 billion) / Dantotsu Project

Integration of LPG operations

Mixed xylene production capacity increases

Overseas petrochemical operations feasibility examination

Business alliance with TonenGeneral Sekiyu geared toward streamlining supply

Business alliance with Cosmo Oil geared towardstrengthening competitiveness in Yokkaichi region

¥34.5 billion achieved, exceeding the target ahead of schedule

OperationConstruction

Preparation as well as consideration for additional areas to streamline

Commencement of alliance

Surveys and examination

Evaluation and implementation

Agreement to examine reached

Agreement to examine reached

Surveys and examination completed

Investment approved

Agreement for alliance reached

Integration agreement concluded

Joint-venture company established, businesses integrated

distribution with Cosmo Oil in Takamatsu, Kagawa Prefecture.

In sales, we are reinforcing our customer foundation with

differentiated products and services. In the shrinking high-octane

gasoline market, in order to respond to the needs of customers

who cherish their cars, we have launched a new product, Shell

V-Power, at our service stations in 2014. In addition, to become

service stations where customers wish to visit again and again, we

are enhancing our credit card services. Collaborating with our

contract dealers who are highly familiar with the needs of local

customers, we have exceeded the industry average in sales growth

for our mainstream high-value-added products such as gasoline,

kerosene, and diesel oil. Furthermore, in April 2016 we began

electricity sales to households targeting gasoline and diesel oil

users, pursuing synergies with the electric power business. Through

these initiatives that offer high added value, we are working to

further reinforce our customer foundation. Also, in lubricants and

asphalt, we are bolstering the sales of high-value-added products

that address the needs of customers and society, including the

need for energy conservation, longer product lifespans, and high

environmental performance. By focusing on consultative sales, we

are steadily growing the sales of our value-added products.

In LPG business, we established Gyxis Corporation in

April 2015, integrating the LPG wholesale operations of four

companies, to increase effi ciency and expand profi t opportunities

through economies of scale. Gyxis is aspiring for sustainable

growth through enhancing profi tability through rationalization in

wholesale and logistics networks, reinforcement in purchasing

power, and overseas trading expansion.

The underlying factor behind our ability to realize a stable

supply while pursuing effi ciency lies in our corporate culture, which

consistently places the utmost emphasis on the safety of operation.

Going forward, we will continue to give priority to our corporate

culture as an indispensable element for business competitiveness in

our goal toward becoming the most profi table oil company in Japan.

Logistics that pursues safety and effi ciency

• Advanced alliances with other companies

• Improvement in effi ciency through large-size trucks

Differentiation of products and services

• Creation of customer needs

• Pursuit of new synergies within the Group


Refi ning and SupplyGroup refi neries with further improvement in productivity

Superiority of Group Refi neries Established through Prompt Response to Changes in the Operating EnvironmentShowa Shell has reinforced the competitiveness of Group refi neries

by implementing strategies ahead of other companies in the

industry to respond to changes in the operating environment, which

include investments to upgrade refi ning facilities and refi nery

closures. At the moment, we hold the top position in Japan in the

installation ratio of residue processing units (equipment that

produces high-value-added oil products from residual oil of lower

value generated during the process of refi ning.) As a result, we

have developed facility structures to produce more high-value-

added oil products from the low-priced heavy crude oil than other

companies in the industry. To further improve the production ratio of

the value-added products, we commenced operations of TDP

units* in 2016 at Yokkaichi Refi nery to increase the production of

mixed xylene, whose demand is expected to grow, switching from

gasoline, whose domestic demand is declining. This will enhance

our competitiveness in refi neries and bolster the profi t structure of

the oil business.

* For details on TDP units, please refer to page 20.

Pursuing High Effi ciency and Stable OperationsBy reducing excess refi ning facilities, Showa Shell has decreased

fi xed costs and has maintained a high capacity utilization ratio

across Group refi neries. The safe and stable management of our

refi neries has contributed to this high utilization. We have kept

equipment trouble and unplanned operation suspensions due to

accidents at an extremely low level by prioritizing operation safety

and constantly improving overall safety levels.

In addition, we have invested in energy conservation

initiatives in our efforts to be eco-friendly, and have improved cost

effi ciency. As a result, we have successfully reduced unit energy

consumption to a much lower level than the industry average. We

have also undertaken a project that promotes energy conservation

by linking our Yokkaichi Refi nery with the adjacent Yokkaichi Plant

of Mitsubishi Chemical Corporation. Since linking the facilities in

2013, we have reduced energy consumption by approximately

70,000 kiloliters of crude oil, equivalent to about a 180,000 ton

reduction in CO2 emissions.

Further Strengthening Competitiveness through Collaboration Outside the Group to Optimize Supply StructureAs demand is expected to fall, Showa Shell is promoting the

optimization of its refi ning and supply structure through collaboration

with other companies to enhance competitiveness and establish a

regarding supply structure. In 2013, we formed a business alliance

within our supply system with TonenGeneral Sekiyu. We are

boosting the effi ciency of facility operation at both companies’

refi neries in Kawasaki by effectively leveraging an existing

underground pipeline for the mutual exchange of feedstock. In

addition, we are extending this collaboration to logistics, including

crude vessel operation and storage terminal management.

In 2015, we also reached an agreement for a business

collaboration between Cosmo Oil’s Yokkaichi Refi nery and our

Yokkaichi Refi nery. While Cosmo Oil will reduce its refi ning

capacity by suspending operations at one of its crude oil

distillation units, Showa Shell will provide Cosmo Oil with oil

products and feedstock. Furthermore, we are examining the

feasibility of promoting effi ciency among other facilities, such as

storage tanks. These efforts will lead to a signifi cant increase in

competitiveness of both companies through synergistic effects. In

addition, we are extending our collaboration with Cosmo Oil by

commencing the joint use of asphalt terminals in Takamatsu,

Kagawa Prefecture from 2015.

(%)

Capacity Utilization Ratio of Domestic Refi neries

2009 2010 2011 2012 2013 20152014

100

90

80

70

60

0

80.8 82.5

91.5

77.075.7

94.6

86.6

75.3

91.6

77.3

84.2

93.2

74.6

86.3

Group refi neries (Keihin Refi nery, Yokkaichi Refi nery, and Yamaguchi Refi nery)Industry

Source: Petroleum Association of Japan

(%)

Installation Ratio of Residue Processing Units vs. CrudeDistillation Capacities

Source: METI (as of March 31, 2016)

Showa Shell Group Company A Company B Company C Company D

60

50

40

30

20

10

0

59.4


Sales

Source: Showa Shell

Developing Differentiation Strategies that Promptly Respond to the Changing Needs of CustomersWithin the shrinking domestic fuel market, competition from both

inside and outside the industry is becoming increasingly severe.

Under these conditions, we have developed cooperative initiatives

with our contract dealers, sales outlets, and service stations with the

goal of “acquiring overwhelming levels of customer satisfaction

through differentiation” in order to promptly and accurately meet the

needs of our customers.

Beginning in 2010 with the introduction of Ponta, a joint point

program among various industries, we have since introduced a new

payment service, Shell EasyPay, and renewed the Shell Starlex Card.

Additionally, in 2015 we further developed the Shell-Ponta credit

card to respond to customer needs for credit cards with joint point

programs. In this way, we offer an industry-leading credit card lineup.

For products, we launched the new high octane gasoline Shell

V-Power in 2014, which draws on the “Clean & Protect Technology”

that the Shell Group has cultivated through a technical partnership

with Ferrari S.p.A. In 2015, we expanded the sales area of Shell

V-Power, and the product has earned a high reputation among

customers. As a result, Shell V-Power has expanded the ratio of high

octane gasoline sales within our overall gasoline sales.

In addition to these initiatives, we commenced household

electricity supply with the gasoline price discount program “Drivers’

Plan,” targeting gasoline and diesel oil users following the

deregulation of the low-voltage electricity retail market in April

2016. By leveraging synergies with our electric power business and

offering customers attractive and easy-to-understand electricity plans,

we are trying to further reinforce our customer foundation.

Strengthening Sales of High-Value-Added Lubricants and AsphaltShowa Shell sells lubricants for transportation and industrial use

primarily through its contract dealers. While demand for lubricants

is infl uenced by the conditions of factory operations in Japan, sales

of products that meet the needs for effi ciency and energy

conservation have been increasing. We have developed and

reinforced sales for lubricants that use synthesized GTL*1 base oil,

which takes advantage of the resilience to degeneration that is

characteristic of oil made with GTL technologies. These products

help lengthen the interval between oil changes, conserve energy,

and extend the lifespan of machinery and engines.

For asphalt, demand is expected for social infrastructure

renewal accompanying national resilience improvement plans as

well as infrastructure development for the 2020 Tokyo Olympic

and Paralympic Games. Accordingly, there is a continued need for

a stable supply of asphalt. To meet this need, we are strengthening

the development and sales of asphalt products that help resolve

social issues. Examples of such products include highly durable

asphalt, eco-friendly asphalt with improved installation features that

allow the asphalt to be paved at lower temperatures, and products

that signifi cantly improve driving performance.

As both lubricants and asphalt require a high level of

expertise to manage, we are focusing our efforts on cultivating

human resources with sophisticated knowledge and an ability to

propose appropriate solutions. In this way, we are working to

bolster sales for lubricants and asphalt going forward.

Details on each of the Company’s products and services are provided in CSR Book 2016.

Increase of approximately 75%

*1 Gas to liquids (GTL) is a refi ning process that converts natural gas into liquid fuel. This method is gaining attention for its ability to create next-generation fuel that features less sulfur and fewer odors than oil fuels.

*2 New XHVI products: Products that use the Shell Group’s proprietary chemical synthetic oil, created through GTL, as a base oil

Growth rate of new XHVI product*2 sales (using 2014 as 100)

Growth rate of value-added asphalt sales in 2015 (compared to 2014 results)

Sales of High-Value-Added Products

20152014

200

150

100

50

0 Showa Shell GroupIndustry

100

90

80

70

0

(%)

Source: Showa Shell

201420132012 2015

14

12

10

8

0

Industry Showa Shell Group

Introduction of Shell V-Power

Showa Shell Credit Card Lineup and Member Refueling VolumesProgress in solidifying customers through an enhanced card lineup

20142013201220112010 2015

Note: Average among Showa Shell service stations that have introduced POS

Refueling volumes of card members Refueling volumes of non-card members

Introduction of Ponta

Introduction of Shell EasyPay

Renewal of Shell Starlex

Card

Introduction of Shell-Ponta credit card

troddu

(%)

Showa Shell’s High Octane Gasoline Sales Ratio


ENERGY SOLUTIONS BUSINESS

In addition to copper, indium, and selenium, which are the key materials used in Solar Frontier’s CIS thin-fi lm solar module, we also procure glass substrates and frames.

Procurement

Power plant operation


Solar Business

Manufacturing

Byproduct fuelFormer business facility sites

Asset synergies

Oil Business

Manufactured solar modules

Synergies between technologies

Solar modules are manufactured primarily at the fl agship Kunitomi Plant, which boasts an annual production capacity of 900 MW, making it one of the largest in the world. It also realizes high levels of production effi ciency through high levels of automation. Tohoku Plant, which has been equipped with the latest technologies, commenced commercial production in June 2016.

Solar Frontier K.K.Solar module production plants

2013 2020 20302025

10,000

7,500

5,000

2,500

0

Forecast for Global Power Generation Capacity(GW)

Oil Hydro Bioenergy WindCoal Gas

Geothermal Solar Other

Nuclear

Source: International Energy Agency (IEA) World Energy Outlook Special Report 2015

• Miyazaki Plant (Miyazaki Prefecture, annual production capacity of 60 MW)• Kunitomi Plant (Miyazaki Prefecture, annual production capacity of 900 MW)• Tohoku Plant (Miyagi Prefecture, annual production capacity of 150 MW)


There are several different channels of electricity sales, including wholesale to electric power companies and other electricity suppliers, retail sales to households and commercial users, and sales through the Japan Electric Power Exchange. We focus on wholesale and retail sales.

In Japan, Solar Frontier sells solar modules to households and solar power plants, primarily through distributors. In addition, we sell solar modules to customers around the world through our subsidiaries in the United States and Germany.

Solar Frontier provides comprehensive support, from fi nancing and design to construction, for large-scale solar power plants that use Solar Frontier’s solar modules. In addition to owning completed power plants and selling the electricity they generate, we also sell the power plants themselves to electricity suppliers, investors, and other third parties.

Development, maintenance, operation, and sale of solar power plants

Electricity sales

Solar module sales

e

operation, s

Solar BusinessWith global demand for energy expected to increase, especially in developing countries, balancing energy supply and greenhouse gas emissions has become a worldwide issue. At COP21 in 2015, numerous countries agreed on establishing targets and initiatives to reduce greenhouse gas emissions. Renewable energy is essential to achieve these goals. In countries and regions around the world, there are particularly high expectations for solar energy. It is relatively easy to install and serves as a self-sustaining energy source. Under the feed-in tariff (FIT) scheme in Japan, which was introduced in 2012, the total power generation capacity of solar power facilities exceeded 25 GW as of 2015. The demand profi le in Japan, however, is changing. With the decline in purchasing price and the introduction of new control regulations by a number of utility companies, construction of new, large-scale solar power plants is expected to gradually slow down. On the other hand, demand in the low-voltage electricity sector, which includes households, is expected to be steady in the future. Electricity prices in this sector are generally higher and solar power is expected to achieve grid parity*1 in the near future. In addition, under Japan’s Basic Energy Plan, the government aims to make the majority of newly constructed houses net-zero energy*2 by 2020. In light of this future development, energy self-suffi cient households using solar energy are anticipated to substantially increase. Meanwhile, against a backdrop of policies to promote solar

power, mainly in developed countries, global selling prices are declining and manufacturers with low levels of competitiveness are gradually being eliminated. As companies continue to implement technological innovations and reduce costs in order to compete, we will soon enter an era where only manufacturers with industry-leading cost structures and high-value-added business models can achieve sustainable growth.

Electric Power BusinessAfter the Great East Japan Earthquake in 2011, nuclear power plants under operation in Japan decreased and various issues emerged, including the self-suffi ciency of energy, the cost of power generation, and the amount of CO2 emissions. These issues forced the government to review energy policies, and nuclear power plants are expected to resume operations toward 2030. Furthermore, the complete deregulation of the electricity retail market in April 2016 will cause an infl ux of new power plants and new retailers into the market. Accordingly, competition is expected to intensify in both supply and sales. Due to the volatile natural resource prices signifi cantly impacting the electricity market, strategies for balancing a stable supply and profi tability will become increasingly important.


Customers

Leveraging synergies with our other businesses, we operate competitive, eco-friendly power plants, primarily in the Keihin region. We own roughly 600,000 kW of power generation capacity.• Ohgishima Power Station, a natural-gas-fi red thermal

power plant (25% stake), with Tokyo Gas, on a former crude oil storage site

• Keihin Biomass Power Plant, which uses only wood biomass as fuel, on a former refi nery site

• Genex Mizue Power Station, which uses refi ning byproducts of off-gas and residue materials, within the Keihin Refi nery site

• Solar power plants that use Solar Frontier modules, primarily on former oil terminal sites

*1 Grid parity occurs when the cost of generating solar power is equivalent to the cost of electricity sourced from the grid.

*2 Net-zero energy homes refer to homes that have net zero annual energy consumption, thanks to energy conserved through thermal insulation and effi cient household appli-ances as well as energy generated by solar power.

Sales synergies

Oil Business


Misao HamamotoExecutive Offi cerEnergy Solutions Business COO

Solar business goal: Become a global leader• Winning in Japan• High-added-value business model• Technology development for growth• CIS global platform

Electric power business goal: Expand business scale and sources of power generation• Business scale expansion to 1 GW class • Diversify sources of power generation

The Showa Shell Group’s source for growth in the solar business is

Solar Frontier’s proprietary thin-fi lm solar module technology.

In addition to being eco-friendly and generating more energy in

real-world conditions, CIS thin-fi lm solar modules can be used in a

wide range of applications. Leveraging this technology, we are

offering high-value-added solar solutions that people from all over

the world can easily and confi dently install and use.

In 2015, we commenced operations at Tohoku Plant, where

we introduced our latest and most cutting-edge technologies. This

will enable us to realize global best-in-class module production

cost. Also serving as a model plant for future overseas factories,

Tohoku Plant began commercial operation in June 2016. In

addition, Atsugi Research Center developed a cell with world-

record conversion effi ciency for thin-fi lm solar technologies.

Through achievements such as these, we are steadily advancing

technological innovations geared toward medium-term growth.

Our strategy for sales extends from module supply to the

provision of high-value-added power generation systems. In Japan,

we are focusing our efforts on sales to households. In 2015, we

collaborated with sales distributors to set up dedicated stores that

offer a full range of services, from making proposals for optimal

module installations to providing follow-up support. Going forward,

we will strengthen our provision of systems that support effi cient

energy consumption, including storage batteries and energy

management systems. Furthermore, as we advance further into

overseas markets, especially in the United States, we are

comprehensively developing large-scale solar power plants and

selling them to utility companies and investors. We plan to continue

to expand this high-value-added business, which leverages the

superior power generation of our CIS thin-fi lm solar modules

without being directly affected by module price competition.

By reinforcing our earnings base through technological

innovations as well as high-value-added systems, we are realizing

a prompt return to profi tability again and advancing toward

becoming a global leader in the solar industry.

Pursuing Cost Competitiveness and Value-Added Sales through Innovative Technologies

Solar Business

The Keywords for Solar Frontier’s Medium-Term Strategy

Leap in Technology

Enhance Production Cost and Effi ciency

Technology Sales

Win in Japan

Go Global

Business Strategy and Progress of the Medium-TermBusiness Action Plan


Progress of Major Projects

Project 2013 2014 2015 2016 2017

Solar: Tohoku Plant

Electric power: Third unit of OhgishimaPower Station

Electric power: Keihin Biomass Power Plant

Investment approved

Investment approved

Construction

Construction

Construction

Operation

Operation

Operation

Under the diffi cult domestic business environment to forecast, our

fundamental strategy for the electric power business is to ensure

both growth and stable profi ts by establishing long-term relationships

with customers based on our highly competitive power plants.

Strengths of our electric power business are the capabilities of

leveraging assets of the oil business and consistently controlling

operations from power generation to sales. Capitalizing fully on

these strengths, we are pursuing stable and strong profi tability.

As a comprehensive energy company, we are pursuing

synergies with other businesses to develop highly competitive

power plants while paying attention to the environment. We started

up Keihin Biomass Power Plant in November 2015 and the third

unit of Ohgishima Power Plant in February 2016, thereby

expanding our overall power generation capacity from

approximately 450,000 kW to 600,000 kW. This expansion

helped us increase both wholesale and retail customers, who can

contribute to strengthening our stable earnings base from a

medium- to long-term perspective. In addition, within the area

where Tokyo Electric Power Company has its power grid and we

operate power plants, we commenced retail sales of low-voltage

electricity to households in April 2016 by leveraging the service

station network of the oil business as well as the sales agent

network of the LPG business. We will pursue cross-business

synergies, such as further expanding electricity retail sales and

reinforcing the customer base of the oil business. At the same time,

we will improve the balance between power generation and sales

by increasing our power supply in the nighttime, and thereby make

our sales structure even more stable.

Going forward, we will further refi ne our strengths and more

effectively integrate strategies between power generation and sales

in pursuit of further profi t growth.

Pursuing Stable and Strong Profi tability Based on Our Highly Competitive Power Plants


Highly Competitive Power Supply

• Large-scale, highly effi cient, and eco-

friendly power plants

• Stable power plant operations

• Expansion of power generation capacity

that can remain competitive under the

changing business environment

Optimal Sales Portfolio

• Sales segment targeting and sales

activities fi tting in well with power

plant strengths and operation policy

• Sales activity according to power

generation capacity expansion

Appropriate Supply/Demand Balance

Comprehensive Management Structure


SOLAR BUSINESSSource of Growth / Unique Technologies

Solar Frontier’s CIS Thin-Film Solar Modules are Distinctly Different

Superior Economic Value Due to High Amounts of Electricity Generated in Real-World Conditions

Conversion effi ciency rates for solar modules are calculated using

a set of standard testing conditions. However, solar modules

react differently depending on their technology and their

installation surroundings. As a result, this set of testing conditions

doesn’t necessarily refl ect how a solar module will perform in the

fi eld. The strength of CIS thin-fi lm solar modules lies in their ability

to generate high amounts of electricity in real-world conditions.

More details on this strength are introduced below.

1. Better Performance at Higher TemperaturesOn a sunny summer day, solar modules installed on roofs can

reach temperatures of 60–80°C, which can adversely affect

output. CIS thin-fi lm solar modules have a lower temperature

Resource Conserving and Cadmium-Free

CIS thin-fi lm solar modules are a type of solar

module that uses copper (C), indium (I), and

selenium (S) as its key materials. Only a small

amount of these materials is required as the

semiconductor layer is only about one-hundredth of

the thickness of a crystalline silicon solar module.

In addition, CIS thin-fi lm solar modules are

cadmium- and lead-free, enabling safe use for a

wide range of uses.

Energy Conservation through an Advanced Manufacturing Process

Compared to crystalline silicon solar modules, the manufacturing

of CIS thin-fi lm solar modules—from raw materials to fi nished

products—all takes place under a single roof. CIS thin-fi lm solar

modules offer a shorter energy payback time (EPT), which refers

to the time required for a module to generate the same amount of

energy spent in its production.

EPT Comparison

(Years) Signifi cant reduction

0

2.0

1.0

EPT = approx. 1.5 yrs. EPT = approx.

1.1 yrs. EPT = approx. 0.9 yrs.

Crystalline silicon solar module

Amorphous silicon

CIS thin-fi lm solar module

(When annual production volume is approximately 100 MW)

Source: Investigation on Solar Power System Generation, New Energy and Industrial Technology Development Organization (NEDO)

Does not contain cadmium

Solar Frontier’s CIS thin-fi lm solar

modules

CIS (CIGS)

Cadmium telluride

Amorphous silicon

Microcrystalline

Hybrid

Monocrystalline

Polycrystalline

HIT (Heterojunction with intrinsic thin layer)

Spherical

Silicon

Compound

Silicon

Dye sensitization

Organic thin-fi lm

Crystalline

Thin-fi lm

Organic

Contains cadmium

Temperature Performance of CIS Thin-Film Solar Modules*

Mod

ule

Out

put (

Rate

d ou

tput

= 1

)

Module Temperature ( C)

1.2

1.1

1.0

0.9

0.8

0.70 25 50 75 100

* Diagram compares a CIS (SF170-S) module with a temperature coeffi cient of –0.31%/ and a standard crystalline silicon module with a temperature coef-fi cient of –0.41%/ when using a light source intensity of 1000 W/m2.

Crystalline silicon modulesCIS modules

When looking at rated output, the output loss of a CIS thin-fi lm solar module heated to 75 is approximately 5% less than the loss of a standard crystalline silicon module under the same conditions.


Steadily Establishing Technologies Geared Toward Business Growth

Evolving Operations at Kunitomi Plant and Establishing New Technologies at Tohoku Plant

coeffi cient than standard crystalline silicon modules, meaning

energy output is less affected by high temperatures.

2. Better Shadow ToleranceWhen a standard crystalline silicon module is partially shaded,

output drops signifi cantly. CIS thin-fi lm solar modules are able to

maintain stable output even when partially shaded thanks to their

circuitry design.

3. Light Soaking EffectExposure tests have shown that the output of CIS thin-fi lm solar

modules rises above initial output fi gures following exposure to light.

Compared to crystalline silicon modules, which are the current

market standard, CIS thin-fi lm solar modules have high potential

for further improvements in energy conversion effi ciency.* At Solar

Frontier’s Atsugi Research Center, we have been conducting

research based on 30cm x 30cm submodules as opposed to

1cm x 1cm cells, which is the general practice. This helps ensure

faster application of R&D efforts in actual commercial

manufacturing lines. In 2015, we achieved a world record for

thin-fi lm cell conversion effi ciency of 22.3% on a 0.5cm2 cell cut

from the 30cm x 30cm submodule.

Technological Development

* Energy conversion effi ciency: This indicator represents the per area effi ciency at whicha solar module can convert solar energy into electricity. However, this fi gure displays nominal output (catalog fi gure) measured under controlled conditions, and the performance of modules under actual operating conditions may vary as a result.

Track Record in Energy Conversion Effi ciency Development at Atsugi Research Center

2015 22.3% 0.5cm2 cell

2014 20.9% 0.5cm2 cell

2013 19.7% 0.5cm2 cell

2012 17.8% 30cm x 30cm submodule



Production

Kunitomi Plant

Crystalline silicon solar module

When a cell in the module ceases to generate electricity, the overall output of the module drops signifi cantly.

ShadeFlow of electricity

Shade may cause a temporary drop in output but has only a limited effect on the entire module.

CIS thin-fi lm solar module

Shade

Flow of electricity

Solar Frontier’s fl agship Kunitomi Plant is one of the world’s largest

solar module manufacturing plants. It can now manufacture

1 GW of solar modules per year, surpassing its 900 MW

nameplate capacity. By leveraging Solar Frontier’s proprietary

production technologies and automation process, Kunitomi Plant

achieves high levels of production effi ciency. And since commencing

operations in 2011, it has continued to boost productivity by

introducing research achievements from Atsugi Research Center

and improving onsite effi ciency. As a result, the plant improved

module energy conversion effi ciency from the lower 13% range in

2014 to nearly 14% in 2015.

In addition, new production technology developed at Atsugi

Research Center has been introduced at Tohoku Plant, enabling

best-in-class production cost with higher levels of energy conversion

effi ciency compared to existing products. The commercial operation

of the plant began in June 2016, and we aim to construct

additional factories overseas once the new technologies are

verifi ed. At the same time, we will work to transfer the new

technologies to Kunitomi Plant as we aspire to further reduce the

plant’s production costs.Please refer to page 21 for more details on Tohoku Plant.


Sales

Solar Frontier aims to signifi cantly expand into global markets

where steady demand growth is expected. While establishing new

technologies at the model Tohoku Plant, in terms of sales, we are

promoting expansion into new markets. Specifi cally, we are

making new inroads into the Middle East, including Turkey, as well

as into Asia, including India and Thailand. In 2015, the number of

countries we ship our products to surpassed 50.

Solar Frontier aims to become a true global leader in solar

energy, solving energy-related issues on a global scale by

providing high-value-added solar power systems. To this end, we

will continue to grow the business, meeting specifi c market

requirements for each region.

Aiming to Become a Global Leader, Promoting Full-Scale Growth in Overseas Markets

In Japan, we are reinforcing the sale of high-value-added solar

power generation systems to households. Applying the

advantages of our CIS thin-fi lm solar modules, we will collaborate

with business partners and enhance our lineup of peripheral

equipment in order to reach grid parity.*1 Additionally, to

promote the spread of net-zero energy homes,*2 we are

cooperating with housing developers and building contractors

who have close ties to local communities, introducing these

systems as standard equipment for new homes.

In 2015, as a policy to enhance the sales capability of our

distributors, we launched “Solar Frontier Pro Shop.” This is a store

dedicated to providing comprehensive services, from making

proposals that meet customer requirements to offering advice on

after-sales procedures, and is staffed by specialists trained by

Solar Frontier. Five of these stores opened in 2015. In 2016,

we plan to increase the number of stores to 50, expanding our

nationwide network while further accumulating know-how and

experience.

Reinforcing Sales of High-Value-Added Solar Power Generation Systems for Households

*1 Grid parity occurs when the cost of generating solar power is equivalent to the cost of electricity sourced from the grid.

*2 Net-zero energy homes refer to homes that have net zero annual energy consumption, thanks to energy conserved through thermal insulation and effi cient household appliances as well as energy generated by solar power.

In the fi eld of large-scale solar power plants, Solar Frontier is

reinforcing its BOT* business. This deals with all aspects of solar

power plant projects, from plant design and construction to the

eventual sale of the power plants themselves. Developing a solar

power plant is a time-consuming process with many steps involved,

including negotiation on power distribution equipment, fi nancing,

material procurement, design, and construction. Therefore, by

comprehensively managing the whole projects, our BOT business

is able to deliver high added value. Additionally, as the economic

value of a solar module is measured based on the amount of

electricity it generates under actual operating conditions, using CIS

thin-fi lm solar modules further leads to higher profi ts.

We have been developing our BOT business both in Japan

and in the United States. As demand for solar power plants in the

United States, in particular, is increasing signifi cantly backed by

government policies to promote solar energy, Solar Frontier

acquired the 280 MW pipeline of projects from Gestamp Solar.

In addition, the experienced staff managing the pipeline joined

the company. Within this pipeline, Solar Frontier has completed

and sold the 15 MW Morelos Del Sol Solar Project as well as the

20 MW Calipatria Solar Project in 2015 and 2016, respectively.

Through these accomplishments, Solar Frontier is enhancing its

reputation as a solar power plant developer, reinforcing its business

foundation in the U.S. market. Positioning the BOT business as a

driver for future profi ts, we will continue to make progress with

remaining projects and also draw upon our accumulated know-

how to promote the development of new projects.

Reinforcing the BOT Business by Leveraging the CIS Thin-Film Solar Module’s Advantages

Morelos Del Sol Solar Project

* BOT: Acronym for build, own, and transfer

Solar Frontier Pro Shop


ELECTRIC POWER BUSINESSPower Generation

By leveraging synergies with the oil business, Showa Shell has

expanded its power generation capacity focusing on competitiveness.

In 2003, we began operations at Mizue Power Station, which is

operated by the subsidiary Genex Co., Ltd. and effectively utilizes

off-gas and residue materials coming down from the oil refi ning

processes at Keihin Refi nery. In 2010, we launched the fi rst and

second units of Ohgishima Power Station, a highly effi cient large-

scale LNG-fi red power plant, together with Tokyo Gas Co., Ltd. on

the vast site of a former crude oil storage facility. In addition, we

commenced operations at the third unit of the power station in

February 2016 in response to the tight supply situation for electricity

following the Great East Japan Earthquake. Keihin Biomass Power

Plant, which commenced operations in November 2015, also

stands on the site of a former Company facility—Keihin Refi nery’s

Ohgimachi Factory. Keihin Biomass Power Plant realizes high cost

competitiveness due to its location, neighboring the major energy-

consumer Keihin area and having good access to existing infrastructure

such as harbor facilities, water systems, and power grid. Furthermore,

we intend to not only achieve economic effi ciency but also curtail

our environmental footprint as much as possible when developing

new power plants. In other words, we aim to strike a balance

between high economic competitiveness and eco-friendliness. Going

forward, always monitoring the changing business environment, we

will seek ways to further expand our power sources that are well

competitive in both environmental and economic performance.

Capacity Expansion Focusing on Competitiveness and Eco-Friendliness

Sales

Leveraging the stability and cost competitiveness of our power plants

to establish profi tability that has little vulnerability to changes in the

business environment, we are focusing efforts on creating stable,

long-term supply relationships with our customers. The wholesale of

electricity to other energy providers, such as utility companies, offers

good earnings stability based on long-term contracts with fi xed terms

and conditions. Our retail sales, which comprise high-voltage,

primarily to commercial users, and low-voltage, mainly to households,

provide a foundation for earnings. By leveraging the strengths of our

power plants, we are expanding wholesale and retail sales, while

minimizing sales through the exchange market. These marketing

efforts will establish a sales portfolio with stable profi tability, backed

by continuously high power plant utilization. Furthermore, where we

have our own power sources that coincide with Tokyo Electric Power

Company’s service area we are expanding retail sales to households,

which were deregulated in April 2016, by leveraging the sales

network of the oil business, specifi cally our service stations and LPG

sales agents. Going

forward, we will pursue

further synergy between

expanding retail sales of

electricity and reinforcing

the customer base of our

oil business. That will also

lead to further improvement

in profi tability of our entire

electric power business.

Establishing a Sustainably Stable Sales Structure by Leveraging Our Competitiveness in Power Sources

To meet the needs of customers who seek to enjoy an affordable car lifestyle and use electricity in an economical fashion, we offer Drivers’ Plan, a set service*1 for electricity and gasoline that leverages synergies between the Company’s businesses. By signing an electricity contract and registering a credit card or Ponta card, customers can receive a discount of ¥10 per liter of gasoline or ¥5 per liter of diesel oil*2 when they refuel at Showa Shell service stations. In addition, the plan offers discounted electricity rates during months when usage is high.

Power Sales with Gasoline Discount Program (Drivers’ Plan)

• Designed to target service station customers by leveraging the sales network of the oil business• Differentiated from competitors’ services by offering an easy-to-understand plan where customers can confi rm

discounts fuel when refueling• Allows Shell Starlex Card and Ponta Card holders to continue to enjoy loyalty programs

*1 Service basically provided in areas within the Tokyo Electric Power Company’s power grid.

*2 Discounts are up to 100 liters a month.

Features ofDrivers’ Plan

2013 2015 2020 (forecast)

100

75

50

25

0

Trends in Sales Portfolio(%)

Low-voltage

High-voltage

Wholesale Sale through the exchange market

For more details on Ohgishima Power Station and Keihin Biomass Plant, please refer to page 21.

70

60

50

40

30

20

10

02003 2010 2014 2015 2016

Track Record inOur Power Plant Development

(10,000 kW)

Genex’s Mizue Power Station

• Generation capacity: Approximately 270,000 kW• Fuel: Off-gas and residue materials via oil refi ning processes at Keihin Refi nery• High level of economic effi ciency through the use of off-gas, which comes down from oil refi ning processes and cannot be upgraded

First and second units of Ohgishima Power Station

Keihin Biomass Power Plant

Third unit of Ohgishima Power Station

Solar power plants

• Generation capacity: Approximately 30,000 kW (Company’s stake)

• Constructed on idle lands• Demonstrate high levels of power generation,

employing Solar Frontier’s solar modules


SAFE OPERATIONAND STABLE SUPPLY

HSSE Promotion SystemWe established the Risk Management Committee to serve as the

highest HSSE decision-making body. This committee is responsible

for all aspects of internal control, including HSSE and compliance.

Matters discussed by the Risk Management Committee are all top

priorities for our business activities, which is why Group CEO

Tsuyoshi Kameoka chairs this committee and reports important

Oil products are indispensable to our daily lives. To maintain a consistent supply of these products, it is essential to procure a

stable supply of crude oil, manufacture quality products safely at refi neries, and then ensure that these products are transported

securely by tankers, trucks, and other means. Ensuring safe operations and a stable supply of oil products is our top priority.

Accordingly, we pursue heightened performance in terms of health, safety, security, and the environment (HSSE) through an

HSSE promotion system spearheaded by senior management.

Goal Zero0.8

1.01.2

1.4

1.71.8

2010 2011 2012 2013 20152014

2.0

1.5

1.0

0.5

0

Total Recordable Case Frequency

Incident rates (%) per 1 million labor hoursFigures include Showa Shell Group companies and business partners, and recordable cases of all occupational accidents, including those that do not result in lost work days.

Commitment to HSSEThere is no doubt that every company positions HSSE and compliance as a top priority in its corporate activities. Most important here,

however, is to pour its heart and soul into such efforts.

Showa Shell, of course, has systems in place to promote the various activities. Moreover, the entire

executive team, including myself, is always conscious of HSSE and compliance, and reminds employees that

these two issues are our top priority whenever we speak to them. For example, at our periodic Town Hall

Meetings held to explain the Company’s performance and business strategies to our employees nationwide,

we always begin with discussions of HSSE and compliance matters, including any accidents that have

occurred. We pay special attention to accidents due to their potential to impede a stable supply. In

executive meetings held at the start of each week, we receive reports on all accidents that occurred during

the previous week, regardless of the scale of the accidents. Based on these reports, we share information on

the causes of the accidents and possible measures with the relevant divisions and operating sites to raise

caution levels. This high consciousness and strenuous effort set the foundations for Showa Shell’s stable

supply of oil products, and we intend to build upon such initiatives going forward.

matters discussed to the Board of Directors. Under the Risk

Management Committee, there are three subcommittees devoted to

specifi c areas of discussion, and members of these subcommittees

include leaders of departments in the Showa Shell head offi ce. In

addition, there are site-level teams at individual worksites and divisions.

Total Recordable Case FrequencyIn 2015, the total recordable case frequency, which represents the

rate of incidents per 1 million labor hours, rose to 1.2, up 0.4

percentage point year on year. Nonetheless, we remain fi rmly

committed to reducing this fi gure to zero. We will therefore

continue to advance Groupwide safety education and promotion

activities through the Goal Zero Movement while conducting

in-depth reviews of all accidents that result in lost work days. The

precautionary measures developed based on these reviews will be

deployed throughout the Group.

Tsuyoshi KameokaRepresentative Director,President, Group CEO

Company level

Site level

Risk Manage-ment Committee

Chair:Group CEO

Product Safety Sub-Committee

Discusses the overall safety of products, from development to disposal, to ensure that the Company’s products do not have a negative impact on users, their property, or the environment, either in their handling, use, or after use.

Showa Shell Group HSSE Conference

Follows the Basic Policy for HSSE and discusses matters pertaining to the formulation of HSSE plans, progress monitoring, and performance reviews for the entire Showa Shell Group.

Security Liaison Committee Meeting (SLCM)

Discusses guidelines, policies, and proposals regarding security (crisis management).

Safety and Hygiene Committees (At all work sites)

HSSE Conference(Each workplace / offi ce)

Reports


Show Shell manufactures oil products at the Group’s three

refi neries: Keihin Refi nery, Yokkaichi Refi nery, and Yamaguchi

Refi nery. These refi neries employ an HSSE management system

(HSSE-MS)* through which they implement comprehensive and

continuous safety improvement measures. At worksites, we also

advance activities to share information about near-misses, a series

of activities for encouraging employees to take steps to prevent the

actualization of risks present in one’s everyday work that have the

potential to cause serious accidents or other incidents. In regard to

quality, the refi neries have instated various thoroughly managed,

product quality-related workfl ow procedures and have acquired

certifi cations from third-party institutions. These certifi cations include

the JIS mark and certifi cation under the ISO 9001 international

quality management standard.

To prepare for natural disasters, we hold comprehensive

disaster drills in cooperation with business partners and government

organizations. These drills prepare employees for large-scale

earthquakes, tsunamis, and other disasters. In addition, oil clean-up

drills are used to train employees on how to respond in the event

of a major oil leak. Conducting such drills on an ongoing basis

enhances employees’ response skills and enables us to periodically

revise and improve our systems to ensure the safety of operations

even under extreme circumstances.

* The comprehensive HSSE-related risk management system adopted by the Group

Initiatives at Group Refi neries

In 2004, we began enhancing the inspection procedures

(inspection and screening systems) used by Showa Shell Group

inspectors in examining domestic shipping vessels chartered by the

Group to ensure their safety and soundness. Our ship inspection

methods include participation in the Ship Information Report

Exchange (SIRE) program of the Oil Companies International

Marine Forum (OCIMF) as well as adoption of the procedures

employed by Shell International Trading and Shipping Company

Limited (STASCO). Should an inspection uncover any safety-related

issues, the Company shall request corrective measures be taken

with regard to the vessel in question or prohibit the chartering of

the vessel.

For international shipping, we have participated in the SIRE

program since 1993 and only charter vessels that meet the safety

standards of STASCO. Furthermore, Group inspectors examine

time charter vessels that are frequently used by the Group to

directly confi rm their safety and soundness.

Transportation Division Initiatives—Sea Transport

Trucks used by the Group are equipped with leak prevention

devices as well as GPS for preventing shipment errors. In addition,

rules that must be followed to prevent accidents while in service

are compiled in the Driving Standards, and we work to ensure that

drivers are well trained and that vehicles are well maintained. In

addition, we implement the Safety & Quality First (SQF) campaign

to promote safety and quality assurance throughout the Group and

among contract dealers and business partners. Through this

campaign, we ensure strict adherence to safety and quality

confi rmation procedures and other basic measures, thereby

working to reduce the number of accidents involving trucks.

Transportation Division Initiatives—Ground Transport

Detailed data and other initiatives can be found in CSR Book 2016.


ENVIRONMENTAL PRESERVATION AND R&D VENTURESShowa Shell strives to maintain an understanding of how its business activities as an energy company contribute to climate

change risks and otherwise impact the environment. We then work to reduce our environmental footprint by acting in accordance

with our Medium-Term Environmental Action Plan. We also go a step further by working to contribute to the realization of a

sustainable society through our energy company operations by developing products that help reduce the burden placed on the

environment and promoting the spread of renewable energy.

Structure for Promoting Environmental Preservation and Medium-Term Environmental Action PlanShowa Shell has formulated its Environmental Preservation

Guidelines in accordance with the Basic Policy for Health, Safety,

Security and the Environment. Based on these guidelines and the

guidance of the HSSE Division, Group companies employ and

operate an HSSE-MS to improve environmental performance on a

continuous basis. In addition, refi neries and other worksites with

large environmental footprints have acquired certifi cation under the

ISO 14001 international environmental management system

standard. The combined footprint of the worksites that hold this

certifi cation accounts for 99% of the total environmental impact

from all work sites. Moreover, to perform focused and systematic

management of our concerted Group efforts to protect the

environment, we formulated the Medium-Term Environmental Action

Plan based on the approval of the Risk Management Committee.

This plan covered the period from 2013 to 2015 and was

concluded with all of its goals met. A new plan was thus

established for the period from 2016 to 2018. This plan defi nes

targets for water usage, an area in which the Company is

expected to enact responsible measures, as well as for the supply

of biomass power and other forms of renewable energy. These

goals will be pursued over the medium term.

Review of 2013–2015 Medium-Term Environmental Action Plan

Environmental strategy Activity themes Medium-term objectives Review

Compliance

Promoting energy conserva-tion and global warming prevention

Reduce medium- to long- term unit energy consumption of more than 1% annually on average, based on the Energy Conservation Act* ：Achieved

Participate in the petroleum industry’s Low-Carbon Society Implementation Plan until fi scal 2020 (Refi nery energy saving policy [total crude oil equivalent savings of 530 megaliters per year within the industry], usage of ETBE bio-fuels [500 megaliters of crude oil equivalent for the industry in 2017])

： Introduced highly effi cient equipment and produced and sold ETBE compound biofu-els, as planned

Conserve energy and reduce consumption of resources in offi ces under the ECO TRY 21 campaign (Management of temperature and lighting, Cool Biz, turning off PC monitors, reduced printing)

： Promoted electricity conservation (lighting, PCs) and paperless operations

Preventing environmental pollution and reducing waste

Achieve zero emissions at Group refi neries (An industrial waste output rate of 1%or less)

： Maintained industrial waste output rate of less than 1%

Promote soil and groundwater contamination countermeasures (Surveys at time of change in land development, preventive measures against groundwater pollution)

： Instituted measures when conducting land development

Strengthen chemical substance management (Reduce use and storage of regulated chemicals) ：Periodically conducted inspections

CSR

Promoting environmental preservation activities and environmental communication

Present opportunities for stakeholders to think about the environment (Environmental Photo Contest, “Things to Preserve and Correct around Our Town”) ：Held photo contest (11th)

Promote environmental preservation projects conducted cooperatively with employees and local communities (Area clean-up activities around various work sites)

： Promoted projects at refi neries and worksites

Promote the environmental sciences, provide energy education program, Niigata Yukigunigata Megasolar Power Plant tours

： Held participatory learning opportunities for students

BusinessOffering eco-friendlyproducts and services

Expand use and sales of CIS thin-fi lm solar modules ： Completed Tohoku Plant and constructed megasolar power plants in Japan and overseas

Popularize gas to GTL fuels, which do not emit sulfur oxide (SOx) ：Sold Shell Heat Clean

Detailed information on the review can be found in CSR Book 2016.

The Basic Policy for Health, Safety, Security and the Environment can be found on the Company’s website.http://www.showa-shell.co.jp/english/profi le/mp/hsse.html


2016–2018 Medium-Term Environmental Action Plan

Important Areas for Reducing Environmental FootprintThe majority of the environmental impacts from Showa Shell’s

business can be attributed to either the oil product manufacturing

processes at Group refi neries,* where all crude oil refi ning is

conducted, or the consumption of oil products by customers. These

two areas are therefore important in reducing our environmental

footprint. To lower the impact from Group refi neries, we are

making capital investments related to environmental preservation

and instituting energy-saving measures. In regard to consumption,

we are reducing environmental impacts by promoting the use of

eco-friendly oil products and solar modules. This corporate report

contains information on such efforts, with particular focus placed

on initiatives at Group refi neries.

* Keihin Refi nery, Yokkaichi Refi nery, and Yamaguchi Refi nery

Water UsageShowa Shell manufacturing plants and other worksites use water in

their operations, almost all of which is seawater primarily used to

cool power generation facilities at refi neries.

In addition, Showa Shell tracks the volumes of fresh water used

(industrial water, underground water, and tap water) by work site.

The majority of fresh water used is the industrial water used at

Group refi neries. The industrial water is used at refi neries for

cooling purposes during various refi ning processes and is also

injected into boilers via deionizers to generate the high-pressure

steam that serves as a heat source for moving generator turbines

and other processes. A portion of this steam is re-condensed into

water to be reused in boilers. The cooling equipment used in

refi ning processes also employs systems for reusing water in order

to reduce the overall usage of industrial water.

Industrial water used in refi ning processes is treated through

wastewater purifi cation, either via oil separators, chemical

treatment using fl occulating agents, or the use of activated sludge

treatment equipment. In this way, we ensure that wastewater meets

environmental regulations related to chemical oxygen demand

(COD) and oil content before it is expelled.

Furthermore, the new Medium-Term Environmental Action Plan

that began in 2016 contains goals aimed at realizing the

sustainable use of water resources, and the Group will band

together in its ongoing quest to monitor water use at refi neries and

other worksites and optimize usage practices.

Atmospheric Pollution PreventionThe Group seeks to reduce emissions of sulfur oxides (SOx) and

nitrogen oxides (NOx), which are produced by fuel oils and

gases in refi nery furnaces and boilers. The Group strictly

maintains SOx emissions below regulated levels by using low-

sulfur fuel oil and sulfur-free fuel gas treated with gas-cleaning

equipment. Efforts to prevent atmospheric pollution by NOx

emissions include improved combustion methods achieved

through the introduction of low NOx burners and the installation

of fl ue gas denitration equipment. Through these efforts, we are

working to prevent atmospheric pollution.

Environmental strategy Activity themes Medium-term objectives

Compliance

Promoting energy conser-vation and global warming prevention

Reduce medium- to long-term unit energy consumption by more than 1% annually on average, based on the Energy Conservation Act

Participate in the petroleum industry’s Action Plan for a Low-Carbon Society, leading up until fi scal 2020 (refi nery energy-saving policy [total crude oil equivalent savings of 530 megaliters per year within the industry], usage of ETBE biofuels [500 megaliters of crude oil equivalent for the industry in 2017])

Conserve energy and reduce consumption of resources in offi ces under the ECO TRY 21 campaign (Management of temperature and lighting, Cool Biz, reduced printing)

Preventing environmental pollution and reducing waste

Achieve zero emissions at Group refi neries (An industrial waste output rate of 1% or less)

Promote soil and groundwater contamination countermeasures (Surveys at time of land development, preventive measures against groundwater pollution)

Strengthen chemical substance management (Reduce use and storage of regulated chemicals)

CSR

Promoting environmental preservation activities and environmental communication

Present opportunities for stakeholders to think about the environment (Environmental Photo Contest, energy education program, Niigata Yukigunigata Megasolar Power Plant tours)

Promote environmental and biodiversity preservation projects conducted cooperatively between employees and local communities(Participation in cleanup activities and forest and sea preservation activities around worksites)

Contribute to the realization of a sustainable water environment (water usage monitoring and optimization)

BusinessOffer eco-friendly products and services

Expand the use and sale of CIS thin-fi lm solar modules

Supply renewable energy (megasolar and biomass power generation)


Industrial Waste ReductionThe Showa Shell Group tracks industrial waste production volumes

at its 16 manufacturing plants. In 2015, the total volume of waste

produced was 53,238 tons, of which 80%, or 42,607 tons, was

from Group refi neries (primarily disposable catalysts from

desulfurization, reforming, and other refi ning processes; sludge

from cleaning tanks; and sludge retrieved from wastewater

treatment equipment). In the Medium-Term Environmental Action

Plan, we have defi ned our goal of achieving zero emissions,

meaning an industrial waste output rate of 1% or less. This goal is

being pursued by reducing and detoxifying waste from refi neries

through intermediate treatment, such as combustion, dehydration,

and dissolution, and actively recycling waste for use as raw

materials for cement or other applications. In 2015, industrial

waste output was 32 tons, or 0.08% of total waste, and with this

result, we successfully achieved our goal, and have continued to

do so since 2008.

Energy ConservationThe Group emits large quantities of greenhouse gases from energy

use during the process of manufacturing oil products, namely the

consumption of purchased electricity and fuel for in-house

generation. We therefore track the volume of CO2 emitted through

fuel usage across all areas of the supply chain, from raw material

procurement to product sales. In 2015, total CO2 emissions

amounted to 6,009,000 t-CO2, of which 84%, or 5,068,000

t-CO2, was emitted by Group refi neries. For this reason, we

position energy conversation measures at refi neries as a high

priority for preventing climate change.

The Petroleum Association of Japan’s Action Plan for a

Low-Carbon Society sets the target of realizing a total reduction in

energy use among all companies in the association of 530,000

KL (crude oil equivalent) by fi scal 2020. Showa Shell is

participating in this plan, as stipulated by the Medium-Term

Environmental Action Plan, which defi nes specifi c targets for the

Company. Based on this plan, we are advancing energy

conservation measures, which include investing in equipment such

as heat exchangers, waste heat recovery boilers, and exhaust gas

recycling equipment while also pursuing the optimization of refi ning

facility operations.

Furthermore, the Medium-Term Environmental Action Plan

prescribes measures targeting reductions in unit energy

consumption (kiloliters of crude oil equivalent ÷ megaliters of

refi ned crude oil and feedstock) of more than 1% annually on

average over the medium to long term, as mandated by the Act on

the Rational Use of Energy. In 2015, unit energy consumption at

Group refi neries was 7.46, meaning that we more than achieved

the targeted 1% average annual reduction.

In addition to the CO2 emitted from energy usage at

refi neries, manufacturing processes release emissions of other

greenhouse gases regulated under the Act on Promotion of Global

Warming Countermeasures, namely CO2, methane (CH4), nitrous

oxide (N2O), and sulfur hexafl uoride (SF6). We track emissions of

these gases for each refi nery and report the resulting fi gures to the

appropriate authorities.

2,000

1,800

1,600

1,400

1,200

1,000

800

600

400

200

0

5.0

4.0

3.0

2.0

1.0

02007 2008 2009 2010 2011 2012 2013 2014 2015

0.08% 32

Amount and Rate of Final Industrial Waste Outputfrom Group Refi neries(Tons/Year) (Waste output rate)

Waste output amount Waste output rate

Detailed data on environmental and biodiversity initiatives conducted outside of refi neries can be found in CSR Book 2016.

Detailed information on initiatives at Keihin Refi nery of Toa Oil Co., Ltd.; Yokkaichi Refi nery of Showa Yokkaichi Sekiyu Co., Ltd.; and Yamaguchi Refi nery of Seibu Oil Co., Ltd. conducted in 2015 can be found on the websites for each company (Japanese only).

(Kilotons/Year) (Unit energy consumption)

15,000

12,000

9,000

6,000

3,000

0

12.00

10.00

8.00

6.00

4.00

1990 2007 2008 2009 2010 2011 2012 2013 20152014

5,068

7.46

8.53

3,965

10.19

9.45

CO2 Emissions and Unit Energy Consumptionat Group Refi neries

CO2 emissions Unit energy consumption (Industrywide) (Right axis)Unit energy consumption (Showa Shell) (Right axis)

Zero emissions achieved at refi neries industrywide(Waste output rate of 1% or less)

Final waste output 32 tons/ Waste output amount

42,607 tons = Final disposal ratio 0.08%


•CO2 emissions 540 thousand t-CO2

•CO2 emissions 5,068 thousand t-CO2

•Total waste 42,607 t•Sulfur oxides (SOx) 3,018 t•Nitrogen oxides (NOx) 2,262 t•Soot dust 135 t•Wastewater 171,772 thousand t

* Calculated based on annual production capacity of solar module plants(450 MW for 2012, 900 MW for 2013 onward) with the usable life of solar modules set at 20 years and the volume of CO2 emission reductions per module per year set at 524 g-CO2/kWh (from Voluntary Industry Rules Related to Indication [Fiscal 2014 edition], Japan Photovoltaic Energy Association).

OFFSET2015 carbon offset volume of aggregate OFFSET total of solar modules produced as of December 31, 2015 Approx. 2,000,000 t-CO2*

Showa Shell Total Adverse Environmental Impact for 2015

OUT

OUT

•CO2 emissions 178 thousand t-CO2

•Total waste 10,631 t•Wastewater 3,906 thousand t

OUT

•CO2 emissions 170 thousand t-CO2OUT

•CO2 emissions 53 thousand t-CO2OUT

•CO2 emissions 70,466 thousand t-CO2OUT

IN

IN

•Energy 7,550 TJ (crude oil equivalent) 195 thousand KL

•Energy 71,970 TJ (crude oil equivalent) 1,857 thousand KL•General-use water 138,733 thousand KL•Seawater 32,866 thousand KL•Tap water 173 thousand KL

IN

•Energy 2,973 TJ (crude oil equivalent) 77 thousand KL•General-use water 1,800 thousand KL•Seawater 116 thousand KL•Tap water 1,990 thousand KL

IN•Energy 2,460 TJ (crude oil equivalent) 63 thousand KL

IN•Energy 1,606 TJ (crude oil equivalent) 41 thousand KL

IN

•Gasoline 8,699 thousand KL•Jet fuel 1,794 thousand KL•Kerosene 2,625 thousand KL•Diesel oil 5,366 thousand KL•Heavy fuel oil 3,081 thousand KL•Other oil products 6,588 thousand KL

Manufacturing plants(refi neries)

Other manufacturing plants(for asphalt, lubricants, LPG, petrochemical

products, solar modules, etc.)

MarketingService stations

(approx. 3,200 stations)

Product transportation and storageOil depots, ground and sea transport of oil

products and solar modules, etc.

Consumption(usage of oil products by customers)

Procurement and transport(primarily crude oil)


R&D activities for the Oil Business and the Energy Solutions

Business (solar business) are conducted at the Group’s Central

Research Laboratory and Atsugi Research Center. We aim to fuel

long-term improvements in corporate value through the development

of next-generation energy sources and high-value-added products

that respond to customer needs and provide superior environmental

performance.

High-Value-Added Oil Product DevelopmentAs part of the Shell Group’s R&D network, the Central Research

Laboratory is creating systems for cutting-edge product development

by exchanging human resources and conducting joint-development

with R&D centers in the United States and Germany as well as the

Shanghai center established in 2014. While pursuing coordination

between the refi ning, supply, distribution, and sales divisions, the

Company is fully leveraging the technologies it has created through

collaboration with the Shell Group to develop lubricants, grease,

asphalt, fuel, and other oil products that respond to customer needs

and provide superior environmental performance. In 2015, we

accelerated our efforts to develop energy-saving, long-lasting

lubricants using highly functional synthesized base oil that employs

the Shell Group’s gas to liquids (GTL) technologies, and create

fuel-saving engine oil and gear oil. We also succeeded in developing

asphalt that is eco-friendly and signifi cantly easier to apply.

Next-Generation Energy DevelopmentAt the Central Research Laboratory, we are actively allocating

management resources to R&D ventures aimed at developing

next-generation energy sources, focusing on social issues, such as

the environment, and the future needs of customers. We are

collaborating with universities and exchanging information with the

Shell Group with the goal of developing a technology for using

nonedible biomass to manufacture low-cost biofuel that emits

minimal amounts of CO2. The Company is also researching

artifi cial photosynthesis, a process that uses sunlight to create

benefi cial chemical substances from water and CO2.

R&D Activities in the Energy Solutions Business (Solar Business)

Solar Frontier’s Atsugi Research Center is advancing cutting-edge

R&D activities related to CIS thin-fi lm solar modules, striving to

improve energy conversion effi ciency at both the research and

mass-production stages. We are also proceeding with the

development of new, state-of-the-art products with the potential to

open up new markets.

Bendable Modules Creating New Possibilitiesfor Solar Power

Solar Frontier’s bendable solar modules utilize the unique

characteristics of CIS thin-fi lm solar module technologies that

cannot be followed by conventional crystalline silicon module

technologies. For example, compared to standard modules, a

bendable and thin metal substrate is applied instead of the glass

substrate, the cover glass is replaced with a high-performance resin

fi lm cover, and the frames are removed. As a result, the bendable

solar modules weigh one-third less than standard modules, are ultrathin

at only 1.5mm, and can be installed on curved surfaces. The ability

to build these modules into various structures is expected to lead to

wider applications, and CIS thin-fi lm solar modules are thus thought

to have big potential for creating new solar power markets.

Central Research Laboratory (Kanagawa Prefecture)

Atsugi Research Center

R&D Activities

2008 2009 2010 2011 2012 2013 20152014

6.0

4.5

3.0

1.5

0

4.7

2.62.2

5.0

5.8

4.34.6

5.6

(Yen Billion)

Trends in R&D CostsIncrease due to the expanding size of the solar business

Artifi cial Photosynthesis Process

Bendable solar module prototype installed on new distribution terminal building in Singapore on trial basis, in June 2015

Photoelectrode Reducing electrode

Sunlight

O2, etc. H2, hydrocarbons, etc.

H2O CO2


STRENGTHENING OFHUMAN RESOURCESThe people that implement management strategies are the most important resource in Showa Shell’s ongoing quest to respond to

society’s energy needs as a pioneer in its fi eld. Showa Shell’s Talent Vision defi nes the credo and behavioral guidelines to which we

expect employees to adhere. Based on this vision, we are strengthening human resources and developing a comfortable workplace

environment with the aim of maximizing the potential of all employees, who possess a diverse range of skills and capabilities.

Talent Vision and Education SystemsShowa Shell established the Talent Vision in 2011, which defi nes

the type of human resources needed by Showa Shell, and we are

constantly working to strengthen human resources in accordance

with this vision. Specifi cally, we have restructured our employee

education systems and revised employee evaluation frameworks. The

three pillars of the Talent Vision are Initiative, Outbound, and Team

Spirit. These are the characteristics we intend for our employees to

share, regardless of age, qualifi cations, or position. Aiming to cultivate

the type of employees described by the Talent Vision, we have

developed education systems based on the following three

development areas: development of competency and way of

thinking, development of professional talent, and improvement of

adaptability to a global business environment. The education systems

contain a variety of programs designed to help employees more

actively work to acquire the skills that will be necessary for their

individual career paths. Programs include seminars for specifi c

business fi elds, such as crude oil procurement, refi ning, logistics,

legal affairs, and IT, which are held on a Groupwide basis, spanning

division boundaries to allow any employee to develop specialized

skills. We also offer training arranged based on the number of years

worked and current position, such as junior employees in their fi rst

three years, mid-level employees, and managers, as well as voluntary

training. Furthermore, in 2015 we deployed numerous initiatives

with the aim of helping new employees come to embody the Talent

Vision soon after they join the Company. These initiatives include

systematizing new employee training, fi rst-year employee training,

and mentor training programs and enhanced problem-solving skills

training programs.

2011 2012 2013 2014 2015

200

150

100

50

0

(Yen Million)

Investment in Training (Non-Consolidated Basis)

Education Systems

GMs

Managers

Mid-Level Employees

Junior Employees (1–3 Years)

Pre-Employment

Development of Competency and Way of Thinking

HR Division

Training Programs for General Managers

Basic Management Training

Leadership Training

Training before Joining

Advanced Courses by Business Segment

Basic Courses byHR Division

Studying Abroad Program

Basic Leadership Training

Training Programs for New Managers, MBO, and Managers

Training Programs for New Graduates and Based on Number

of Years at the Company

Business Segments HR Division & Business Segments Test Support for

Self-Education

Development of Professional Talent Improvement of Adaptability to Global Business Environment Other

Elective Domestic Off-Site Training Specialized

Skill Development Courses by Business Segment

Support for Specialized

Skill Development

Courses Outside of the

Company

Shell Overseas Training

Elective Overseas Off-Site Training

TOEIC Test (Offered

Companywide)

Correspondence Education /

English Trainingby Schooling

Talent Vision Realizationof the Talent

Vision

Initiative

Outbound Team Spirit


Employee Opinion SurveysEmployee opinion surveys are instituted each year. These surveys

include questions related to issues with management or particular

divisions and improving workplace environments. In 2015, the

survey response rate*1 was 95.6%. The results indicated

improvement with regard to the three prioritized items described to

the right, whose improvement had been positioned as an issue to

be tackled by the entire Company during 2015. We have been

advancing projects for transforming our corporate culture and

reforming workfl ow processes since 2013, and we feel that the

aforementioned improvements can be attributed to these projects.

Moreover, the results of surveys are relayed back to each division

and, under the guidance of division heads, are utilized in

uncovering and improving issues at individual worksites.

Respect for Human RightsShowa Shell’s Code of Conduct requires us to conduct business as a

responsible member of society, observe laws, and respect fundamental

human rights. We respect the human rights of our employees and of

all our other stakeholders. We adhere to international labor standards,

such as those forbidding child labor, and promote initiatives to

create opportunities for fair and impartial treatment, eliminating

discrimination on many fronts: from hiring, transfers, treatment, and

educational opportunities to retirement. As a hiring initiative and in

accordance with the Policy for Diversity and Inclusiveness, we hire

employees based on their compatibility with the Talent Vision,

regardless of their nationality, gender, or disability status.

Discussions with Labor UnionsWe engage in discussions with our labor unions on a regular basis.

These discussions are held on a variety of themes, including

management issues, workplace culture, workfl ow improvement, and

work-life balance. Through intensive discussions, we exchange opinions

regarding issues faced by management and employees, consider

possible solutions, and otherwise seek out ways of creating a

workplace environment in which all employees can utilize their skills

to the fullest extent. The results of such discussions are emailed to all

employees, and these results can also be viewed on our intranet.

Reemployment of People Retiring at Retirement AgeWe have in place a reemployment system for reemploying ambitious

and capable people aged 60 and over, putting the knowledge and

expertise they have accumulated over the course of their careers to

good use. In 2015, 72.1% of employees that retired after reaching

the regular retirement age of 60 expressed the desire for reemployment.

Employment of Differently Abled PeopleWe are actively developing a workplace environment in which

differently abled people can work to their fullest. As of December

31, 2015, differently abled employees represented 2.0% of

employees (non-consolidated), a level that satisfi es the minimal

legally mandated requirement. Going forward, we will continue

to provide employment opportunities for a diverse range of

individuals.

Employment Statistics (Non-Consolidated Basis)As of December 31, 2015

Number of employees 808

Percentage of employees that are female 22.8%

Percentage of employees with disabilities 2.0%

Number of managers (including executives) 206

Percentage of managers that are female 4.4%

Average age 44.0 years old

Average length of employment 19.9 years

Hiring Statistics (Non-Consolidated Basis)As of December 31, 2015

Number of new graduates hired in 2015 20

Women among new graduates hired over past 5 years 29%

Non-Japanese among new graduates hired over past 5 years 6%New graduate retention rate (percentage of new graduates hired in April 2012 that were still employed in April 2015)

100%

Number of mid-career personnel hired in 2015 4

*1 Employee opinion survey response rates: 95.3% in 2014; 95.6% in 2015*2 Increase in ratio of employees choosing “conditions favorable” from three response

choices (“conditions favorable,” “no strong feeling,” and “conditions unfavorable”)

(1) Collaboration that spreads across departmental boundaries

63%55%20152014

+8 percentage points*2

(2) Improvement of workflow processes

70%57%20152014


(3) Learning from the successes of other employees and companies

71%48%20152014


Employee Opinion Survey: Improvement in Prioritized Items


Systems to Promote Work-Life BalanceThe Company is committed to establishing a workplace environment

that enables all employees to fully utilize their skills, and we supply a

range of support programs that exceeds legally required levels. In

2008, we introduced a telecommuting system. In 2014, we

expanded the scope of our fl extime system to make it available to

employees working shortened hours for childcare or nursing care

purposes in addition to employees working regular hours. The goal

of this change was to provide an environment that facilitates more

fl exible work styles. To promote the usage of under-used programs

going forward, we will continue to improve the programs themselves

while also cultivating a corporate culture their use is more acceptable.

Work-Life Balance Support Systems and Usage NumbersFigures in parentheses indicate number of men.

2013 2014 2015

Childcare or nursing care leave 23 (3) 20 (2) 40 (2)

Shortened working hours for child-care or nursing care 9 (1) 13 (1) 17 (1)

Leave to care for a sick child 35 (19) 41 (22) 34 (15)

Family care leave of absence 23 (11) 20 (13) 13 (8)

Telecommuting 4 (0) 4 (0) 5 (0)

Self-development leave of absence 3 (0) 2 (0) 4 (1)

The Policy for Diversity and Inclusiveness can be viewed at the following website:http://www.showa-shell.co.jp/english/profi le/mp/D_and_I.html

First Showa Shell Women’s Network Meeting

Showa Shell Women’s Network

Showa Shell has been striving to create a comfortable workplace environment in which all employees can fully exercise their skills. Prior

to the 1991 enactment of the Ordinance for Enforcement of the Act on Childcare Leave, Caregiver Leave, and Other Measures for the

Welfare of Workers Caring for Children or Other Family Members, the Company had introduced a childcare leave system and various

other systems for supporting work-life balance, and in 2002, the Company formulated the Policy for Diversity, which was later replaced

with the Policy for Diversity and Inclusiveness. In addition, a survey of all female employees was conducted in October 2014 to be

used in establishing measures for supporting female employees in their medium- to long-term career development, and 95.3% of

applicable employees responded. After analyzing and examining the results of this survey, we developed four priority action plans that

set forth initiatives for further empowering female employees. Later, in October 2015, we formed the Showa Shell Women’s Network

as an internal organization to advance the priority action plans and since then, we have implemented various initiatives.

During Phase 1 of the Showa Shell Women’s Network’s activities, for female employees, we held subcommittee meetings for

discussing themes of importance to female employees, such as balancing work and child-rearing and improving mindset, together

with female managers. Lectures by female offi cers were also conducted. Anyone could voluntarily attend all of these assemblies.

Roughly 50% of female employees took part in these activities. A survey conducted after these assemblies indicated that almost all

participants felt that the gatherings were incredibly meaningful, demonstrating that these activities served as an opportunity for

participants to cultivate an positive mindset and fi nd something new.

In February 2016, we held the First Showa Shell Women’s

Network Meeting. A panel consisting of female managers as well as

eight members of senior management, including Group CEO Tsuyoshi

Kameoka, participated in this meeting, reviewing the activities of Phase

1 while drafting activity plans for Phase 2. Through an active exchange

of opinion, it was decided that Phase 2 should include Companywide

activities for both female and male employees and that senior management

should continue to proactively support these activities. Currently, Phase 2

initiatives are under way.

Four Priority Action Plans Overview of Showa Shell Women’s Network Activities

• Female employee development programs

• Networking initiatives

• Flexible workstyle promotion

• Empowering corporate culture cultivation

Phase 1 (Oct.–Dec. 2015): Activities targeting female employees (subcommit-tees, lectures, etc.)

Phase 2 (Feb. 2016–Present): Expansion of Phase 1 activities and advance-ment of Companywide activities (male and female employees)

First Showa Shell Women’s Network Meeting (Feb. 2016)


Showa Shell SekiyuEnvironmental Photo Contest

2015Shell Art Award 2015 The 11th “Things to Preserve and Correct around Our Town”

Environmental Photo ContestThe Shell Art Award is an art contest that was fi rst held in 1956 with the aim of discovering young artists capable of shaping the next generation of their medium. Young artists under the age of 40 are able to apply to this open competition, which has been held a total of 44 times.

This environmental photo contest is held as an educational event designed to provide children with an opportunity to think about environmental preservation and act responsibly based on the scenery and sights they see around them. Beginning in 2015, this contest includes divisions for elementary school, junior high school, high school, and vocational school students.

COMMUNITY AND SOCIAL CONTRIBUTION ACTIVITIESShowa Shell conducts environmental preservation and international community support activities

with an emphasis on supporting the education of the children and youths who will eventually be

responsible for shaping the future of society. Through these efforts, we are working to provide a

different type of energy to local communities and society as a whole. Based on this policy, we

conducted a robust program of community and social contribution activities in 2015.

Details on community and social contribution activities and other activities conducted in 2015 can be found in CSR Book 2016.

Provision of Offi ce Space for Refugees International JapanShowa Shell and Shell Chemicals Japan have been providing support in the form of free offi ce space to Refugees International Japan (RIJ), an NPO dedicated to raising funds to assist refugees, since its inception in 1979.

Jointly Held Energy Sustainability ForumTogether with the Integrated Research System for Sustainability Science (IR3S), operated by the University of Tokyo, Showa Shell held the 11th Energy Sustainability Forum public symposium based on the theme of creating an ecologically sound society by combining efforts related to energy, resources, and the environment.

Teruha no Mori Ongaeshi Forest Support ProjectSolar Frontier employees participate in the thinning of Japanese cedar (Cryptomeria japonica) and cypress (Chamaecyparis obtusa) trees that have been introduced into the Aya no Shoyo Jurin Forest located in Miyazaki Prefecture, northwest of the Kunitomi Plant solar module manufacturing facility. These activities are conducted to allow greater amounts of sunlight to enter the forest, thereby stimulating natural growth and helping the Aya no Shoyo Jurin Forest grow even lusher.

Participation in TABLE FOR TWO Cafeteria Charity ProgramThrough TABLE FOR TWO International, a portion of the price paid for applicable meals purchased at employee cafeterias is donated to fund school lunch programs for children in developing countries.

Photograph provided by TABLE FOR TWO International

Support education for

next generation

Environmental Environmental preservation preservation

activitiesactivities

International International communitycommunity

supportsupportactivitiesactivities

Supporteducation for next

generation


generation


generation

Environmentalpreservation

activities


activities


activities

International community

support activities

International community

support activities


Financial Section and Corporate Data

48 Twelve-Year Summary of Selected Financial Data

50 Management’s Analysis of Financial Position and

Operating Results

54 Business Risks

56 Consolidated Financial Statements

61 Notes to the Consolidated Financial Statements

78 Independent Auditor’s Report

79 Operations Data

80 Network

82 Major Subsidiaries and Affi liates

83 Investor Information


Twelve-Year Summary of Selected Financial Data

Showa Shell Sekiyu K.K. and Consolidated SubsidiariesYears ended December 31

2015 2014 2013 2012For the year:

Net sales ¥2,177,625 ¥2,997,984 ¥2,953,808 ¥2,629,261Oil Business 2,049,935 2,850,218 2,803,041 2,539,754Energy Solutions Business 119,482 138,610 141,210 78,262Other 8,207 9,156 9,556 11,245

Cost of sales 2,078,535 2,890,430 2,744,530 2,481,144Gross profi t 99,089 107,554 209,278 148,117Selling, general and administrative expenses 111,298 125,611 133,847 133,419Operating income (loss) (12,209) (18,057) 75,430 14,697

Oil Business (3,812) (37,391) 56,114 28,128CCS operating income (Oil Business)*1 51,014 13,839 21,742 26,678Energy Solutions Business (10,191) 17,691 17,553 (15,435)Other and adjustments 1,794 1,642 1,763 2,004

Ordinary income (loss) (13,282) (16,723) 76,204 12,674CCS ordinary income (loss)*1 41,544 34,507 41,832 11,224Net income (loss) after taxes (27,467) (9,703) 60,295 1,013

At year-end:Total shareholders’ equity*2 ¥ 222,625 ¥ 272,052 ¥ 300,618 ¥ 249,826Total assets 957,665 1,176,282 1,295,831 1,233,193Net interest-bearing debt*3 138,915 164,417 192,358 247,552Depreciation and amortization 38,898 41,361 40,601 43,620Capital expenditures 32,342 29,313 25,011 20,987Capital employed*4 378,095 481,551 521,612 515,554

Cash fl ows:Cash fl ow from operating activities ¥ 74,819 ¥ 72,733 ¥ 95,133 ¥ 41,922Cash fl ow from investing activities (43,685) (28,151) (27,534) (17,747)Free cash fl ow*5 31,134 44,581 67,598 24,174Cash fl ow from fi nancing activities (56,182) (28,148) (57,193) (21,391)

Per share data:Net income (loss) after taxes per share (yen) ¥ (72.93) ¥ (25.76) ¥ 160.09 ¥ 2.69Total shareholders’ equity per share (yen) 591.10 722.33 798.17 663.33Dividends per share (yen) 38 38 36 18Payout ratio (%)*6 — — 38.3 224.9

Performance and fi nancial indicators:Return on sales (operating profi t basis) (%) (0.6)% (0.6)% 2.6% 0.6%Return on sales (net income basis) (%) (1.3) (0.3) 2.0 0.0Return on assets (%) (2.6) (0.8) 4.8 0.1Return on equity (%)*2, 7 (11.1) (3.4) 21.9 0.4Shareholders’ equity ratio (%)*2, 8 23.2 23.1 23.2 20.3Current ratio (%)*9 93.5 100.1 107.0 104.3Gearing ratio (%)*10 38.4 37.7 39.0 49.8Number of shares outstanding at year-end (thousand shares)*11 376,632 376,634 376,637 376,623

* 1. CCS income (Income on a Current Cost of Supply basis): Income based on costs excluding inventory valuation effects* 2. Total shareholders’ equity = Total net assets – Minority interests. The defi nition of “shareholders’ equity” was revised under the new Corporation Law in 2006, and “shareholders’ equity” under the new law excludes minority i

above are based on the new defi nition of “shareholders’ equity,” not including minority interests. “Return on equity” and “Shareholders’ equity ratio” are also calculated using these numbers.* 3. Net interest-bearing debt = Interest-bearing debt – Cash and deposits* 4. Capital employed = Total shareholders’ equity + Interest-bearing debt* 5. Free cash fl ow = Cash fl ows from operating activities + Cash fl ows from investing activities* 6. Payout ratio = Dividends per share/Net income per share (non-consolidated)* 7. Return on equity = Net income/Average total shareholders’ equity* 8. Shareholders’ equity ratio = Total shareholders’ equity/Total assets* 9. Current ratio = Total current assets/Total current liabilities*10. Gearing ratio = (Interest-bearing debt – Cash and deposits)/(Capital employed – Cash and deposits)*11. Treasury stock is excluded. The number of treasury stock includes Showa Shell Sekiyu stock held by affi liates accounted for by the equity method.


Yen Million

2011 2010 2009 2008 2007 2006 2005 2004

¥2,771,418 ¥2,346,081 ¥2,022,520 ¥3,272,801 ¥3,082,641 ¥2,921,287 ¥2,268,488 ¥1,839,445 2,695,278 2,304,019 — — — — — —

65,799 28,863 — — — — — —10,339 13,198 — — — — — —

2,582,339 2,183,535 1,956,623 3,161,950 2,874,422 2,728,137 2,056,023 1,665,978 189,078 162,545 65,896 110,851 208,219 193,149 212,465 173,466 128,790 125,844 123,038 123,134 119,405 118,847 114,084 113,280 60,288 36,701 (57,142) (12,283) 88,813 74,301 98,381 60,185 87,267 45,569 — — — — — —55,479 37,707 — — — — — —(28,895) (11,581) — — — — — —

1,917 2,713 — — — — — —61,807 42,148 (56,455) (10,065) 92,709 77,675 100,497 61,927 30,020 34,286 (11,691) 45,697 44,271 58,074 53,279 40,42623,110 15,956 (57,619) (16,221) 43,729 46,249 58,370 2,362

¥ 255,865 ¥ 240,204 ¥ 235,517 ¥ 306,813 ¥ 338,933 ¥ 309,411 ¥ 275,232 ¥ 226,955 1,208,442 1,193,149 1,172,739 1,209,956 1,339,114 1,195,015 1,145,191 905,823

262,800 280,108 275,837 206,363 166,655 173,881 162,180 106,229 43,329 33,949 35,277 31,239 26,708 27,329 23,979 24,653 39,559 81,733 49,933 37,606 23,617 32,540 17,442 12,408

534,228 541,256 533,590 586,290 522,068 499,939 467,063 341,738

¥ 50,551 ¥ 89,836 ¥ (7,395) ¥ 26,631 ¥ 44,796 ¥ 29,312 ¥ 25,806 ¥ 29,598 (24,560) (82,510) (47,761) (42,932) (25,687) (28,883) (28,548) (19,194)25,991 7,325 (55,156) (16,301) 19,108 429 (2,742) 10,403 (31,159) (8,671) 4,371 72,337 (21,029) (13,712) 20,725 (17,700)

¥ 61.36 ¥ 42.37 ¥ (152.99) ¥ (43.07) ¥ 116.12 ¥ 122.95 ¥ 155.31 ¥ 6.14 679.37 637.78 625.33 814.63 899.90 822.20 732.08 605.25

18 18 36 36 36 36 35 30 310.3 30.3 — — 29.8 32.4 24.5 355.5

2.2% 1.6% (2.8)% (0.4)% 2.9% 2.5% 4.4% 3.3%0.8 0.7 (2.8) (0.5) 1.4 1.6 2.6 0.1 1.9 1.3 (4.9) (1.3) 3.3 3.9 5.1 0.3 9.3 6.7 (21.2) (5.0) 13.5 15.8 23.2 1.0

21.2 20.1 20.1 25.4 25.3 25.9 24.0 25.1 103.2 90.2 83.0 95.4 102.3 95.9 91.0 83.8 50.7 53.8 53.9 40.2 33.0 36.0 37.1 31.9

376,624 376,625 376,627 376,630 376,633 376,323 375,863 374,868

nterests. Please note referred numbers


Management’s Analysis of Financial Position and Operating Results

Business EnvironmentIn 2015, despite some positive impacts from the depreciation of

the yen, economic expansion in Japan was stalled by a slowdown

in demand from China and other Asian countries and sluggish

private consumption.

The global crude oil market was once again subject to volatility

due to concerns around the demand and supply similarly driven by

factors such as Iran’s nuclear agreement with the international

community, sustained shale oil production in the Unite States and a

reduction in demand from China and other emerging economies.

As a result, the price of Dubai crude oil started the year at roughly

US$54/bbl, recovering to US$67/bbl in mid-May in response to

the situation in the Middle East and a drop in U.S. crude oil reserves.

The price returned to a declining trend as oil reserves in the United

States increased, fi nishing the fi scal year at US$32/bbl.

In the foreign exchange markets, the USD/JPY rate started the

year at around ¥120 and reached ¥125 in early August. Overall,

however, the rate remained relatively stable throughout the year,

entering 2016 at the ¥120 level again.

Operating ResultsConsolidated Statement of Income (Summary)Years ended December 31 Yen Billion

2015 2014 Change

Net sales 2,177.6 2,997.9 (820.3)

Operating income (loss) (12.2) (18.0) 5.8

Ordinary income (loss) (13.2) (16.7) 3.4

Net extraordinary income (loss) (8.0) 1.3 (9.3)

Net income (loss) after taxes (27.4) (9.7) (17.7)

Ordinary profi t excluding the effects of inventory valuation 41.5 34.5 7.0

Business Results for 2015

The Showa Shell Group reported consolidated net sales of

¥2,177.6 billion, a decrease of 27.4% year on year.

The Group reported an operating loss of ¥12.2 billion, an

improvement of ¥5.8 billion from the previous fi scal year, and an

ordinary loss of ¥13.2 billion, an improvement of ¥3.4 billion

year on year. These losses mainly refl ected inventory valuation

losses in the oil business due to the continued steep decline in

crude oil prices from the previous fi scal year, as well as the

contraction in domestic fuel oil margin attributable to the time lag

between the accounting cost excluding the impact of inventory

evaluation and the cost upon which fuel oil wholesale prices are

determined. CCS ordinary income (current cost of supply basis,

excluding the impact of inventory valuation) totaled ¥41.5 billion,

an increase of ¥7.0 billion from the previous fi scal year.

The Group reported net extraordinary loss of ¥8.0 billion, with

extraordinary losses, such as losses on the disposal of fi xed assets

and expenses relating to damage to a submarine pipeline at

Keihin Kawasaki sea berth, exceeding extraordinary income, such

as subsidy income and gain on changes in equity. There was a net

loss before taxes of ¥21.2 billion, a decline of ¥5.9 billion year

on year. As a result, net loss after taxes, corporation tax adjustments

and minority interests in income totaled ¥27.4 billion, a decrease

of ¥17.7 billion compared with the previous fi scal year.

Net Sales(Yen Billion)

Ordinary Income (Loss)(Yen Billion)

2,177.6

3,200

2,400

1,600

800

02011 2012 2013 2014 2015

41.5

-13.2

90

60

30

0

–302011 2012 2013 2014 2015

Ordinary income (loss) CCS ordinary income (loss)*

* CCS ordinary income (ordinary income on a Current Cost of Supply basis): Ordinary income based on costs excluding inventory valuation effects


Segment InformationNet Sales by Segment Yen Billion

Years ended December 31 2015 2014Oil Business 2,049.9 2,850.2 Energy Solutions Business 119.4 138.6 Other 8.2 9.1 Total 2,177.6 2,997.9

Operating Income (Loss) by Segment Yen Billion

Years ended December 31 2015 2014Oil Business (3.8) (37.3)Energy Solutions Business (10.1) 17.6 Other 1.7 1.6 Internal trade 0.0 0.0 Total (12.2) (18.0)

a) Oil BusinessThe oil business reported net sales of ¥2,049.9 billion, a decrease of

28.1% year on year, and an operating loss of ¥3.8 billion, an

improvement of ¥33.5 billion, refl ecting factors such as declines in

the prices of oil products due to the continued slide in crude oil

prices throughout the year as well as the resulting inventory valuation

losses. CCS ordinary income (current cost of supply basis, excluding

the impact of inventory valuation) totaled ¥51.0 billion, rising

signifi cantly by ¥37.1 billion compared with the previous fi scal year.

Several factors were behind the substantial year-on-year increase

in profi ts. These included the increase in comparatively high-value-

added fuel oil, such as gasoline, diesel oil, and kerosene; the

implementation of cost reductions; and the increase in oil product

exports, which all resulted from the positive effects of promoting

differentiated product and service strategies and activities to improve

competitiveness, as well as the improvement in oil product margins.

b) Energy Solutions BusinessIn the solar energy business, demand for new solar cells cooled in

Japan due to the signifi cant reduction in the electricity purchase price

under the renewable energy feed-in tariff scheme as well as to the

introduction of a new output control regulation by certain utility

Net Income (Loss) after Taxes per Share(Yen)

CCS Operating Income (Loss) by Segment(Yen Billion)

-72.93

200

100

0

‒100

‒2002011 2012 2013 2014 2015

90

60

30

0

‒302011 2012 2013 2014 2015

-10.1

42.651.0

Oil Business (CCS operating income*) Energy Solutions Business CCS operating income*

*CCS operating income (operating income on a Current Cost of Supply basis): Operating income based on costs excluding inventory valuation effects

companies. As a result, the selling price for solar modules declined.

While the Company reinforced domestic sales of household-use

solar modules, which have comparatively high profi tability and are

expecting solid demand in the future, the average unit selling price

for solar modules decreased due to the fact that the Company

increased the shipping ratio of solar modules for overseas markets,

which have relatively lower selling prices. The Company continued

full operations at its core Kunitomi Plant throughout most of the year

and worked to reduce module production and other costs. These

efforts had limited effect, however, and operating income saw a

signifi cant decline.

Turning to the electric power business, the Company maintained

the stable operation of its power plants and commenced commercial

operations at Keihin Biomass Plant in November ahead of schedule.

In addition, the Company moved forward with initiatives to optimize

its sales portfolio. These efforts allowed the Company to secure

stable operating income.

As a result of the above, net sales in the Energy Solutions

Business were ¥119.4 billion, down 13.8% year on year, and an

operating loss of ¥10.1 billion was recorded, a decrease of ¥27.8

billion year on year.


Total Net Assets / ROE(Yen Billion) (%)

Total Assets / ROA(Yen Billion) (%)

Total assets (left scale) ROA (right scale) Total net assets (left scale) ROE (right scale)

957.6

1,500

1,000

500

0

–500

12

8

4

0

‒42011 2012 2013 2014 2015

-2.6

243.3

360.0

240.0

120.0

0

–120.0

45

30

15

0

–152011 2012 2013 2014 2015

-11.1

Assets, Liabilities, and Net AssetsConsolidated Balance Sheets (Summary)

At December 31 2015 2014

Current assets 448.2 662.1

Property, plant and equipment 365.6 395.6

Intangible assets, investments, and other assets 143.7 118.5

Total assets 957.6 1,176.2

Total liabilities 714.3 879.9

(Interest-bearing debt) 155.4 209.4

Total net assets 243.3 296.3

(Total shareholders’ equity*) 222.6 272.0*Total shareholders’ equity = Total net assets – Minority interests

Consolidated total assets as of the end of the year were ¥957.6

billion, a decrease of ¥218.6 billion compared with the end of

the previous year. This was mainly attributable to the decrease in

accounts receivable and inventories, owing to the drop in the price

of crude oil and others. Consolidated net assets as of the end of

the year were ¥243.3 billion, a decrease of ¥52.9 billion

compared with the end of the previous year. This was mainly

attributable to dividend payments and the net loss.

Consolidated total liabilities were ¥714.3 billion, a decrease

of ¥165.6 billion compared with the end of the previous year.

This was mainly attributable to the decrease in accounts payable,

owing to the drop in price of crude oil. Interest-bearing debts

(borrowings, CP, and bonds) was ¥155.4 billion, a decrease of

¥54.0 billion compared with the end of the previous fi scal year.

As a result, shareholders’ equity ratio at the end of the year was

23.2%. Total shareholders’ equity per share based on the total

number of shares issued as of the end of the year was ¥591.1,

compared with ¥722.3 as of the previous year.

Fund-RaisingThe Group’s need for short-term fi nances is related primarily to the

purchase of raw materials and manufactured goods, as well as the

taxes that accompany these purchases. Long-term fi nance needs

are primarily related to capital expenditures for refi neries and solar

module manufacturing plants. The Company allocates cash fl ow

provided from operating activities to meet these fi nancial needs. As

for any remaining fi nancial needs not covered by this cash fl ow,

the Company procures funds through loans and bonds from

fi nancial institutions while giving comprehensive consideration to

the business environment and interest rate trends.

Financial Position

Yen Billion

c) Other BusinessOther business covers construction work, the sale of automobile

accessories, the leasing of Company-owned offi ce buildings, and

other businesses. In the fi scal year under review, the segment

reported net sales of ¥8.2 billion, a decrease of 10.4% year on

year, and an operating income of ¥1.7 billion, an increase of

¥0.1 billion.


Cash Flows Consolidated Statement of Cash Flows (Summary)

Years ended December 31 2015 2014

Cash fl ows from operating activities 74.8 72.7

Cash fl ows from investing activities (43.6) (28.1)

Cash fl ows from fi nancing activities (56.1) (28.1)

Change in cash and cash equivalents (25.0) 16.4

Cash and cash equivalents at beginning of year 43.8 27.4

Cash and cash equivalents at end of year 15.3 43.8

Cash and cash equivalents (hereinafter referred to as “funds”) as of

the end of the year totaled ¥15.3 billion, a decrease of ¥28.5

billion compared with the previous year. The details are as follows:

Cash fl ow from operating activities

Operating activities provided net cash of ¥74.8 billion (compared

with ¥72.7 billion in net cash provided in the same period of the

previous year). This mainly refl ected the factors contributing to

increases in cash, such as decrease in notes and accounts

receivable trade and decrease in inventories, outweighing the

factors contributing to decreases in cash, such as decrease in notes

and accounts payable trade.

Cash fl ow from investing activities

Investing activities used net cash of ¥43.6 billion (compared with

¥28.1 billion in net cash used in the same period of the previous

year). This mainly refl ected the acquisition of property, plant and

equipment, including the establishment of solar module plants and

new power generation facilities, net increase in short-term loans

receivable, and the acquisition of subsidiaries’ securities.

Cash fl ow from fi nancing activities

Financing activities used net cash of ¥56.1 billion (compared with

¥28.1 billion in net cash used in the same period of the previous

year), mainly refl ecting a decline in interest-bearing debt and cash

dividends paid. As of the end of the fi scal year, interest-bearing

debt totaled ¥155.4 billion, a decrease of ¥54.0 billion

compared with the end of the previous year.

Net Interest-Bearing Debts / Gearing Ratio(Yen Billion) (%)

Cash Flow Gain / Out(Yen Billion)

Cash fl ow from operating activities Cash fl ow from investing activities Dividend payout

Net interest-bearing debt (left scale) Gearing ratio* (right scale)

*Gearing ratio: Net interest-bearing debt / (Total shareholders’ equity + Net interest-bearing debt)

Outlook for 2016 (As of February 2016)In the oil business, we will strengthen retail initiatives and the volume

growth of value-added products that address customers’ needs by

focusing on our core strategy to differentiate our products and

services for the expansion of our customer base, as well as continue

stable operations at our refi neries and improvements in supply chain

effi ciency while ensuring fair margins.

In the energy solutions business, domestic module selling prices

continued to decline, while we expect to improve profi tability by the

reduction of overall costs, including selling expenses, and developing

the profi table business models “BOT” (Build-Own-Transfer of solar

power plants). In the electric power business, in which the scale of

business expands by the launch of new electric power plants, we

expect to ensure stable profi ts by effi cient operations at electric

power plants and the optimization of our sales portfolio.

In consideration of the above, we estimate that consolidated net

sales will be ¥1,680.0 billion, consolidated ordinary income for

the period will total ¥36.0 billion, and consolidated net income will

be ¥16.0 billion. We expect that the relevant consolidated ordinary

income will be ¥54.0 billion, excluding the impact of inventory

valuation. The above forecast is based on a crude oil price

assumption of US$30/bbl and an exchange rate of ¥120 per

U.S. dollar.

138.9

320

240

160

80

0

60

45

30

15

02011 2012 2013 2014 2015

38.4%74.8

14.3

43.6

100

75

50

25

02011 2012 2013 2014 2015

Yen Billion


Domestic demand for oil products is affected by, and changes with, factors such as the economic

situation in Japan and domestic energy supply and demand. Moreover, Japan’s domestic oil product

market is affected by factors such as the demand trend, price competition with other companies in the

industry, overseas prices for oil products, and changes in comparative price competition with other forms

of energy. The solar module market is also affected by factors such as the balance between supply and

demand as well as price competition with other companies in the industry. These fl uctuating factors also

exert an infl uence on the quantities and prices of products that the Showa Shell Group sells, and can

therefore cause changes to the Group’s earnings.

A) Impact on sales margin and working capital

Because the cost of sales on a yen basis of oil products the Group sells domestically is affected by

changes in crude oil prices and foreign exchange rates, the basic policy is to refl ect these infl uences in its

sales prices. The cost of sales on a yen basis of solar modules is also affected by changes in raw material

prices and foreign exchange rates. The basic policy is to refl ect these infl uences in its sales prices.

However, when it is diffi cult to refl ect these changes, which result from factors such as trends in the

global market environment and in sales prices, the changes will cause fl uctuations in Group earnings.

In addition, there is a possibility that the amount of required working capital will increase because of

a rise in crude oil prices or raw material prices or a drastic fl uctuation in foreign exchange rates.

B) Impact of inventory valuation

The Group mainly uses the weighted-average method to value inventories. When prices for crude oil,

raw materials, and products have declined, the Group’s cost of sales will increase by the effect of

inventory valuation that is relatively expensive at the beginning of the period, which will be a negative

factor for earnings. When prices for crude oil, raw materials, and products have risen, on the other

hand, the cost of sales will be reduced by the effect of inventory valuation that is relatively inexpensive

at the beginning of the period, which will be a positive factor for earnings.

As this illustrates, there is a possibility that changes in prices of crude oil, raw materials, and

products will affect the Group’s operating results.

The Group procures crude oil from overseas, mainly countries in the Middle East. There is a possibility

that the fi nancial position and operating results of the Group will be affected by obstacles to its supply,

such as events in which the international political climate, primarily the political climate of oil-producing

countries, is impacted, and an appropriate alternative supply source cannot be ensured. There is also a

possibility that the fi nancial position and operating results of the Group will be affected in the event that

obstacles arise impacting the procurement of the rare metals used in solar modules, for reasons such as

an unexpected event in the supplying region.

The Group is exposed to tough competition with other oil companies due to refi nery overcapacity and

excess number of service stations in addition to declining domestic oil demand. With rapid technical

innovation in the solar business, change in technical standards and our cost-competitive edge will affect

global competition. Although the Group will make efforts to maintain and improve competitiveness, there

is a possibility that its fi nancial position and business performance will be affected should effective

operation not be accomplished adequately under such a competitive environment.

The Showa Shell Group has created a system to monitor and manage business risk, and endeavors to mitigate the risks it identifi es.

The following risks are considered important risks related to the businesses of the Showa Shell Group and its fi nancial position that

might have a material effect on the decisions of investors. The risks described below are the risks evaluated to be material by the

Showa Shell Group (on a consolidated basis) at the end of the fi nancial year under review. This list is not meant to be, and should not

be construed as, a comprehensive list of every risk affecting the Group. Furthermore, the matters discussed below concerning future

circumstances are those evaluated by the Showa Shell Group at the end of the fi nancial year under review.

2. RISKS RELATED TO CHANGES IN PRICESOF CRUDE OIL AND MATERIALS, AND EXCHANGE RATES

1. RISKS RELATED TO THE EFFECTS OF ENERGY DEMAND AND MARKET CONDITIONS

3. RISKS RELATED TO SOURCES OF CRUDE OIL AND MATERIALS PROCUREMENT

Business Risks

4. RISKS CONCERNING COMPETITION WITH OTHER COMPANIESOR TECHNICALINNOVATION


In the event that new environmental regulations regarding carbon dioxide emissions or fossil fuel

consumption are introduced in the future in Japan, there is a possibility that the fi nancial position and

operating results of the Group will be affected because additional capital expenditures or incremental

costs might become necessary. Regarding the solar business, there is a possibility that the fi nancial

position and operating results of the Group will be affected in the event that changes in governmental

subsidy policies in certain countries or regions might infl uence domestic and global demand trends for

solar modules.

The Group has enacted a basic policy concerning health, safety, security, and environmental conservation

based on HSSE management rules, and strives to ensure safe operations and minimize risks that arise in

the event of a disaster or the spread of contagious diseases such as a new strain of infl uenza, through the

use of appropriate insurance, including property and casualty insurance, as well as formulation of a risk

control plan and a business continuity plan with its related discipline. There is a possibility, however, that

each offi ce and facility of the Group, including its refi neries and plants for producing solar modules, could

face obstacles beyond the anticipated scope of risk events, which might affect the Group’s fi nancial

position and operating results. There is also a possibility of being similarly affected by the termination or

restriction of its business activities as the result of an occurrence such as a serious industrial injury,

equipment accident, or information system fault.

The Group strives to enhance compliance by means of the appointment of Directors in charge of the

Code of Conduct, implementation of compliance rules for the antitrust law, establishment and operation

of risk management systems, implementation of internal audits, etc. However, when the established

internal control system does not function effectively and the Group is not able to avoid compliance risks

completely, the trust of stakeholders will be lost. Therefore, there is a possibility that the fi nancial position

and business performance of the Group will be affected.

In addition to competition in technological development, intellectual property rights strategies have

become more important. We established a dedicated department in order to strengthen the management

system for intellectual property rights, know-how, and defensive measures, but there is still a risk that

disputes over violations of intellectual property rights or the leakage of know-how will occur if inadequacies

arise in this system. Such circumstances may have an impact on the fi nancial position and business

performance of the Group.

The Group manufactures products based on strict quality control standards and obtains product liability

insurance in case a product defect occurs. However, there is a possibility that the fi nancial position and

operating results of the Group will be affected in the event that legal liability is incurred or brand image

is decreased due to an unexpected large-scale recall or lawsuit.

The Group obtains and uses personal data, including information on its customers, in relation to its

businesses such as product sales, and has created in-house management systems for the administration of

this data. Although the Group strives to protect such information with extreme caution, there is a possibility

of legal liability being incurred or the Group brand image being decreased and subsequently fi nancial

position and business performance being negatively affected if such data is disclosed outside the Group

and misused for some reason.

The Group’s pension benefi t obligations and costs are computed by actuarial calculation, and basic

rates such as the discount rate and the long-term expected rate of return on pension plan assets have

been set as actuarial assumptions. In the event that the actual numerical values concerning the basic

rates differ from these assumptions, or in the event that the assumptions are revised, these changes will

affect the amount of the pension benefi t obligation and the costs recognized in the future because the

effects will be cumulative and will be recognized regularly in future periods.

7. RISKS RELATED TO THE ESTABLISHMENT OF INTERNAL CONTROL SYSTEMS

6. RISKS RELATED TO TERMINATION OR RESTRICTION OF BUSINESS ACTIVITIES AS THE RESULT OF DISASTER, ACCIDENT, ETC.

8. RISKS RELATED TO INTELLECTUAL PROPERTY RIGHTS

9. RISKS RELATED TO PRODUCT LIABILITY

5. RISKS RELATED TO ENVIRONMENTAL REGULATIONS AND TAX LEVIES

10. RISKS RELATED TO CONTROL OF PERSONAL DATA

11. RISKS RELATED TO RETIREMENT BENEFITS


Consolidated Balance Sheet

Showa Shell Sekiyu K.K. and Consolidated SubsidiariesAs of December 31, 2015 and 2014

Yen Million

2015 2014

ASSETS

Current assets

Cash and deposits (Notes 13 and 18) ¥ 16,554 ¥ 45,081

Notes and accounts receivable–trade (Notes 13, 18 and 21) 212,659 300,564

Merchandise and fi nished goods 81,203 137,486

Work in process 977 2,968

Raw materials and supplies (Note 18) 81,432 121,871

Deferred tax assets (Note 10) 12,986 10,237

Other current assets (Notes 13 and 14) 42,478 44,129

Allowance for doubtful accounts (71) (224)

Total current assets 448,220 662,114

Noncurrent assets

Property, plant and equipment

Buildings and structures 91,614 95,161

Tanks 10,060 10,436

Machinery, equipment and vehicles 102,695 117,186

Land 142,272 154,660

Construction in progress 13,043 11,368

Other property, plant and equipment 5,993 6,848

Total property, plant and equipment (Notes 8, 17 and 18) 365,680 395,661

Intangible assets

Goodwill 171 1,431

Leasehold rights 3,718 3,808

Software 4,726 5,556

Other intangible assets 179 237

Total intangible assets 8,796 11,033

Investments and other assets

Investment securities (Notes 7 and 13) 67,277 40,444

Long-term loans receivable 9,629 8,888

Deferred tax assets (Note 10) 39,449 38,149

Asset for retirement benefi ts (Note 11) 126 115

Other investments and other assets 18,746 20,407

Allowance for doubtful accounts (261) (532)

Total investments and other assets 134,967 107,472

Total noncurrent assets 509,445 514,167

Total assets ¥957,665 ¥1,176,282

The accompanying notes are an integral part of these fi nancial statements.


Yen Million

2015 2014LIABILITIES Current liabilities Notes and accounts payable–trade (Notes 13 and 21) ¥210,388 ¥ 284,944 Short-term loans payable (Notes 9, 13 and 18) 52,265 109,673 Accounts payable–other (Notes 13 and 18) 154,648 204,142 Income taxes payable 4,184 2,713 Accrued expenses 9,582 9,472 Provision for employees’ bonuses 2,195 2,202 Provision for directors’ bonuses 59 84 Provision for damages to the submarine pipeline (Note 17) 6,589 — Other current liabilities (Notes 9 and 13) 39,422 48,374 Total current liabilities 479,334 661,607

Noncurrent liabilities Bonds payable (Notes 9 and 13) 20,000 20,000 Long-term loans payable (Notes 9, 13 and 18) 83,205 79,825 Deferred tax liabilities (Note 10) 2,656 3,669 Provision for special repairs 16,258 11,597 Liability for retirement benefi ts (Note 11) 90,143 82,097 Other noncurrent liabilities (Note 12) 22,740 21,168 Total noncurrent liabilities 235,002 218,357 Total liabilities 714,337 879,964

NET ASSETS Shareholders’ equity Capital stock Authorized 440,000,000 shares Issued 376,850,400 shares in 2015 and 2014 34,197 34,197 Capital surplus 22,123 22,123 Retained earnings 171,721 219,740 Treasury stock

218,724 shares as of December 31, 2015 and 216,116 shares as of December 31, 2014 (185) (182)

Total shareholders’ equity 227,857 275,878 Accumulated other comprehensive income Unrealized holding gain (loss) on securities 2,128 2,093 Unrealized gain (loss) from hedging instruments (81) 289 Retirement benefi ts liability adjustment (Notes 3 and 11) (7,278) (6,209) Total accumulated other comprehensive income (5,232) (3,826) Minority interests 20,702 24,264 Total net assets 243,328 296,317Total liabilities and net assets ¥957,665 ¥1,176,282


Consolidated Statement of Income

Consolidated Statement of Comprehensive Income

Showa Shell Sekiyu K.K. and Consolidated SubsidiariesYears ended December 31, 2015 and 2014

Yen Million

2015 2014Net sales (Notes 21 and 22) ¥2,177,625 ¥2,997,984Cost of sales (Notes 11, 21 and 22) 2,078,535 2,890,430Gross profi t 99,089 107,554Selling, general and administrative expenses (Notes 11 and 15) 111,298 125,611Operating income (loss) (12,209) (18,057) Non-operating income Interest income 178 139 Dividends income 646 570 Foreign exchange gains — 708 Reversal of allowance for doubtful accounts 150 259 Equity in earnings of affi liates (Note 22) — 873 Gain on investments in silent partnerships 1,603 1,336 Fiduciary obligation fee — 687 Other 1,384 1,880

3,963 6,456Non-operating expenses Interest expense 1,326 1,697 Sales discounts 1,225 1,665 Foreign exchange losses 585 — Equity in losses of affi liates (Note 22) 1,126 — Fiduciary obligation cost — 667 Other 773 1,092

5,037 5,121Ordinary income (loss) (13,282) (16,723)Extraordinary income Gain on sales of property, plant and equipment 1,340 3,666 Gain on sales of investment securities and others (Note 7) 55 5 Subsidies 4,252 3,177 Gain on changes in equity 3,450 — Other 838 638

9,936 7,487Extraordinary loss Loss on disposal of property, plant and equipment 2,673 2,053 Loss on valuation of investment securities — 288 Impairment loss (Notes 16 and 22) 6,669 1,575 Loss on damages to the submarine pipeline (Note 17) 7,275 — Litigation settlement — 828 Other 1,334 1,366

17,952 6,112Income (loss) before income taxes and minority interests (21,298) (15,347)Income taxes (Note 10) Current 5,161 4,020 Deferred (1,137) (10,686)Total income taxes 4,024 (6,665)Income (loss) before minority interests (25,323) (8,682)Minority interests in income 2,144 1,021Net income (loss) ¥ (27,467) ¥ (9,703)

Yen

2015 2014Per share data Net income (loss)–primary ¥ (72.93) ¥ (25.76)

Net income (loss)–diluted Not prepared due to having no dilutive shares

Not prepared due to having no dilutive shares

Dividends 38.00 38.00 Net assets 591.10 722.33



Yen Million

2015 2014Income (loss) before minority interests ¥(25,323) ¥(8,682)Other comprehensive income Unrealized holding gain (loss) on securities (7) 570 Unrealized gain (loss) from hedging instruments (371) 800 Remeasurements of defi ned benefi t plans (1,134) — Share of other comprehensive income in affi liates (2) (77) Total other comprehensive income (Note 20) (1,515) 1,293Comprehensive income (26,838) (7,388)Total comprehensive income attributable to: Owners of the parent (28,886) (8,423) Minority interests ¥ 2,047 ¥ 1,034




Yen Million

2015 2014Shareholders’ equity Capital stock Balance at the beginning of the period ¥ 34,197 ¥ 34,197 Changes of items during the period Total changes of items during the period — — Balance at the end of the period 34,197 34,197 Capital surplus Balance at the beginning of the period 22,123 22,123 Changes of items during the period Disposal of treasury stock 0 0 Total changes of items during the period 0 0 Balance at the end of the period 22,113 22,123 Retained earnings Balance at the beginning of the period 219,740 243,374 Cumulative effect of change in accounting policies (6,236) — Restated balance at the beginning of the period 213,503 243,374 Changes of items during the period Dividends from surplus (14,314) (13,937) Net income (loss) (27,467) (9,703) Changes in scope of consolidation — 1 Changes due to merger — 5 Total changes of items during the period (41,781) (23,634) Balance at the end of the period 171,721 219,740 Treasury stock Balance at the beginning of the period (182) (180) Changes of items during the period Purchase of treasury stock (2) (2) Disposal of treasury stock 0 0 Total changes of items during the period (2) (2) Balance at the end of the period (185) (182) Total shareholders’ equity Balance at the beginning of the period 275,878 299,515 Cumulative effect of change in accounting policies (6,236) — Restated balance at the beginning of the period 269,642 299,515 Changes of items during the period Dividends from surplus (14,314) (13,937) Net income (loss) (27,467) (9,703) Purchase of treasury stock (2) (2) Disposal of treasury stock 0 0 Changes in scope of consolidation — 1 Changes due to merger — 5 Total changes of items during the period (41,784) (23,636) Balance at the end of the period 227,857 275,878Accumulated other comprehensive income Unrealized holding gain (loss) on securities Balance at the beginning of the period 2,093 1,613 Changes of items during the period Net changes of items other than those in shareholders’ equity 34 480 Total changes of items during the period 34 480 Balance at the end of the period 2,128 2,093 Unrealized gain (loss) from hedging instruments Balance at the beginning of the period 289 (510) Changes of items during the period Net changes of items other than those in shareholders’ equity (371) 800 Total changes of items during the period (371) 800 Balance at the end of the period (81) 289 Retirement benefi ts liability adjustments Balance at the beginning of the period (6,209) — Changes of items during the period Net changes of items other than those in shareholders’ equity (1,069) (6,209) Total changes of items during the period (1,069) (6,209) Balance at the end of the period (7,278) (6,209) Total accumulated other comprehensive income Balance at the beginning of the period (3,826) 1,102 Changes of items during the period Net changes of items other than those in shareholders’ equity (1,405) (4,929) Total changes of items during the period (1,405) (4,929) Balance at the end of the period (5,232) (3,826)Minority interests Balance at the beginning of the period 24,264 24,733 Changes of items during the period Net changes of items other than those in shareholders’ equity (3,562) (468) Total changes of items during the period (3,562) (468) Balance at the end of the period 20,702 24,264 Total net assets Balance at the beginning of the period 296,317 325,352 Cumulative effect of change in accounting policies (6,236) — Restated balance at the beginning of the period 290,080 325,352 Changes of items during the period Dividends from surplus (14,314) (13,937) Net income (loss) (27,467) (9,703) Purchase of treasury stock (2) (2) Disposal of treasury stock 0 0 Changes in scope of consolidation — 1 Changes due to merger — 5 Net changes of items other than those in shareholders’ equity (4,967) (5,398) Total changes of items during the period (46,752) (29,035) Balance at the end of the period ¥243,328 ¥296,317

Consolidated Statement of Changes in Net Assets



Yen Million

2015 2014Operating activities Income (loss) before income taxes and minority interests ¥(21,298) ¥(15,347) Depreciation and amortization 38,898 41,361 Impairment loss 6,669 1,575 Loss (gain) on disposal of property, plant and equipment 2,673 2,053 Loss (gain) on sales of property, plant and equipment (1,340) (3,666) Gain on changes in equity (3,450) — Loss (gain) on valuation of investment securities — 288 Increase (decrease) in allowance for doubtful accounts (332) (330) Increase (decrease) in liability for retirement benefi ts (2,721) (1,657) Decrease (increase) in asset for retirement benefi ts (11) (32) Increase (decrease) in provision for damages to the submarine pipeline 6,589 — Increase (decrease) in provision for special repairs 4,661 (3,436) Interest and dividends income (824) (709) Interest expense and sales discounts 2,552 3,362 Decrease (increase) in notes and accounts receivable–trade 80,343 91,532 Decrease (increase) in inventories 76,166 61,299 Increase (decrease) in notes and accounts payable–trade (79,903) (91,459) Increase (decrease) in accounts payable–other (35,497) 20,906 Other, net 7,094 (10,181) Sub-total 80,267 95,559 Interest and dividends income 794 855 Interest expense paid (2,605) (3,489) Income taxes (paid) refunded (3,636) (20,191) Net cash provided by (used in) operating activities 74,819 72,733Investing activities Purchase of property, plant and equipment (31,835) (26,950) Purchase of intangible assets (1,000) (2,358) Proceeds from sales of property, plant and equipment 3,555 4,920 Purchase of investment securities (9) (9) Proceeds from sales of investment securities 111 49 Net decrease (increase) in short-term loans receivable (7,438) 1,287 Payments for long-term loans receivable (2,232) (2,389) Collection of long-term loans receivable 3 8 Purchase of subsidiaries’ share (5,375) (228) Other, net 537 (2,481) Net cash provided by (used in) investing activities (43,685) (28,151)Financing activities Net increase (decrease) in short-term loans payable 6,956 (2,135) Proceeds from long-term loans payable 4,000 15,000 Repayments of long-term loans payable (50,811) (24,360) Proceeds from bonds — 10,000 Redemption of bonds — (10,000) Purchase of treasury stock (2) (2) Proceeds from sales of treasury stock 0 0 Repayments of lease obligations (1,261) (1,526) Cash dividends paid (14,314) (13,937) Cash dividends paid to minority shareholders (749) (683) Other, net (0) (502) Net cash provided by (used in) fi nancing activities (56,182) (28,148)Net increase (decrease) in cash and cash equivalents (25,048) 16,433Cash and cash equivalents at beginning of the period 43,877 27,428Increase due to inclusion in consolidation — 1Increase (decrease) in cash and cash equivalents due to merger of subsidiaries — 13Decrease due to exclusion in consolidation (3,473) —Cash and cash equivalents at end of the period ¥ 15,355 ¥ 43,877

Reconciliation between cash and cash equivalents at end of the period and cash and deposits on the balance sheets

Yen Million

2015 2014Cash and deposits ¥ 16,554 ¥ 45,081Time deposit exceeding 3 months (1,198) (1,204)Cash and cash equivalents ¥ 15,355 ¥ 43,877

Consolidated Statement of Cash Flows


Notes to the Consolidated Financial Statements

1. BASIS OF PRESENTATION

The accompanying consolidated fi nancial statements of Showa Shell

Sekiyu K.K. (the “Company”) and its consolidated subsidiaries (together,

the “Companies”) have been prepared in accordance with the

provisions set forth in the Financial Instruments and Exchange Act of

Japan and its related accounting regulations, and in conformity with

accounting principles and practices generally accepted in Japan,

which are different in certain respects from the application and

disclosure requirements of International Financial Reporting Standards.

As permitted by the Financial Instruments and Exchange Act of

Japan, fractions below ¥1 million are rounded off. This causes certain

totals in the fi nancial statements to not be equivalent to the sums of

each item.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(1) POLICIES OF CONSOLIDATIONa) Consolidated subsidiaries as of December 31, 2015 (21 companies)

Showa Yokkaichi Sekiyu Co., Ltd. K.K. Rising SunNippon Grease Co., Ltd. Genex Co., Ltd.Leef Energy K.K. Showa Shell Business & IT Solutions Ltd.Wakamatsu Gas K.K. Showa Shell Sempaku K.K.Nissho Koyu K.K. Heiwa Kisen Kaisha, Ltd.Nagase Oil Ltd. Chuo Shell Sekiyu Hanbai K.K.Jonen Co. Tokyo Shell Pack K.K.Toa Oil Co., Ltd. Hayashi-Bussan Co., Ltd.Shoseki Kako Co., Ltd. Shoseki Engineering & Petro Star Kansai Co., Ltd. Construction Co., Ltd.Nakagawa Oil Co., Ltd. Solar Frontier K.K.

During the period, Enessance Holdings Co., Ltd. (“Enessance Holdings”)

conducted the share exchange, in which Enessance Holdings issued

additional shares to the shareholders of Tohoku Cosmo Gas Co., Ltd. As

a result, Enessance Holdings became the wholly owning parent company

and Tohoku Cosmo Gas Co., Ltd. became a wholly-owned subsidiary.

Due to the decrease in the Company’s shareholding ratio of Enessance

Holdings’ share, Enessance Holdings has been excluded from the scope of

consolidation, and included in affi liates accounted for by the equity

method.

Certain subsidiaries, such as Rekisei Kagaku K.K., are excluded

from consolidation because their infl uence is immaterial to the

consolidated fi nancial statements.

b) The end of accounting periodThe end of accounting period of the consolidated subsidiaries are as

follows.

Account closing date Number of subsidiaries

September 30 6

October 31 1

December 31 14

The consolidated fi nancial statements have been prepared by

using the accounts of the Company and other subsidiaries as of their

respective fi scal year end. Signifi cant transactions between their

respective fi scal year end and the consolidated balance sheet date are

adjusted for consolidation.

(2) EQUITY-METHOD AFFILIATESEquity-method affi liates as of December 31, 2015 (14 companies)

Seibu Oil Co., Ltd. Joyo Shell Sekiyu Hanbai K.K.Japan Oil Network Co., Ltd. Mieseki Shoji K.K.Central Sekiyu Gas Co., Ltd. Dia Shoseki Co. Ltd.Shell Tokuhatsu K.K. Niigata Joint Oil Stockpiling Co., Ltd.Ohgishima Power Co., Ltd. Marubeni Energy CorporationToyotsu Petrotex Corporation Shell Sekiyu Osaka Hatsubaisho K.K.Enessance Holdings Co., Ltd. Gyxis Corporation

During the period, Enessance Holdings, which had been included in

the scope of consolidated subsidiaries, conducted the share exchange,

in which Enessance Holdings issued additional shares to the

shareholders of Tohoku Cosmo Gas Co., Ltd. As a result, Enessance

Holdings became the wholly owning parent company and Tohoku

Cosmo Gas Co., Ltd. became a wholly-owned subsidiary. Due to the

decrease in the Company’s shareholding ratio of Enessance Holdings’

share, Enessance Holdings has been excluded from the scope of

consolidation, and included in affi liates accounted for by the equity

method.

As a result of the Company’s acquisition of shares of Gyxis

Corporation by the formation of joint controlled entity, Gyxis Corporation

has been included in affi liates accounted for by the equity method.

Certain 20%- to 50%-owned companies, such as Kyoudo Gas

K.K., are excluded from equity-method affi liates because their infl uence

is immaterial to the consolidated fi nancial statements.

When the end of the accounting period of equity-method affi liates

is different from that of the Company, the fi nancial statements of

affi liates as of their respective fi scal year end are used by the Company

in applying the equity method.

(3) VALUATION METHOD FOR MAJOR ASSETSa) SecuritiesMarketable securities are carried at fair value with changes in

unrealized holding gain or loss, net of the applicable income taxes,

included directly in net assets.

Non-marketable securities are stated at cost, determined by the

moving average method. Cost of securities sold is calculated primarily

by the moving average method.

b) Derivatives and hedging activitiesThe Company and certain consolidated subsidiaries enter into various

derivative transactions in order to manage certain risks arising from

adverse fl uctuations in foreign currency exchange rates, interest rates,

and commodity prices. Derivative fi nancial instruments are carried at

fair value with changes in unrealized gain or loss charged or credited

to operations, except for those which meet the criteria for deferral hedge

accounting under which unrealized gain or loss is deferred as a

component of net assets.

Deferral hedge accounting is adopted for derivatives which qualify

as hedges, under which unrealized gain or loss is deferred. Hedging

instruments are derivative transactions and hedged items are primarily

forecast sales denominated in foreign currencies, and receivables and

payables denominated in foreign currencies. Hedge effectiveness is not

assessed if the substantial terms and conditions of the hedge instruments

and those of hedging items are the same and changes in market rates

or cash fl ows are expected to perfectly offset.

The interest rate swaps which qualify for hedge accounting and

meet specifi c matching criteria are not remeasured at fair value but the

differential paid or received under the swap agreements are recognized

and included in interest expense or income. Hedge assessment for any

interest rate swap, which applies special method is abbreviated.

The Companies manage their derivative transactions in accordance

with the internal management policies.


c) InventoriesInventories are stated principally at the lower of cost or market, cost

being determined by the weighted average method.

(4) DEPRECIATION AND AMORTIZATION OF MAJOR ASSETSa) Property, plant and equipment (Excluding lease assets)The straight-line method has been adopted. The same standard as

stipulated in the Corporate Tax Law is applied to the useful economic

lives and the residual values. The main refi ning facilities at the Yokkaichi

Refi nery of Showa Yokkaichi Sekiyu Co., Ltd., are depreciated with

estimated useful economic lives of 20 years.

b) Intangible assets (Excluding lease assets)The straight-line method has been adopted. Software for in-house use is

amortized by the straight-line method over the expected useful economic

life of 5 years.

c) Lease assetsLease assets are depreciated using the straight-line method over the

lease terms without the residual value.

Financial lease transactions that do not transfer ownership to

lessees and whose commencement day falls prior to December 31,

2008, are accounted for in a similar manner with ordinary rental

transactions.

(5) BASIS OF PROVISIONSa) Allowance for doubtful accountsAllowance for doubtful debts are calculated based on an estimate of

the collectability of receivables from companies in fi nancial diffi culty.

For normal receivables, provisions are calculated based on the actual

ratio of the past doubtful debt losses.

b) Provision for employees’ bonusesProvision for employees’ bonuses is provided based on the estimated

bonuses to be paid in respect of service rendered by employees in the

current fi scal year.

c) Provision for Directors’ bonusesProvision for Directors’ bonuses is calculated based on the estimated

bonuses to be paid in respect of service rendered by Directors in the

current fi scal year.

d) Provision for special repairsEstimated accrued expenses on inspections and maintenance on refi ning

machinery and oil tanks are provided. Periodical inspections on oil tanks

are required under the Fire Service Act.

e) Provision for damages to the submarine pipelineProvision for damages to the submarine pipeline is estimated for

restoration costs.

(6) ACCOUNTING METHOD RELATED TO RETIREMENT BENEFITS

Accrued retirement benefi ts for employees have been recorded mainly

at the amount calculated based on the retirement benefi t obligation and

the fair value of the pension plan assets as of the balance sheet date.

The retirement benefi t obligation for employees is attributed to each

period by the benefi t formula method.

Actuarial gain or loss is amortized in the year following the year

in which the gain or loss is recognized primarily by the straight-line

method over periods (mainly 10 years through 14 years), which are

shorter than the average remaining years of service of the employees.

Prior service cost is being amortized as incurred by the straight-line

method over periods (mainly 10 years through 14 years), which are


Transition differences due to accounting changes are amortized as

incurred by the straight-line methods over periods (15 years), which are


Certain consolidated subsidiaries use a simplifi ed method for

calculating retirement benefi t expenses and liabilities based on the

assumption that the benefi ts payable, which are calculated as if all

eligible employees voluntarily terminated their employment at fi scal

year-end, approximates the retirement benefi t obligation at year-end.

(7) CONSUMPTION TAXTransactions subject to consumption taxes are recorded at amounts

exclusive of consumption taxes.

(8) AMORTIZATION OF GOODWILLGoodwill is amortized by the straight-line method over periods not

exceeding 20 years, which is determined in consideration of its causes.

Immaterial amount of goodwill is charged in the year of acquisition.

(9) APPROPRIATION OF RETAINED EARNINGSUnder the Companies Act of Japan, the appropriation of retained

earnings in the current fi scal year is determined by resolution of the

shareholders’ meeting held after the fi scal year-end. Therefore, the

appropriation of the retained earnings for the current fi scal year is

not refl ected in these fi nancial statements.

(10) CASH AND CASH EQUIVALENTSCash and cash equivalents in the consolidated statement of cash fl ows

consists of cash on hand, cash in banks which can be withdrawn at

any time, and short-term investments with a maturity of 3 months or less

when purchased, which can easily be converted to cash and are

subject to little risk of change in value.

(11) RECLASSIFICATIONCertain comparative accounts in the consolidated fi nancial statements

for the year ended December 31, 2014 have been classifi ed to conform

to the 2015 presentation.

3. ACCOUNTING CHANGES

The Company has adopted the main clause of Paragraph 35 of

“Accounting Standards for Retirement Benefi ts” (ASBJ Statement No. 26

of May 17, 2012) and the main clause of Paragraph 67 of “Guidance

on Accounting Standard for Retirement Benefi ts” (ASBJ Guidance No.

25 of March 26, 2015) effective from January 1, 2015. As a result,

the methods for calculating the retirement benefi t obligation and service

cost have been revised in the following respects: the method for

attributing projected benefi ts to each period has been changed from

the straight-line method to the benefi t formula method, and the method

for determining the discount rate has been changed.

The cumulative effect of changing the method for calculating the

retirement benefi t obligation and service cost was recognized by

adjusting retained earnings at January 1, 2015 in accordance with

the transitional treatment provided in Paragraph 37 of the Standard.



4. STANDARDS ISSUED BUT NOT YET EFFECTIVE

Accounting standards for business combinationsOn September 13, 2013, the ASBJ issued “Revised Accounting

Standard for Business Combinations” (ASBJ Statement No. 21),

“Revised Accounting Standard for Consolidated Financial Statements”

(ASBJ Statement No. 22), “Revised Accounting Standard for Business

Divestitures” (ASBJ Statement No. 7), “Revised Accounting Standard for

Earnings Per Share” (ASBJ Statement No. 2), “Revised Guidance on

Accounting Standard for Business Combinations and Accounting

Standard for Business Divestitures” (ASBJ Guidance No. 10), and

“Revised Guidance on Accounting Standard for Earnings Per Share”

(ASBJ Guidance No. 4).

(1) OVERVIEWUnder these revised accounting standards and guidance, the

accounting treatment for any changes in a parent’s ownership interest in

a subsidiary when the parent retains control over the subsidiary and the

corresponding accounting for acquisition-related costs were revised. In

addition, the presentation method of net income was amended, the

reference to “minority interests” was changed to “non-controlling

interests,” and provisional accounting for these accounting standards

were also defi ned.

(2) SCHEDULED DATE OF ADOPTIONThe Company expects to adopt these revised accounting standards

and guidance from the beginning of the fi scal year ending December

31, 2016. The provisional accounting for business combinations are

expected to be adopted from the beginning of the fi scal year ending

December 31, 2016.

(3) IMPACT OF ADOPTING REVISED ACCOUNTING STANDARDS AND GUIDANCE

The Company is currently evaluating the impact of adopting these

revised standards on its consolidated fi nancial statements.

Implementation Guidance on Recoverability of Deferred Tax AssetsOn December 28, 2015, the ASBJ issued “Implementation Guidance

on Recoverability of Deferred Tax Assets” (ASBJ Guidance No. 26).

(1) OVERVIEW

The Implementation Guidance basically continues to apply the

framework used in the Auditing Guidance No. 66 ”Auditing Treatment

for Judgment of Recoverability of Deferred Assets”, issued by Japanese

Institute of Certifi ed Public Accountants (JICPA) where recoverability of

deferred tax assets is assessed based on entities’ categories, but certain

accounting treatments were changed. The Implementation Guidance

includes the following:

(i) accounting treatments for entities which are not included in any

category,

(ii) criteria as to the classifi cation of entities in the category 2 and the

category 3,

(iii) accounting treatments of unscheduled deductible temporary

differences for entities in the category 2,

(iv) accounting treatments for deductible temporary differences for

entities in the category 3, which are scheduled to be deductible

after 5 years, and

(v) accounting treatments for entities in the category 4 in the current

fi scal year, which are expected to be included in the category 2 or

3 in the following year.

(2) SCHEDULED DATE OF ADOPTIONThe Implementation Guidance is effective from the beginning of the

fi scal year ending December 31, 2017.

(3) IMPACT OF ADOPTING THE ACCOUNTING GUIDANCEThe Company is currently evaluating the impact of adopting the

guidance on its consolidated fi nancial statements.

5. CHANGES IN PRESENTATION

Consolidated statement of cash fl ows“Increase (decrease) in accounts payable‒other” included in “Other,

net” in the operating activities for the previous year is reported

separately for the current year due to its materiality. In order to refl ect

this change in presentation, consolidated statement of cash fl ows for the

previous year have been restated.

As a result, the amount of ¥10,725 million included in “Other, net”

in the operating activities in the previous year is restated to ¥20,906

million of “Increase (decrease) in accounts payable‒other” and

¥(10,181) million of “Other, net.”

“Purchase of subsidiaries’ share” included in “Other, net” in the

investing activities for the previous year is reported separately for the

current year due to its materiality. In order to refl ect this change in

presentation, consolidated statement of cash fl ows for the previous year

have been restated.

As a result, the amount of ¥(2,710) million included in “Other, net”

in the investing activities in the previous year is restated to ¥(228)

million of “Purchase of subsidiaries’ share” and ¥(2,481) million of

“Other, net.”

6. ADDITIONAL INFORMATION

Business Integration with Idemitsu Kosan Co., Ltd.The Company and Idemitsu Kosan Co., Ltd. (collectively, the

“Companies”) entered into a Memorandum of Understanding

(hereinafter the “MoU”) for the Business Integration based on a spirit of

equal partnership (hereinafter the “Business Integration”), which shall not

be legally binding, as of November 12, 2015. The Companies will

As a result, the liability for retirement benefi ts increased by

¥10,182 million and retained earnings decreased by ¥6,236 million

at January 1, 2015, and operating loss, ordinary loss and loss before

income taxes and minority interests for the fi scal year decreased by

¥574 million, respectively.



discuss and formally enter into a legally binding defi nitive agreement

(hereinafter the “Defi nitive Agreement”) through necessary procedures

including a resolution by the Board of Directors.

(1) OBJECTIVES OF THE BUSINESS INTEGRATION

The Companies agreed, in the MoU, to create an industry-leading

player unparalleled competitive position by combining the strengths and

the management resources of both companies. The new company (the

“NewCo”) will lead the effort of solving the industry’s various structural

issues with the aim at improving the lives of Japanese citizens through

effi cient and stable energy supply.

(2) METHOD OF THE BUSINESS INTEGRATIONThe Companies have set a merger as the base structure of the Business

Integration, subject to further discussions and an offi cial agreement.

(3) SCHEDULES OF THE BUSINESS INTEGRATIONThe schedule of the Business Integration will be discussed further with

the following target timeline: commencement of due diligence of the

Companies and their subsidiaries upon signing of the MoU, followed

by the signing of the Defi nitive Agreement incorporating the defi nitive

details and terms, approval at the shareholders’ meetings of both

parties, and the launch of the NewCo in October 2016–April 2017.

However, changes to the schedule may be made upon consultation

between the Companies for certain reasons such as delays in the

review process by the relevant competition law authorities, delays

concerning the progress of post-merger integration preparation required

for a smooth start of operation on Day 1, and others.

(4) NAME OF THE NEWCOThe name of the NewCo is currently undetermined and is scheduled to

be decided upon further discussion between the Companies.

(5) LOCATION OF THE HEAD OFFICE OF THE NEWCOThe Companies have yet to decide the location of the head offi ce of

the new company but are planning to fi nd a location different from the

current offi ces of the Companies by the effective date of or as soon as

possible after the Business Integration.

(6) STRUCTURE OF BOARD OF DIRECTORSWhile the structure of the Board of Directors will be decided upon

further discussions between the Companies, representative directors

and executive directors will consist of an equal number of

representatives from each company.

7. SECURITIES

(1) INVESTMENT SECURITIESYen Million

2015 2014

Investment securities ¥ 8,927 ¥ 9,516Investment in unconsolidated subsidiaries and affi liates 58,349 30,927[Including investment in entities jointly controlled] [18,212] —

¥67,277 ¥40,444

(2) MARKETABLE SECURITIESFor the year ended December 31, 2015

Yen Million

2015

Acquisition cost Carrying amount Unrealized gain (loss)

Securities whose carrying value exceeds their acquisition cost: Equity securities ¥3,113 ¥5,989 ¥2,876Securities whose carrying value does not exceed their acquisition cost: Equity securities 60 65 5

For the year ended December 31, 2014Yen Million

2014

Acquisition cost Carrying amount Unrealized gain (loss)

Securities whose carrying value exceeds their acquisition cost: Equity securities ¥3,188 ¥6,187 ¥2,999Securities whose carrying value does not exceed their acquisition cost: Equity securities 1 1 (0)

(3) SECURITIES SOLDYen Million

2015 2014

Proceeds from sales of securities during the year ¥67 ¥49Realized gains 17 5Realized losses 3 4


(4) NON-MARKETABLE SECURITIESYen Million

2015 2014

Securities for which it is extremely diffi cult to determine the fair value: Unlisted securities ¥2,872 ¥3,326

8. INVESTMENT AND RENTAL PROPERTY

The Company and certain subsidiaries own some rental properties,

such as offi ce buildings and commercial facilities including land in

Tokyo and other areas. The net of rental income and operating

expenses for those rental properties for the years ended December 31,

2015 and 2014 were ¥1,329 million and ¥1,293 million,

respectively, and the net gains (loss) on sales and disposal of those

properties for the years ended December 31, 2015 and 2014 were

¥32 million and ¥2,836 million, respectively. An impairment loss for

the years ended December 31, 2015 and 2014 were ¥231 million

and ¥149 million, respectively.

The carrying amounts, changes in such balances, and fair values of such properties are as follows:Yen Million

Carrying amount Fair valueDecember 31, 2014 Increase (Decrease) December 31, 2015 December 31, 2015

¥23,786 ¥563 ¥24,350 ¥49,580

Yen Million

Carrying amount Fair valueDecember 31, 2013 Increase (Decrease) December 31, 2014 December 31, 2014

¥24,713 ¥(926) ¥23,786 ¥47,325

Notes: 1. The carrying amount recognized in the balance sheet is net of accumulated depreciation and accumulated impairment losses, if any. 2. The increase during the fi scal year ended December 31, 2015 primarily represents the properties becoming idle of ¥2,455 million, and the decrease primarily represents sales and

disposals of ¥988 million, depreciation of ¥581 million and impairment loss of ¥231 million. 3. The increase during the fi scal year ended December 31, 2014 primarily represents the properties becoming idle of ¥2,640 million, and the decrease primarily represents sales and

disposals of ¥2,400 million, depreciation of ¥966 million and impairment loss of ¥149 million. 4. The fair value of properties is measured by the Company based mainly on real estate appraisal standards.

9. SHORT-TERM AND LONG-TERM DEBTS

(1) SHORT-TERM DEBTSYen Million

2015 2014

Short-term loans payable ¥51,645 ¥58,862Short-term lease obligations 1,002 1,119

¥52,647 ¥59,981

Note: The weighted average interest rates on short-term loans payable at the year-end were as follows:

%

2015 2014

Short-term loans payable 0.10 0.10

(2) LONG-TERM DEBTSYen Million

2015 2014

Loans from banks, other fi nancial institutions, etc. ¥ 83,825 ¥130,636Long-term lease obligations 1,764 2,1050.97 percent unsecured straight bond due in 2017 10,000 10,0000.29 percent unsecured straight bond due in 2019 10,000 10,000

¥105,589 ¥152,741Less: Long-term bonds due within one year — —Less: Long-term loans due within one year 620 50,811

¥104,969 ¥101,930

Note: The weighted average interest rates on long-term loans payable (excluding the balance due within 1 year) as of December 31, 2015 and 2014 were 1.01% and 1.14%, respectively.



Annual maturities of bondsYen Million

2015 2014

Within one year — —More than one year and less than two years ¥10,000 —More than two years and less than three years — ¥10,000More than three years and less than four years 10,000 —More than four years and less than fi ve years — 10,000More than fi ve years — —

¥20,000 ¥20,000

Annual maturities of long-term debts (Excluding bonds)Yen Million

2015 2014

Within one year ¥ 620 ¥ 50,811More than one year and less than two years 9,308 1,444More than two years and less than three years 31,151 9,178More than three years and less than four years 44,300 31,077More than four years and less than fi ve years 139 40,158More than fi ve years 68 71

¥85,589 ¥132,741

(3) COMMITMENT-LINE CONTRACTSThe Company maintains a revolving credit contract available up to ¥150 billion with a banking syndicate and an overdraft contract up to ¥10 billion

with Mizuho Bank Ltd.

There was no balance as of December 31, 2015 under these contracts.

10. DEFERRED TAXATION

(1) SIGNIFICANT COMPONENTS OF DEFERRED TAX ASSETS AND DEFERRED TAX LIABILITIESYen Million

2015 2014

Deferred tax assets: Liability for retirement benefi ts ¥ 23,019 ¥ 25,584 Impairment loss 13,920 14,753 Loss on liquidation of business 1,900 2,111 Loss on valuation of investment securities 888 1,114 Allowance for doubtful accounts 274 496 Net loss carried forward 33,331 29,813 Other 23,924 16,062 Sub-total 97,258 89,936 Valuation allowance (33,898) (29,132) Total deferred tax assets ¥ 63,360 ¥ 60,804Deferred tax liabilities: Reserve for advanced depreciation on property, plant and equipment transaction ¥ (9,848) ¥ (11,077) Unrealized gain (loss) on securities (823) (933) Other (2,908) (4,077) Total deferred tax liabilities (13,580) (16,087) Net deferred tax assets (liabilities) ¥ 49,780 ¥ 44,716

(2) THE RECONCILIATION BETWEEN THE EFFECTIVE STATUTORY TAX RATE AND THE EFFECTIVE TAX RATEDisclosures are abbreviated, because loss before income taxes was recorded for the year ended as of December 31, 2015 and 2014.

(3) AMENDMENTS TO DEFERRED TAX ASSETS AND DEFERRED TAX LIABILITIES DUE TO THE CHANGES IN THE RATE OF CORPORATION TAX

The “Act for Partial Amendment of the Income Tax Act, etc.” and the “Act

for Partial Amendment of the Local Tax Act, etc.” were promulgated on

March 31, 2015. As a result, the effective statutory tax rate used to

measure the Company’s deferred tax assets and liabilities was changed

from 35.6% to 33.1% and 32.3% for the temporary differences

expected to be realized or settled in the year beginning January 1,

2016 and for the temporary differences expected to be realized or

settled from January 1, 2017, respectively.

The effect of the announced reduction of the effective statutory tax

rate was to decrease deferred tax assets, after offsetting deferred tax

liabilities, by ¥5,205 million and income tax–deferred was to increase

by ¥4,915 million for the year ended December 31, 2015.


11. RETIREMENT BENEFITS

The Companies have both defi ned benefi t plans (including defi ned

benefi t corporate pensions, corporate pension fund and lump-sum

retirement plans) and defi ned contribution plans (defi ned contribution

corporate pensions, Smaller Enterprise Retirement Allowance Mutual Aid

System, and specifi c mutual aid) included as part of the total retirement

allowance.

1. Defi ned benefi t plan

(1) The changes in the retirement benefi t obligation during the years ended December 31, 2015 and 2014 (except for fi gures adopting a simplifi ed method) Yen Million

2015 2014

Retirement benefi t obligation at the beginning of the year ¥ 99,884 ¥102,113Cumulative effect of change in accounting policies 10,182 —Restated balance at the beginning of the year 110,066 102,113 Service cost 1,474 1,707 Interest cost 958 1,509 Actuarial loss 1,957 982 Retirement benefi t paid (5,965) (6,429) Decrease due to exclusion in consolidation (1,965) —Retirement benefi t obligation at the end of the year ¥106,526 ¥ 99,884

(2) The changes in plan assets during the years ended December 31, 2015 and 2014 (except for fi gures adopting a simplifi ed method)Yen Million

2015 2014

Plan assets at the beginning of the year ¥19,791 ¥18,674 Expected return on plan assets 817 871 Actuarial loss (538) 491 Contributions by the Company 769 1,194 Retirement benefi ts paid (1,097) (1,439) Decrease due to exclusion in consolidation (1,412) —Plan assets at the end of the year ¥18,330 ¥19,791

(3) The changes in liabilities for retirement benefi t by adopting a simplifi ed method during the years ended December 31, 2015 and 2014Yen Million

2015 2014

Liabilities for retirement benefi ts at the beginning of the year ¥1,890 ¥1,529 Retirement benefi t expenses 515 415 Retirement benefi ts paid (223) (111) Contributions by the Company (291) (383) Increase due to new consolidation — 439 Decrease due to exclusion in consolidation (69) —Liabilities for retirement benefi ts at the end of the year ¥1,820 ¥1,890

(4) The funded status of the plans and the amounts recognized in the consolidated balance sheet as of December 31, 2015 and 2014Yen Million

2015 2014

Funded retirement benefi t obligation ¥108,773 ¥103,418Plan assets at fair value (19,725) (22,349)

89,047 81,069Unfunded retirement benefi t obligation 969 912Net liability for retirement benefi ts in the balance sheet 90,016 81,982Liability for retirement benefi ts 90,143 82,097Asset for retirement benefi ts (126) (115)Net liability for retirement benefi ts in the balance sheet ¥ 90,016 ¥ 81,982Note: Figures adopting a simplifi ed method are included in the above table.

(5) The components of retirement benefi t expense for the years ended December 31, 2015 and 2014Yen Million

2015 2014

Service cost ¥1,474 ¥1,707Interest cost 958 1,509Expected return on plan assets (817) (871)Amortization of actuarial loss 1,407 2,238Amortization of prior service cost (128) (118)Amortization of transition difference due to accounting changes 29 117Retirement benefi t expense adopting a simplifi ed method 515 415Retirement benefi t expense for defi ned benefi t plan ¥3,439 ¥4,999



(6) The components of retirement benefi ts liability adjustments included in other comprehensive income (before tax effect) for the years ended

December 31, 2015 and 2014Yen Million

2015 2014

Actuarial gain and loss ¥1,088 —Prior service cost 128 —Transition difference due to accounting changes (29) —Total ¥1,187 —

(7) The components of retirement benefi ts liability adjustments included in accumulated other comprehensive income (before tax effect) for the years

ended December 31, 2015 and 2014Yen Million

2015 2014

Unrecognized actuarial loss ¥11,678 ¥11,126Unrecognized prior service cost (730) (801)Unrecognized transition difference due to accounting changes — 29Total ¥10,948 ¥10,354

(8) Plan assets

(i) The fair value of plan assets, by major category, as a percentage of total plan assets for the years ended December 31, 2015 and 2014 is as follows:

2015 2014

Securities 67% 64%Stocks 23% 27%General account 3% 1%Cash on hand and in banks 2% 3%Others 5% 5%Total 100% 100%

(ii) Method for determining the long-term expected return on plan assets

The long-term expected return on plan assets has been estimated based on the present and anticipated allocation to each asset class and the expected

long-term return on assets held in each category.

(9) The assumptions used in accounting for the above plans are as follows:2015 2014

Discount rates Principally 0.8% Principally 1.5%Expected long-term rates of return on plan assets Principally 2.9% Principally 3.7%Expected rates of salary increase Principally 2.3% Principally 2.4%

2. Defi ned contribution plan

Contributions by the Companies totalled ¥74 million and ¥68 million for the years ended December 31, 2015 and 2014, respectively.

12. ASSET RETIREMENT OBLIGATIONS

(1) OVERVIEW OF ASSET RETIREMENT OBLIGATIONSThe Companies estimate obligations of restoration under the lease agreements of real estate in connection with land for service station facilities

and offi ces.

(2) CALCULATION METHOD OF ASSET RETIREMENT OBLIGATIONSThe discount rates used for calculating asset retirement obligations range from 0.473% to 2.078%, corresponding with estimated useful lives of

10 to 50 years from the acquisition date.

(3) CHANGES IN THE TOTAL AMOUNT OF ASSET RETIREMENT OBLIGATIONSYen Million

2015 2014

Balance at beginning of year ¥3,821 ¥3,636Additional provisions associated with the acquisition of property, plant and equipment 286 190Reconciliation associated with passage of time 55 58Increase due to changes in estimation — 22Reduction associated with settlement of asset retirement obligations (236) (86)Decrease due to exclusion in consolidation (4) —Balance at end of year ¥3,922 ¥3,821


13. FINANCIAL INSTRUMENTS AND RELATED DISCLOSURES

(1) GROUP POLICY FOR FINANCIAL INSTRUMENTSThe Companies, based on their capital investment plans, raise necessary

funds through bank loans, issues of corporate bonds, and other sources.

In addition, to obtain short-term working capital, the Companies raise

funds through bank loans, issues of commercial paper (CP), and other

sources. The Companies use derivatives to reduce the risk of fl uctuations

in commodity prices, foreign exchange rates, and interest rates.

Derivatives are not used for speculative purposes.

(2) NATURE AND EXTENT OF RISKS ARISING FROM FINANCIAL INSTRUMENTS

Receivables, such as trade notes and trade accounts, are exposed to

customer credit risk. Investment securities are mainly equity instruments

of customers and suppliers of the Companies.

Payment terms of payables, such as trade notes and trade accounts,

are less than three months. Moreover, payables in foreign currencies

are exposed to the market risk of fl uctuation in foreign currency

exchange rates.

Maturities of bank loans, commercial paper, and bonds, which

are for the purpose of capital investment and working capital, are less

than seven years after the balance sheet date. Moreover, variable

interest rate debt is exposed to market risks from changes in variable

interest rates.

In addition to foreign currency forward contracts and interest rate

swaps, derivatives mainly include options, which are used to hedge

foreign exchange risk associated with receivables and payables in

foreign currencies, and swaps, which are used to hedge market price

fl uctuations risk associated with crude oil and petrochemical products.

(3) RISK MANAGEMENT FOR FINANCIAL INSTRUMENTSCredit risk management Credit risk is the risk of economic loss arising from a counterparty’s

failure to repay or service debt according to the contractual terms.

The Companies manage their credit risk from receivables by

monitoring of payment terms and balances of each customer and

recognizing credit standing of major customers to identify the default

risk of customers at an early stage.

Market risk management (Foreign exchange risk and interest rate risk) Foreign currency trade payables are exposed to market risk resulting from

fl uctuations in foreign currency exchange rates. Such foreign exchange

risk is hedged principally by foreign currency forward contracts.

Interest rate swaps are used to manage exposure to market risks

from changes in interest rates of loan payables. Investment securities

are managed by monitoring the market values and fi nancial positions

of issuers on a regular basis. To manage the risk of derivatives, the

Companies have prepared a set of internal rules and implemented them

in line with only real demand.

(4) SUPPLEMENTARY EXPLANATION OF THE ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of fi nancial instruments is based on their quoted market

prices, if available. When there is no quoted market price available,

fair value is reasonably estimated. Since various assumptions and

factors are refl ected in estimating the fair value, different assumptions

and factors could result in different fair value. In addition, the notional

amounts of derivatives in Note 14, Derivatives – Supplemental

Explanation on Quantitative Information, are not necessarily indicative

of the actual market risk involved in derivative transactions.

(5) FAIR VALUES OF FINANCIAL INSTRUMENTSFair values of fi nancial instruments are based on the quoted price in active markets. If the quoted price is not available, other rational valuation

techniques are used.

(a) Fair value of fi nancial instrumentsYen Million

December 31, 2015 Carrying amount Fair value Unrealized gain (loss)

Cash and deposits ¥ 16,554 ¥ 16,554 ¥ —Notes and accounts receivable–trade 212,659 212,659 —Investment securities 6,055 6,055 —Total assets ¥235,269 ¥235,269 ¥ —Notes and accounts payable–trade ¥210,388 ¥210,388 ¥ —Accounts payable–other 154,648 154,648 —Short-term loans payable (Note 1) 51,645 51,645 —Bonds payable (Note 2) 20,000 20,191 191Long-term loans payable (Note 1) 83,825 85,854 2,029Total liabilities ¥520,506 ¥522,726 ¥2,220Derivative transactions (Note 3) ¥ (204) ¥ (204) ¥ —

Notes: 1. Current portion of long-term loans payable is included in long-term loans payable. 2. Current portion of bonds is included in bonds payable. 3. The value of assets and liabilities arising from derivatives is shown at net value, and with the amount in parentheses representing liability position.



Yen MillionDecember 31, 2014 Carrying amount Fair value Unrealized gain (loss)

Cash and deposits ¥ 45,081 ¥ 45,081 ¥ —Notes and accounts receivable–trade 300,564 300,564 —Investment securities 6,189 6,189 —Total assets ¥351,835 ¥351,835 ¥ —Notes and accounts payable–trade ¥284,944 ¥284,944 ¥ —Accounts payable–other 204,142 204,142 —Short-term loans payable (Note 1) 58,862 58,862 —Bonds payable (Note 2) 20,000 20,299 299Long-term loans payable (Note 1) 130,636 133,232 2,596Total liabilities ¥698,585 ¥701,481 ¥2,895Derivative transactions (Note 3) ¥ 307 ¥ 307 ¥ —

Notes: 1. Current portion of long-term loans payable is included in long-term loans payable. 2. Current portion of bonds is included in bonds payable. 3. The value of assets and liabilities arising from derivatives is shown at net value, and with the amount in parentheses representing liability position.

ASSETSCash and deposits and Notes and accountsreceivable–tradeTheir carrying values approximate fair value because of their short

maturities.

Investment securitiesThe fair value of investment stocks is measured at their quoted market

price of the stock exchange for the equity instruments. The information

of the fair value for the investment securities by classifi cation is included

in Note 7.

LIABILITIESNotes and accounts payable–trade, Accounts payable–other, and Short-term loans payable Their carrying values approximate fair value because of their short

maturities.

Bonds payableThe fair value of bonds payable is based on the present value of

principal and interest discounted by the interest rates determined taking

into account the remaining period of each bond and current credit risk.

Long-term loans payableThe fair value of long-term loans payable is based on the present value

of the total of principal and interest discounted by the interest rates to

be applied if similar new borrowings were entered into.

DERIVATIVESThe information of the fair value for derivatives is included in Note 14.

(b) Financial instruments whose fair value cannot be reliably determined Yen Million

2015 2014

Investments in equity instruments that do not have a quoted market price in an active market ¥61,222 ¥34,254

(6) MATURITY ANALYSIS FOR FINANCIAL ASSETS Yen Million

December 31, 2015 Due in one year or lessDue after one year through fi ve years

Due after fi ve years through ten years Due after ten years

Cash and deposits ¥ 16,554 ¥— ¥— ¥—Notes and accounts receivable–trade 212,659 — — —Total ¥229,213 ¥— ¥— ¥—

Yen Million

December 31, 2014 Due in one year or lessDue after one year through fi ve years

Due after fi ve years through ten years Due after ten years

Cash and deposits ¥ 45,081 ¥— ¥— ¥—Notes and accounts receivable–trade 300,564 — — —Total ¥345,646 ¥— ¥— ¥—

Please see Note 9 for annual maturities of long-term debts and obligations under leases, respectively.

14. DERIVATIVES

(1) CONDITIONS OF TRANSACTIONSIn the normal course of business, the Companies use derivatives to manage their exposures to market risks in compliance with their internal policies. The Companies do not use derivatives for speculative purposes.

These instruments include foreign exchange contracts, foreign currency options, interest rate swaps, futures, forward contracts, and options of crude oil and oil products. All such derivatives involve risks, including the credit risk of nonperformance by counterparties. In order to minimize the


credit risk of nonperformance by counterparties, the Companies enter into derivative contracts with major fi nancial institutions and trading companies that have a high credit rating.(2) SUPPLEMENTAL EXPLANATION ON QUANTITATIVE

INFORMATIONThe fair value and unrealized gain or loss on derivative transactions are estimates considered appropriate based on the market at the balance sheet date and, thus, fair value is

not necessarily indicative of the actual amounts that may be realized or settled in the future. The notional amounts of the swaps are not direct measures of the Company’s risk exposure in connection with its swap transactions.

(3) CURRENT VALUE OF DERIVATIVESDerivative transactions to which hedge accounting is not applied as of December 31, 2015 and 2014

Yen Million

December 31, 2015

Notional amountNotional amount due

after one year Fair value Unrealized gain (loss)

Forward foreign exchange contracts To buy (US$) ¥23,481 ¥ — ¥(216) ¥(216) To sell (US$) 5,848 — 62 62Total ¥(154) ¥(154)Commodity-related transactions—Crude oil futures contracts To sell ¥ 1,058 ¥ — ¥ 244 ¥ 244Commodity-related transactions—Oil products futures contracts To buy 820 — (185) (185)Total ¥ 58 ¥ 58

Yen Million

December 31, 2014

Notional amountNotional amount due

after one year Fair value Unrealized gain (loss)

Foreign currency forward contracts To buy (US$) ¥46,942 ¥ — ¥303 ¥303 To sell (US$) 7,269 — (82) (82)Total ¥221 ¥221Commodity-related transactions—Crude oil futures contracts To sell ¥ 427 ¥ — ¥ 87 ¥ 87Commodity-related transactions—Oil products futures contracts To buy 537 — (84) (84)Total ¥ 3 ¥ 3

Derivative transactions to which hedge accounting is applied as of December 31, 2015Yen Million

December 31, 2015 Hedge accounting method Hedged item Notional amountNotional amount due

after one year Fair value

Forward foreign exchange contractsTo buy (US$) Deferral hedge

accounting Foreign forecasted transactions

¥3,411 ¥ — ¥ (36)

To sell (US$) Deferral hedge accounting

Foreign forecasted transactions

5,477 — 59

Total ¥ 23Interest rate swap (fi xed rate payment, fl oating rate receipt)

Special hedge accounting treatment

Interest of long-term loans payable

¥7,000 ¥7,000 ¥ (37)

Total ¥ (37)Commodity-related transactions—Crude oil forward contracts To buy Deferral hedge

accounting Crude oil ¥1,982 ¥ — ¥(223)

Commodity-related transactions—Oil products forward contracts To sell Deferral hedge

accounting Oil products ¥2,956 ¥ — ¥ 92

Total ¥(130)



Derivative transactions to which hedge accounting is applied as of December 31, 2014Yen Million

December 31, 2014 Hedge accounting method Hedged item Notional amountNotional amount due

after one year Fair value

Foreign currency forward contractsTo buy (US$) Deferral hedge

accounting Foreign forecasted transactions

¥ 8,213 ¥ — ¥ 221

To sell (US$) Deferral hedge accounting

Foreign forecasted transactions

23,108 — (626)

Total ¥ (405)Interest rate swap (fi xed rate payment, fl oating rate receipt)

Special hedge accounting treatment

Interest of long-term loans payable

¥11,000 ¥7,000 ¥ (57)

Total ¥ (57)Commodity-related transactions—Crude oil forward contracts To buy Deferral hedge

accounting Crude oil ¥ 9,787 ¥ — ¥(1,011)

To sell Deferral hedge accounting

Crude oil 3,879 — 524

Commodity-related transactions—Oil products forward contracts To sell Deferral hedge

accounting Oil products ¥11,506 ¥ — ¥ 975

Total ¥ 488

15. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Major elements of selling, general and administrative expenses for the years ended December 31, 2015 and 2014Yen Million

2015 2014

Transportation ¥ 35,389 ¥ 37,473Salaries 25,766 34,142Rents 3,795 5,403Depreciation 4,935 6,658Research and development expenses 5,606 4,632Other 35,805 37,301

¥111,298 ¥125,611

16. IMPAIRMENT LOSS

As a minimum unit for generating cash fl ows, service stations were

assessed for impairment individually, and other property, plant and

equipment were grouped by segments of management accounting.

Assets used for rent and idle assets were assessed individually.

Recoverable value was assessed by comparing the net realizable

value and value in use. The realizable value was mainly adopted for

idle assets and value in use for other assets.

Material assets were estimated in accordance with real estate

appraisal standards.

To calculate value in use, future cash fl ows were discounted by

6.0% (6.0% in 2014).

Impairment loss was recorded at the amount by which the carrying

amount of each asset group exceeded its recoverable value.

For the year ended December 31, 2015, the Companies recognized

an impairment loss of ¥6,669 million on 110 groups (¥1,575 million

on 71 groups in 2014) of impaired property, plant and equipment,

which was accounted for as an extraordinary loss. Impairment loss

recorded primarily related to the signifi cant decrease in the market

value of the Companies’ land as well as to the overall deterioration

of their business environment. Impaired asset groups consisted of the

following:


2015Land Others Total

Service stations (92 groups) ¥2,309 ¥1,275 ¥3,585Factories 430 1,860 2,291Idle assets (17 groups) 551 240 791

¥6,669



2014Land Others Total

Service stations (65 groups) ¥ 64 ¥1,295 ¥1,360Idle assets (6 groups) 129 85 214

¥1,575

17. LOSS ON DAMAGES TO THE SUBMARINE PIPELINE

Damages to a submarine pipeline at Keihin Kawasaki sea berth

(Higashi-Ohgishima offshore, owned by the Company and managed

by Toa Oil Co., Ltd.) occurred in May 2015. A loss on damages to the

submarine pipeline of ¥7,275 million, including provision for damages

to the submarine pipeline of ¥6,589 million, has been recorded for

restoration costs as extraordinary losses for the year ended as of

December 31, 2015.

18. COLLATERAL ASSETS

(1) COLLATERAL ASSETSYen Million

2015 2014

Cash and deposits ¥ — ¥ 3,396Notes and accounts receivable–trade — 1,640Raw materials and supplies — 89Buildings and structures 11,142 12,749Tanks 4,838 4,701Machinery, equipment and vehicles 28,968 41,996Land 22,955 23,154Other 7 12

¥67,912 ¥87,740

(2) SECURED DEBTSYen Million

2015 2014

Long-term loans payable ¥ 85 ¥ 1,749Short-term loans payable 1,360 1,457Accounts payable–other 65,199 65,625

¥66,644 ¥68,831

19. CONTINGENT LIABILITIES

The Companies had the following contingent liabilities as of December 31, 2015 and 2014.Yen Million

2015 2014

Guarantees for: Japan Biofuels Supply LLP ¥3,199 ¥2,782 Solar Frontier Americas Incorporated 3,259 — Employees (housing loan) 457 515

¥6,916 ¥3,298

The Company is subject to legal proceedings claims and liabilities

which arise in the ordinary course of business. In the opinion of

management, the amount of the ultimate liability with respect to those

actions will not materially affect the Companies’ fi nancial position or

results of operations and cash fl ows.



20. COMPREHENSIVE INCOME

The components of other comprehensive income for the years ended December 31, 2015 and 2014 were as follows:Yen Million

2015 2014

Unrealized holding gain (loss) on securities: Amount arising during the year ¥ (113) ¥ 789 Reclassifi cation adjustments for gains and losses included in net income (3) 2 Amount before tax effect (116) 791 Tax effect 108 (221) Total ¥ (7) ¥ 570Unrealized gain (loss) from hedging instruments: Amount arising during the year ¥ (120) ¥ 449 Reclassifi cation adjustments for gains and losses (449) 823 Amount before tax effect (570) 1,273 Tax effects 199 (473) Total ¥ (371) ¥ 800Retirement benefi ts liability adjustment Amount arising during the year ¥(2,495) — Reclassifi cation adjustments for gains and losses included in net income 1,308 — Amount before tax-effect (1,187) — Tax effects 53 — Total ¥(1,134) —Share of other comprehensive income in affi liates Amount arising during the year ¥ (5) ¥ (77) Reclassifi cation adjustments for gains and losses included in net income 2 0 Total ¥ (2) ¥ (77)Total other comprehensive income ¥(1,515) ¥1,293

21. RELATED PARTY TRANSACTIONS

When transactions of the Company with its related parties are more

than 10% of the consolidated sales proceeds, or 10% of the total

amount of the consolidated cost of sales and selling, general and

administrative expenses, they are disclosed.

The Company discloses material balances and transactions with

related parties when such balances and transactions represent more

than 1% of the consolidated total assets.

(1) RELATED PARTIES–CORPORATIONSFor the year ended December 31, 2015

Capital (Million)

Voting right share owning (Shares owned)

Yen Million

Name Transactions Closing balances

Saudi Arabian Oil Co., Ltd. ¥ — Indirect 15.0% Purchase of crude oil and oil products

¥565,861 Accounts payable–trade ¥17,797

Seibu Oil Co., Ltd. ¥8,000 Direct 38.0% Purchase of oil products

Advanced purchase of crude oil

427,013 Accounts payable–trade 50,594

— Accounts receivable–trade 7,667

Marubeni Energy Corporation ¥2,350 Direct 33.4% Sale of oil products 125,783 Accounts receivable–trade 11,669Shell Chemicals Japan Ltd. ¥ 250 NA Sale of oil products and

petrochemicals239,140 Accounts receivable–trade 12,425

Shell Eastern Trading (Pte), Ltd. US$714 NA Purchase of crude oil and oil products


For the year ended December 31, 2014

Capital (Million)

Voting right share owning (Shares owned)

Yen Million

Name Transactions Closing balances

Saudi Arabian Oil Co., Ltd. ¥ — Indirect 15.0% Purchase of crude oil and oil products

¥946,770 Accounts payable–trade ¥50,273

Seibu Oil Co., Ltd. ¥8,000 Direct 38.0% Purchase of oil products 571,378 Accounts payable–trade 53,283Advanced purchase of crude oil

— Accounts receivable–trade 13,992

Marubeni Energy Corporation ¥2,350 Direct 33.4% Sale of oil products 169,680 Accounts receivable–trade 14,870Shell Chemicals Japan Ltd. ¥ 250 NA Sale of oil products and

petrochemicals266,179 Accounts receivable–trade 22,715

Shell Eastern Trading (Pte), Ltd. US$714 NA Purchase of crude oil and oil products



(2) RELATED PARTIES–INDIVIDUALSThere are no material transactions and balances of the Companies with related individuals, including shareholders and directors, representing more

than ¥10 million for the years ended December 31, 2015 and 2014.

22. SEGMENT INFORMATION

(1) OVERVIEW OF REPORTABLE SEGMENTSThe Companies’ reportable segments are those for which separately

fi nancial information is available and the Board of Directors carries out

periodic review to allocate management resources and evaluate

business performance.

The Companies are mainly engaged in the manufacture and sale

of energy-related products including oil products, solar modules, and

electricity. The Company and its subsidiaries, serving as independent

management units of each business, create comprehensive strategies

and implement business activities about its products and services.

The companies’ activities are composed of two reportable

segments, “Oil business” and “Energy solutions business,” each of

which is involved in the sale of products and services. The businesses

which are not included in reportable segments are shown in “Other.”

The “Oil business” manufactures and sells gasoline, naphtha,

kerosene, diesel oil, fuel oil, lubricants, LP gas, asphalt, and petrochemical

products. The “Energy solutions business” incorporates the manufacture

and sale of solar modules and wholesale supplies of electricity.

(2) METHODS OF MEASUREMENT FOR THE AMOUNTS OF SALES, PROFIT (LOSS), ASSETS, LIABILITIES, AND OTHER ITEMS FOR EACH REPORTABLE SEGMENT

The accounting policies of each operating segment are consistent with

those disclosed in Note 2, “SUMMARY OF SIGNIFICANT

ACCOUNTING POLICIES.”

Segment profi t (loss) is stated on an operating income basis. Inter-

segment sales and transfers are recorded at the same prices used in

transactions with third parties.

As stated above in the “Accounting Changes,” the methods of

calculating the retirement obligation and service cost in the business

segment have been changed in accordance with accounting changes.

As a result, operating loss in the oil business is decreased by

¥541 million, operating loss in the energy solutions business is

decreased by ¥26 million and operating income in the other business

is increased by ¥5 million compared with the previous accounting

methods.

(3) INFORMATION ABOUT SALES, PROFIT (LOSS), ASSETS, LIABILITIES, AND OTHER ITEMSFor the year ended December 31, 2015

Yen Million

Reportable segment

Oil businessEnergy solutions

business Sub-total Others Total Adjustments Consolidated

Sales Sales to customers ¥2,049,935 ¥119,482 ¥2,169,418 ¥ 8,207 ¥2,177,625 ¥ — ¥2,177,625 Inter-segment sales and transfers 8,993 5,539 14,533 9,607 24,140 (24,140) — Total ¥2,058,928 ¥125,022 ¥2,183,951 ¥17,814 ¥2,201,765 ¥(24,140) ¥2,177,625Segment profi t (loss) (3,812) (10,191) (14,004) 1,785 (12,218) 9 (12,209)Segment assets ¥ 777,736 ¥160,776 ¥ 938,513 ¥36,798 ¥ 975,311 ¥(17,646) ¥ 957,665Other: Depreciation and amortization ¥ 20,818 ¥ 17,542 ¥ 38,360 ¥ 537 ¥ 38,898 — ¥38,898 Amortization of goodwill and

negative goodwill(162) (28) (191) 5 (185) — (185)

Equity in net earnings (losses) ofaffi liates

(1,161) 35 (1,126) — (1,126) — (1,126)

Impairment loss 4,377 2,291 6,669 — 6,669 — 6,669 Balance of goodwill 67 — 67 101 169 — 169 Capital expenditures 11,591 21,281 32,873 190 33,064 — 33,064

Notes: 1. The segment “Others” refers to the total of other segments that are not included in the reportable segments, including real estate, construction works, sale and leases of automobile accessories, etc.

2. The Adjustment for segment profi t (loss) includes ¥9 million of elimination of inter-segment profi t (loss). 3. The Adjustment for segment assets includes ¥(17,646) million of elimination of inter-segment assets. 4. Segment profi t (loss) is reconciled to operating income (loss) in the accompanying consolidated statement of income.




Reportable segment

Oil businessEnergy solutions

business Sub-total Others Total Adjustments Consolidated

Sales Sales to customers ¥2,850,218 ¥138,610 ¥2,988,828 ¥ 9,156 ¥2,997,984 ¥ — ¥2,997,984 Inter-segment sales and transfers 10,241 9,579 19,821 6,479 26,300 (26,300) — Total ¥2,860,460 ¥148,190 ¥3,008,650 ¥15,635 ¥3,024,285 ¥(26,300) ¥2,997,984Segment profi t (loss) (37,391) 17,691 (19,700) 1,619 (18,080) 22 (18,057)Segment assets ¥ 993,525 ¥159,435 ¥1,152,961 ¥35,832 ¥1,188,793 ¥(12,511) ¥1,176,282Other: Depreciation and amortization ¥ 23,585 ¥ 17,268 ¥ 40,854 ¥ 507 ¥ 41,361 — ¥ 41,361 Amortization of goodwill and

negative goodwill(162) (28) (191) 2 (188) — (188)

Equity in net earnings (losses) ofaffi liates

875 (2) 873 — 873 — 873

Impairment loss 1,575 — 1,575 — 1,575 — 1,575 Balance of goodwill (94) (28) (123) 107 (16) — (16) Capital expenditures 17,336 13,581 30,917 182 31,099 — 31,099

Notes: 1. The segment “Others” refers to the total of other business segments that are not included in the reportable segments, including real estate, construction works, sale and leases of automobile accessories, etc.

2. The Adjustment for segment profi t (loss) includes ¥22 million of elimination of inter-segment profi t (loss). 3. The Adjustment for segment assets includes ¥(12,511) million of elimination of inter-segment assets. 4. Segment profi t (loss) is reconciled to operating income (loss) in the accompanying consolidated statement of income.

(4) RELATED INFORMATIONa) Information for each product and serviceDisclosure of this information is not presented since similar information is included in segment information.

b) Geographic segment information1) Sales

Disclosure of this information is not presented since domestic sales make up more than 90% of consolidated sales.

2) Property, plant and equipment

Disclosure of this information is not presented since property, plant and equipment located in Japan makes up more than 90% of consolidated net

book value.

c) Information by major customerFor the years ended December 31, 2015 and 2014

Disclosure on this information is not presented since there were no customers that accounted for 10% or more of net sales to third parties recorded in the

consolidated statement of income.


23. BUSINESS COMBINATIONS

JOINT CONTROLLED ENTITYAbsorption-type company split regarding LP (Liquid Petroleum) gas

import and wholesale operation

Based on the resolution at the Board of Directors’ meeting held on

December 16, 2014, Cosmo Petroleum Gas Co., Ltd. (“Cosmo

Petroleum Gas”) has succeeded the LP gas import and wholesale

operations effective as of April 1, 2015.

(1) OVERVIEW OF THE COMPANY SPLIT(i) Contents of the business to be split

The LP gas import and wholesales operations

(ii) Purpose of the company split

The Company, the Cosmo Oil Co. Ltd., Sumitomo Corporation and

Tonen General Sekiyu K.K. (the “Four Corporate Group”) concluded in

the business integration as to the LP gas import and wholesale

operations as of August 5, 2014. The Four Corporate Group aimed to

create one of Japan’s top-class LP gas import and wholesale

companies, by the integration of the LP gas import and wholesale

operations, including the importing of LP Gas, the management of

shipping, logistics and wholesales in domestic market, and overseas

trading operation by four corporate groups.

The company split has been carried out as a part of the business

integration.

(iii) Effective date

April 1, 2015

(iv) Company split method

This is an absorption-type split in which the Company is the splitting

company and Cosmo Petroleum Gas is the successor company.

(v) Name of post-combination enterprise

Gyxis Corporation (formerly known as Cosmo Petroleum Gas Co., Ltd.)

(vi) Basis of judgment as joint controlled entity

The Four Corporate Group entered into the Shareholders’ Agreement

regarding the joint controlled entity, and allocated voting shares as

compensation for the business combination. In addition, there is no

certain fact indicating the existence of other controlling relationships.

(2) OVERVIEW OF THE ACCOUNTING METHODThe Company adopted ASBJ Statement No. 21 Accounting Standard

for Business Combinations (released on December 26, 2008) and

ASBJ Guidance No. 10 Guidance on Accounting Standard for

Business Combinations and Accounting Standard for Business

Divestitures (released on December 26, 2008).

As a result of the business combination, Gyxis Corporation has been

included in affi liates accounted for by the equity method.


Independent Auditor’s Report


Operations Data

Years ended December 31

2015 2014 2013 2012 2011

Refi nery data:

Crude oil refi ned (thousand kl)*1 23,639 22,182 21,782 21,053 26,212

Group refi nery capacity utilization rate (%)*1 91.5 86.6 94.6 91.6 93.2

Sales data:

Oil product sales volume (thousand kl)

Gasoline 8,699 8,694 8,952 9,060 9,494

Jet fuel 1,794 1,791 1,856 2,158 2,077

Kerosene 2,625 2,681 2,710 2,830 2,816

Diesel oil 5,366 5,395 5,264 4,999 4,952

Fuel oil A 2,007 1,836 1,720 1,634 1,610

Fuel oil C 1,074 1,263 1,325 1,928 1,769

Others*2 3,495 4,022 4,157 4,042 4,195

Domestic sales total 25,060 25,681 25,985 26,649 26,914

Exports 3,093 2,063 1,558 574 3,548

Total (thousand kl) 28,153 27,744 27,543 27,223 30,462

Gasoline market share (%)*3 16.0 16.1 15.6 15.5 15.5

High-octane gasoline market share (%)*3 19.4 18.3 16.9 16.6 16.6

Number of service stations 3,212 3,339 3,464 3,633 3,782

Number of self-service stations 984 993 990 978 963

*1. Total for Yokkaichi Refi nery, Keihin Refi nery, and Yamaguchi Refi nery*2. Includes naphtha, LPG, lubricants, asphalt, bitumen, and coal, excludes cargo trade*3. Source: Showa Shell


Solar FrontierMiyazaki PlantKunitomi Plant

Kyushu Branch

Yamaguchi Refi nery of Seibu Oil Co., Ltd.

Keihin Refi nery of Toa Oil Co., Ltd.Mizue Power Station of Genex Co., Ltd.

Ohgishima Power Station of Ohgishima Power Co., Ltd.Keihin Biomass Power Station

Head Offi ceMetropolitan BranchKanto BranchSolar Frontier K.K. Head Offi ce

Hokkaido Branch

Chugoku Branch

Kinki Branch

Central Research LaboratoryAtsugi Research Center

Ishioka Training Center

Yokkaichi Refi nery of Showa Yokkaichi Sekiyu Co., Ltd.

Chubu Branch

Niigata Petroleum Import TerminalNiigata Yukigunigata Megasolar Power Plant and

Niigata Second Megasolar Plant

Internal Audit DivisionIntegration Preparation Offi ceOil Business Center• Commercial Sales Division• Crude Oil & Marine Division• Distribution & Operations Division• Lubricants & Bitumen Division• Manufacturing Division• Marketing Planning Division• New Business Promotion Division• Oil Products Division• Petro Chemical Business Promotion Team• Research & Development Division• Retail EPOCH Project Team• Retail Sales Division• Sales Division• Supply Division

Energy Solutions Business Center• Power Demand and Supply Division • Power Sales Division• Solar Frontier K.K.

Group Functions• Health, Safety, Security and Environ-

ment (HSSE) Division• Credit & Financial

Risk Management Team• General Affairs Division• Integrated Corporate Planning

Division• Internal Control Promotion Division• IT Planning Department• Integrated Finance &

Control Division• Integrated Legal Division• Integrated Human Resources Division• Procurement Team• Public Affairs Division• Secretariat Department

(As of April 1, 2016)

Network

Head Offi ce

Solar Frontier Tohoku Plant

Tohoku Branch

1, 8

10

9

2

6

5

4

3

7


Solar Frontier Alcobar Offi ce (Saudi Arabia) Solar Frontier Americas (United States)

Saudi Aramco(Saudi Arabia)

Solar Frontier Europe (Germany)

Abu Dhabi Representative Offi ce (UAE)

Refi neries, import terminals, and power plants

Offi ces, depots, and asphalt terminals

Head Offi ce, branches, R&D center, and other business locations

• Kushiro Nishiko• Shiogama• Sado• Hiroshima• Karatsu

Ishioka Training Center

Central Research Laboratory

Branches• Hokkaido Branch• Tohoku Branch• Metropolitan Branch• Kanto Branch• Chubu Branch• Kinki Branch• Chugoku Branch• Kyushu Branch

Niigata Petroleum Import Terminal

Lubricants Blending Plants

• Yokohama• Kobe

Depots Solar Module Plants andResearch Center• Atsugi Research Center• Miyazaki Plant• Kunitomi Plant• Tohoku Plant

Power Plants

• Mizue Power Station ofGenex Co., Ltd.

• Ohgishima Power Station of Ohgishima Power Co., Ltd.

• Keihin Biomass Power Station• Niigata Yukigunigata Megasolar

Power Plant and Niigata Second Megasolar Plant

Group Refi neries

• Yokkaichi Refi nery of Showa Yokkaichi Sekiyu Co., Ltd.

• Keihin Refi nery of Toa Oil Co., Ltd.• Yamaguchi Refi nery of Seibu Oil Co., Ltd.

Asphalt Terminals

• Yokohama• Takamatsu• Mie

8

9

10



Company name Major businesses

Consolidated subsidiaries (21 companies)

Showa Yokkaichi Sekiyu Co., Ltd. Oil refi ning

Toa Oil Co., Ltd. Oil refi ning

Showa Shell Sempaku K.K. Domestic and international shipping operations

Heiwa Kisen Kaisha, Ltd. Depots operationShipping brokerage

Shoseki Engineering & Construction Co., Ltd. Design and construction of mainly oil-related industrial facilities and service stations

Nippon Grease Co., Ltd. Grease and lubricant sales

Solar Frontier K.K. Development, manufacture, and sales of solar panels and systems

Shoseki Kako Co., Ltd. Manufacture, sales, and installation of waterproofi ng materialsManufacture and sales of oil products and bitumen paving materials

K.K. Rising Sun Automobile parts salesEquipment leaseInsurance agent

Wakamatsu Gas K.K. Sales of oil productsCity gas business

Genex Co., Ltd. Power generation

Leef Energy K.K. Oil products sales

Jonen Co. Oil products sales

Chuo Shell Sekiyu Hanbai K.K. Oil products sales

Tokyo Shell Pack K.K. Oil products sales

Nakagawa Oil Co., Ltd. Oil products sales

Petro Star Kansai Co., Ltd. Oil products sales

Nissho Koyu K.K. Oil products sales

Nagase Oil Ltd. Oil products sales

Showa Shell Business & IT Solutions Ltd. Provision of IT-related services

1 other company

Equity-method affi liates (14 companies)

Seibu Oil Co., Ltd. Oil refi ning

Japan Oil Network Co., Ltd. Storing

Niigata Joint Oil Stockpiling Co., Ltd. Stockpiling

Dia Shoseki Co., Ltd. Oil products sales

Shell Sekiyu Osaka Hatsubaisho K.K. Oil products sales

Central Sekiyu Gas Co., Ltd. Oil products sales

Mieseki Shoji K.K. Oil products sales

Shell Tokuhatsu K.K. Oil products sales

Joyo Shell Sekiyu Hanbai K.K. Oil products sales

Marubeni Energy Corporation Oil products sales

Toyotsu Petrotex Corporation Oil products sales

Ohgishima Power Co., Ltd. Power generation

Enessance Holdings Co., Ltd. Sales of liquefi ed gasConstruction related to high-pressure gas and oilSales of residential and offi ce automation equipment

Gyxis Corporation Manufacture, storage, transport, sale, and import/export of LP gas

(As of December 31, 2015)

Major Subsidiaries and Affi liates


Date of Establishment: January 1,1985

Authorized Number of Shares: 440,000,000 shares

Number of Shares Issued: 376,850,400 shares

Paid-in Capital: ¥34,197,585,900

Number of Employees: 808

Total Number of Service Stations: 3,212

Number of Shareholders: 48,621

Securities Listing: Tokyo Stock Exchange

Ticker Code: 5002

Transfer Agent: Sumitomo Mitsui Trust Bank, Limited2-8-4, Izumi, Suginami-ku, Tokyo 168-0063, Japan

Independent Auditors: PricewaterhouseCoopers Aarata

General Shareholders’ Meeting: March

Major shareholders Number of shares heldPercentage of total common

shares outstanding

The Shell Petroleum Co., Ltd. 125,261.2 (Thousands) 33.24%

Aramco Overseas Company B.V. 56,380.0 14.96

The Master Trust Bank of Japan, Ltd. (Trust Account) 18,814.4 4.99

Japan Trustee Services Bank, Ltd. (Trust Account) 12,783.3 3.39

The Anglo-Saxon Petroleum Co., Ltd. 6,784.0 1.80

Trust & Custody Services Bank, Ltd. (Securities Investment Trust Account) 4,705.6 1.25

BNP Paribas S.A. 3,502.0 0.93

STATE STREET BANK WEST CLIENT-TREATY 2,965.5 0.79

Nomura Securities Co., Ltd. 2,575.8 0.68

Japan Trustee Services Bank, Ltd. (Trust Account 9) 2,435.0 0.65

Total 236,206.8 62.68

Trading Volume

Stock Price Range Stock price (left) TOPIX (right)

(As of December 31, 2015)

Investor Information

(Yen)

1,200

900

600

300

0

2,000

1,500

1,000

500

(Month)

20121 2 3 4 5 6 7 8 9 10 1112

20131 2 3 4 5 6 7 8 9 10 1112

20141 2 3 4 5 6 7 8 9 10 1112

20151 2 3 4 5 6 7 8 9 10 1112

(Thousand shares)

(Month)

20121 2 3 4 5 6 7 8 9 10 1112

20131 2 3 4 5 6 7 8 9 10 1112

20141 2 3 4 5 6 7 8 9 10 1112

20151 2 3 4 5 6 7 8 9 10 1112

100,000

75,000

50,000

25,000

0

June 2016Printed in Japan

Showa Shell Sekiyu has been selected for the FTSE4Good Index(a socially responsible investment index) for twelve consecutive years starting in 2004.

Inclusion in SRI Index (As of May 31, 2016)

Caution Regarding Business Forecasts and Forward-Looking StatementsBusiness forecasts and other forward-looking statements regarding Showa Shell found in this report reflect the management’s assessment based on data available to it at the time the report was published. Readers are cautioned that actual business results may differ materially from these statements due to changes in economic conditions, market trends, exchange rates and other factors.

Showa Shell Sekiyu K.K.Daiba Frontier Bldg., 2-3-2, Daiba, Minato-ku,

Tokyo 135-8074, Japan

Tel: +81-3-5531-5594

http://www.showa-shell.co.jp/english/

This corporate report was printed using vegetable oil ink and a waterless printing process.

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