Energizing the Future

Corporate Report 2016 [Year ended December 31, 2015] ENERGIZING THE FUTURE

Showa Shell Sekiyu K.K. Business Model

Business Model

Procurement Refi ning Oil Business Gasoline, kerosene, In the oil business, we refi ne imported diesel oil, heavy fuel oil, petrochemicals,emicals, crude oil at our Group refi neries and sell and LPG oil products. Our highly competitive Group refi neries, local contract dealers, and business partners including transportation companies are all playing critical roles to Synergies provide the oil products that customers between assets Management need in a safe and stable manner. Strategies Byproduct fuel Former business facility sites Corporate Procurement Governance Energy Solutions Business Solar 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 The wholly owned subsidiary Solar Frontier K.K. operates solar power plants that use these modules. the solar business. In the electric power business, we leverage synergies with our other businesses Electric Power Business to construct and operate power stations as well as sell electricity.

Allocation of Resources

Management Resources and Stakeholders

Technologies and expertise Networks of the Shell Manufacturing facilities Business partners Group and Saudi Aramco

CONTENTS 2 Our History 20 Business Activities 4 Group CEO Interview 20 Special Feature: 12 Corporate Governance TO THE NEXT GROWTH STAGE 22 Oil Business 28 Energy Solutions Business Customers Export Storagee Sales

Oil product Manufacturing transportation Lubricants and Sales synergies asphalt

Manufacturing Leveraging our service stations Solar module sales and LPG business network

Development, maintenance, operation, and sale of solar power plants SynergiesS between technologies

Manufactured solar modules

Power plant opoperationeration Electricity sales

Returns from Business Activities

Human resources Financial base Communities and society Shareholders Global environment

36 Management Resources The Showa Shell Group aims to increase corporate value by providing society with the energy Editorial that it needs. Based on this recognition and to provide a more comprehensive view of the 36 Safe Operation and Policy Group’s management and business activities, Corporate Report 2016 includes a full range of Stable Supply information regarding management policies and strategies, business conditions and risks, and 38 Environmental Preservation and the Group’s management resources and stakeholders. The Company referenced guidelines in R&D Ventures compiling this report, such as the International Integrated Reporting Framework Ver. 1.0 released 43 Strengthening of Human Resources by the International Integrated Reporting Council. 46 Community and Social Contribution CSR Book 2016 (available as PDF only) CSR Book 2016 contains detailed non-ﬁ nancial data and information Activities on the corporate social responsibility (CSR) activities conducted to the 47 Financial Section and Corporate Data 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

Showa Shell Sekiyu K.K. Corporate Report 2016 1 Our History

Foundation 1985–2004

1900: Rising Sun Petroleum Co. Ltd. established by Samuel 1985: Shell Sekiyu and Showa Oil merged to become Company Showa Shell Sekiyu K.K. 1942: Showa Oil Co., Ltd. established through the merger of 1993: Commenced research on CIS thin-fi lm solar modules 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 Launch of the groundbreaking high- Launch of the new X Card, with a 1967: Entered into capital alliance with Seibu Oil Co., Ltd. octane gasoline Formula Shell Super X points back system, an industry fi rst 1973: Commenced an advanced POS management system (1987) (1995) 1978: Began research on solar cell in support of a stable 1996– energy supply for Japan Jump 21 Reconstruction Period To stay ahead of the intensifying competition, Showa Shell concentrated its management resources in oil refi ning and sales through streamlining measures, in

Sale of lamp oil, wax candles, addition to reconstructing its business portfolio. and benzene (1900) 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

Sale of Red Shell Symbol and Black Shell Symbol brand gasoline for automobiles Launch of new high-octane (1917) gasoline Shell Pura (2002)

Industry and Social Environment 1980s 1986: Act on Designated 1910s 1950s–1960s Petroleum Products,* which Motorization driven by • Postwar recovery, rapid economic growth encouraged the import of imported automobiles • 1962: Deregulation of crude oil imports gasoline, kerosene, and • 1964: Opening of the Tokaido Shinkansen (bullet train) in diesel oil under certain conjunction with the Tokyo Olympics conditions. The act • 1969: Full opening of the Tokyo–Nagoya Expressway effectively limited importers • Rapid increase in vehicle ownership in Japan to oil companies.

* Act on Designated Petroleum Products is short for the Act on 1940s 1970s Interim Measures concerning the Wartime era. End of • First and second oil shocks Importation of Designated Petroleum Products. The act World War II in 1945 • Establishment of the Agency for Natural regulated the import of oil following the conclusion Resources and Energy and implementation of products. The act prescribed of the Paciﬁ c War the Petroleum Stockpiling Law as part of efforts regulations for reserves, quality to reinforce Japan’s energy security adjustments, and alternative supplies, and effectively limited • Full-ﬂ edged arrival of an automobile society importers to oil companies. This act was abolished on March 31, 1996, as part of efforts to promote deregulation and Trends in Domestic globalization in Japan. Demand for Fuel Oil

1965 1970 1980

2 Showa Shell Sekiyu K.K. Corporate Report 2016 2005–2012 2013–

2005– 2013– New Foundation Period Medium-Term Business Action Plan (through to 2017) In addition to further structural cost reductions, Showa Shell Aiming to become an integrated energy company that is promoted the growth of its core businesses and established overwhelmingly competitive, Showa Shell has launched a foundation for new businesses. strategies to maximize value in each business. 2005: • Decided on the commercialization of the solar business 2013: Began partnership with TonenGeneral Sekiyu K.K. for • Entered into a purchasing agreement for oil products the supply of oil products with Fuji Oil Co., Ltd. 2015: • Established Gyxis Corporation, integrating the LPG 2008: Established Enessance Holdings Co., Ltd., by merging businesses of Cosmo Oil Co., Ltd., Sumitomo the LPG business with that of Sumitomo Corporation Corporation, and TonenGeneral Sekiyu • Completed Tohoku Plant, a CIS thin-fi lm solar module 2010– manufacturing plant Medium-Term Business Vision, Conquer the Change, • Reached an agreement on business partnership with Cosmo Oil at refi neries in the Yokkaichi region, Mie Pioneer the Future Prefecture To conquer the change in the business environment, Showa • Entered into a memorandum of understanding with Shell enhanced the competitiveness of its oil business and Idemitsu Kosan Co., Ltd., regarding business developed new energy businesses. integration • Commenced commercial operations at Keihin 2010: Commenced commercial operations at the fi rst and Biomass Power Plant second units of Ohgishima Power Station 2016: • Commenced commercial operations at the third unit 2011: • Closed Ohgimachi Factory, which was part of Keihin of Ohgishima Power Station Refi nery of Toa Oil Co., Ltd. • Commenced retail sales of low-voltage electricity • Commenced operations at Kunitomi Plant, a CIS thin-fi lm solar module manufacturing plant

Introduction of the new payment service Shell EasyPay at service stations (2012) Launch of new high-octane Introduction of the Shell-Ponta credit Introduction of the joint point gasoline Shell V-Power card (2015) (Million KL) program Ponta (2010) (2014) 250

2000s 2010 2012 200 • Peak of demand for Enactment of the ﬁ rst round of Commencement of domestic oil products the Sophisticated Methods of feed-in tariff scheme • Partial deregulation of the Energy Supply Structures Law, for renewable energy retail electricity market which required oil companies in Japan to upgrade reﬁ ning facilities 150

1990s 2014 2016 100 • 1996: Abolishment of the Act on Designated Enactment of the second Complete Petroleum Products, which signiﬁ cantly eased round of the Sophisticated deregulation conditions for the import of oil products Methods of Energy Supply of the retail • Increase in domestic gasoline demand Structures Law, which electricity 1998: Lifting of the ban on self-service gas stations required further upgrading market • Advancement of full-scale initiatives to mitigate global of reﬁ ning facilities 50 warming, establishment of targets to reduce greenhouse gases under the Kyoto Treaty

0 1990 2000 2010 Source: Resources and Energy Statistics, Ministry of Economy, Trade and Industry

Showa Shell Sekiyu K.K. Corporate Report 2016 3 Group CEO Interview

Entering the ﬁ nal stage of our transformational journey to be a truly competitive global energy company—business integration

Tsuyoshi Kameoka Representative 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.

4 Showa Shell Sekiyu K.K. Corporate Report 2016 Q1 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?

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

In 2015, environmental changes continued to affect our performance. new technologies as well as developing new business models. In the oil business, the environment was severe throughout the year In the electric power business, the market environment was as the drop in crude oil prices caused a time-lag effect in which oil extremely challenging as power prices in the exchange market fell product prices declined earlier than the cost of processed crude following the decline in crude oil prices. We maintained steady oil, and as a result, our product margins decreased. Under these profi ts, however, due to effi cient and safe operations at our power circumstances, the oil business managed to record a solid plants, expansion of retail sales and wholesale according to a performance with a year-on-year increase in profi ts on a CCS medium- to long-term strategy, and the commencement of basis,* which the Company positions as an important management operations at Keihin Biomass Power Plant ahead of schedule. indicator to measure substantial profi tability. I believe that this I believe we demonstrated the strengths of the Showa Shell strong performance resulted from our continuous efforts to reinforce Group by adapting well to the severe business environment in our earnings base under the Medium-Term Business Action Plan. each business and steadily implementing our medium-term As for the solar business, the purchase price for solar power strategies, which resulted in a year-on-year increase in profi ts. electricity under the feed-in-tariff scheme fell substantially, and certain electric power companies introduced free output control in Operating Income (Loss) by Business (Yen Billion) Japan, our primary market. Consequently, investments in new solar 120 power projects were somewhat more sluggish than our initial expectations, causing the solar panel selling price to decline. To 80 respond to the changes in the domestic environment, we further focused on the residential market, where stable demand is 40 55.4 21.7 13.8 51.0 expected to continue. In addition, we tried to further develop our 26.6 17.5 17.6 0 sales foundation in overseas markets, as global demand is –15.4 –10.1 –28.8 expected to grow in the future. However, as our average selling –40 price declined because of the rapid expansion of overseas sales, 2011 2012 2013 2014 2015 where the unit sales price is relatively lower, profi ts decreased Oil Business (CCS operating income*) Energy Solutions Business signifi cantly year on year. On the other hand, 2015 was a year in * 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 which we made great strides toward realizing medium-term growth, an important management indicator for the Company that refl ects substantive particularly in such ways as launching a new plant to introduce underlying earnings.

Q2 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?

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 product and service differentiation to maintain our domestic sales chain to realize the highest level of profi tability in the domestic oil volume of oil products amid declining demand. In addition to industry, even under a tough business environment. initiatives for service stations, we are also bolstering the In refi ning and supply, we are strengthening our development and sale of products that meet customer needs in the competitiveness by region and business area beyond the Group’s fi eld of high-value-added products, such as lubricants and asphalt. boundaries. In April 2015, we reached an agreement with Cosmo These efforts resulted in a solid sales performance for 2015. Oil for collaboration between refi neries in Yokkaichi. This Furthermore, as a strategy that pursues synergies within the Group, collaboration will satisfy our mandate under the second round of we commenced electricity sales to households leveraging the sales the Sophisticated Methods of Energy Supply Structures Law.* We network of our service stations and LPG business in April 2016. also commenced another collaboration in asphalt distribution with Overall, I believe we are making sound progress in strategies Cosmo Oil. In petrochemicals, we launched a new production that pursue improvement in both effi ciency and added value, facility in 2016 to increase the production of petrochemical thereby steadily enhancing the profi tability of the oil business. products, in response to declining gasoline demand in Japan and * For details on the Sophisticated Methods of Energy Supply Structures Law, please refer increasing petrochemical demand in Asia. to page 22. In regard to sales, we have been conducting strategies for

Showa Shell Sekiyu K.K. Corporate Report 2016 5 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, power plants, in addition to our business in Japan, we have countries around the world are working together to substantially commenced operations in the United States. This business offers reduce greenhouse gas emissions. In the meantime, Showa Shell is signifi cant added value by drawing on the special properties of committed to promoting the spread of renewable energy with its CIS, which generates a larger amount of electricity, and managing highly competitive solar power systems. the entire development process of large-scale solar power plants In order to do so, it is absolutely necessary to reduce the from start to fi nish. As such, we plan to expand this business both overall costs for solar power systems to a level that meets the in Japan and overseas. Moreover, we made solid progress in economic requirement around the world. Accordingly, we are 2015 in entering new markets overseas to accelerate full-scale leveraging our proprietary technologies to reduce costs and global business expansion. strengthen product development. One major step was the In technology development—the key to promoting solar commencement of operations at our new Tohoku Plant. We power and achieving our long-term business growth—we are position this plant as a model plant for future overseas deployment advancing R&D activities to enhance the energy conversion and plan to achieve best-in-class production costs by adopting effi ciency of our solar panels. We have made solid progress in state-of-the-art mass production technology. We advanced startup these activities, including achieving a world record with our processes, verifying our new technologies on real production lines, small-scale solar cell prototype. and started commercial production in June 2016. As the business environment changes signifi cantly, we will In sales, we are focusing our efforts on high-value-added continue to implement these strategies from a medium-term strategic offerings. For residential panel sales in Japan, we are intensifying prospective. In 2016, we will enter a stage in which we will our efforts to offer a one-stop service, from installation proposal to achieve further results. We aim to once again realize profi tability after-sales care, as well as a total system to promote the spread of in the solar business as soon as possible. energy-saving houses. For the development and sale of solar

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

Anticipating changes in the business environment, including the power plants. Preparing for the launch of these plants, we worked future restart of nuclear power plants, the increase of new market on expanding retail sales and wholesale, and we have successfully entrants, and extremely volatile oil prices, we are expanding our reinforced a stable business foundation and proﬁ t base. As one of business, aiming to establish proﬁ tability that has little vulnerability these efforts, we began retail electricity sales to households in April to these external factors. Accordingly, we are rapidly developing 2016, when the retail market was completely deregulated, by the electric power business both in power generation and sales. leveraging synergies with the oil business’s service stations as well We have expanded overall power generation capacity by as our LPG sales network. By adding to our portfolio general adding competitive and eco-friendly power plants, effectively household customers, who have a different pattern of energy utilizing our oil business assets, as well as collaborating with other consumption compared to our existing corporate customers, we companies. From late 2015 to 2016, we launched two new 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 high-octane gasoline that was launched in 2014. The predecessor reinforce structural cost competitiveness. While cost reductions can to Shell V-Power was Shell Pura, which was sold in limited regions increase profi ts in the short term, sustainable growth essentially instead of nationwide as shipping costs would have increased in requires enhancing business value. Thus, it is necessary to have a doing so. For the Shell V-Power launch, we closely examined ways corporate culture that can lead the Company to this goal. to deliver our high-value-added product to people across Japan. As I stated last year, we defi ned the three worst items in our Through tireless discussions between shipping and sales departments, annual employee opinion survey conducted in 2012 as indicators we came to the conclusion that even if the Company spent more for corporate culture transformation. The worst of the three was on shipping costs, overall business profi ts throughout the value “collaboration beyond departmental boundaries.” This result chain, which includes our contract dealers, would also increase as indicates, for example, that thinking only about cost reductions for long as the sales volume for this high-value-added product one’s own department will not produce the optimal outcome for the increases. While seeking the support from a great number of entire Company. Based on this idea, we made efforts to seriously business partners, we succeeded in the nationwide delivery of improve in this area. Shell V-Power. One signifi cant accomplishment was Shell V-Power, a We also made efforts in BPR* while appointing a BPR supervisor

6 Showa Shell Sekiyu K.K. Corporate Report 2016 for each department. Even slightly expanding the scope of work for improvements in effi ciency across the entire Company. These efforts one department can signifi cantly reduce the workload for another have led to an improvement in the results of the employee opinion department. As such, we have continued to improve workfl ow and survey year by year. With these results, I truly believe a culture of effi ciency beyond departmental boundaries Groupwide. Furthermore, pursuing optimization Groupwide has taken root. we saw positive results from sharing best practices regarding * BPR: Business Process Re-engineering

Making 2016 the year in which we will complete our Medium-Term Business Action Plan Our Medium-Term Business Action Plan covers the ﬁ ve-year period year we complete the plan, one year ahead of schedule. We from 2013 to 2017. However, as we prepare for the business hope that this early ﬁ nish will ensure a good start for the new integration with Idemitsu Kosan, we have positioned 2016 as the company.

Q3 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?

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 integrated energy company that can provide new kinds of energy 2000s, after which the resulting supply glut across the industry for today’s society, what the Company alone can do or what a started to weigh on profi tability. And although the supply-demand partial business partnership can do is limited. Therefore, we balance improved due to the reduction in domestic refi ning considered it necessary to let business integration further improve capacity via the Sophisticated Methods of Energy Supply Structures our effi ciency as well as re-establish both a strong business base Law, it is still clear that domestic demand for oil products will and a stable earnings foundation. continue to decline as social needs for energy change due to After reviewing every possibility, we recognized Idemitsu changes in people’s lifestyles and increasingly stringent Kosan as the best candidate for business integration. Like Showa environmental regulations. Shell, Idemitsu Kosan has been actively making efforts to optimize Even before the importation of oil products was substantially facilities in its domestic oil business and pursuing the development deregulated through the abolishment of the Japan Special of an effi cient and sustainable supply foundation. With the mutually Petroleum Law* in 1996, we have been trying to structurally shared goal of creating a truly leading company with unrivaled reduce costs. In 2010, we decided to close a refi nery on our own competitiveness, we reached an agreement for business initiative before the Sophisticated Methods of Energy Supply integration with Idemitsu Kosan and, subsequently, concluded a Structures Law required refi ning companies to reduce their refi ning Basic Memorandum of Understanding in November 2015 in capacities. As this example shows, we have always led the which the companies set a merger as the basic structure of industry in terms of business transformation. In addition, we have business integration. been promoting the Medium-Term Business Action Plan since 2013 * “Japan Special Petroleum Law” is short for the “Act on Interim Measures concerning the to establish industry-leading profi tability regardless of the business Importation of Designated Oil Products.” The Japan Special Petroleum Law pertained to environment. In doing so, we established robust earnings and a the importation of oil products. The law required importers to have emergency reserves, conduct quality adjustments, and provide alternative supplies, which effectively limited strong fi nancial foundation. However, to support Japan’s energy importers to oil companies. Amid a shift toward deregulation and internationalization, supply over the long term, as well as realize growth as an the law was abolished on March 31, 1996.

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

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 resources generated from the relentless pursuit of efﬁ ciency in great number of other partner companies. Through the business growth opportunities that the expansion of our business scope will integration, we will create an earnings base with even more bring. Also, we will aggressively promote global expansion stability by establishing an even stronger supply chain together with supported by a stable domestic earnings base. At the same time, our partner companies, as well as through pursuing synergies. In we will leverage the experience and know-how that both doing so, I believe we can support Japan’s energy security in a companies have cultivated over the years to create a Japan- sustainable manner going forward. originated model for a new energy company that can contribute to In addition, this business integration allows us to invest new solving social and environmental issues.

Showa Shell Sekiyu K.K. Corporate Report 2016 7 Q5 Could you tell us about the basic strategy and expected synergies in oil and petrochemical businesses after the integration?

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 fi nancial discipline. companies’ assets. When it comes to business integration in Meanwhile, regarding sales, the new company will result in manufacturing industries in general, the main focus tends to be on having a vast service station network of approximately 7,000 outlets. the rationalization of key production facilities. In our case, both While Showa Shell has abundant service stations in urban areas, companies share the same enthusiasm for refi nery effi ciency and Idemitsu Kosan has a well-balanced nationwide network. After the have proactively closed low-competitive refi neries ahead of their integration, we will be able to deliver products and services on an even competitors. The group refi neries of both companies lead the wider scale as well as enhance effi ciency in shipping and other areas. industry in terms of value-added production capacity, and they These improvements in effi ciency and added value will bring both maintain high utilization rates. Accordingly, we do not have in ¥50 billion of annual synergies by the integration’s fi fth anniversary. plans at this moment to close or consolidate refi neries following the This is the minimum fi gure calculated from the limited information business integration. Rather, we plan to generate synergistic effects we could access before assessing both companies’ businesses in by optimizing operations across both companies’ highly competitive detail. Once we start the actual operational integration, I am refi neries. Furthermore, in the fi elds where numerous growth confi dent that we will not only exceed this fi gure but reach this opportunities exist, such as in petrochemicals, we intend to invest, fi gure sooner than fi ve years. Going forward, we will establish carefully analyzing the future business environment and emphasizing a stable cash fl ow structure as quickly as possible.

Overview of MoU Method of the Business Integration Merger as the basic structure, subject to further consideration and discussion A 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 Location of the Head Offi ce as possible thereafter The ideas proposed in the Corporate Governance Code including the appointment of two or more independent outside directors are to be Corporate Governance actively adopted Structure of the Board of For the time being, an equal number of nominees for New Company’s representative directors and executive directors are to be Directors appointed by each Company The Companies are to continue to use existing brands for a certain period after the Business Integration Brands After a certain period, the introduction of a new service station brand in Japan is to be proactively discussed by New Company’s management Further discussions and deliberations are to be conducted by the Integration Preparation Committee, co-chaired by the presidents Integration Preparation of the Companies Committee Detailed matters are to be discussed by the subcommittees Approx. ¥50 billion per year by the fi fth anniversary of the Business Integration through (1) optimization of supply and demand, and Synergy production plans, (2) optimization of logistics, and (3) streamlining of sales and corporate functions, etc.

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

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 Idemitsu Kosan, and I have meetings periodically where we Preparation Committee and related subcommittees in each division, repeatedly discuss the items that top management should decide and are gradually advancing integration discussions to the extent upon. After reviews based on fair competition laws and due that fair competition laws allow. Mr. Takashi Tsukioka, president of diligence are successfully completed, we will reach a deﬁ nitive

Discussions in the Integration Preparation Committee Schedule and subcommittees

Announcement on July 30, 2015 Announcement on November 12, 2015 April 1, 2017* • Commencement of a full-scale • Execution of MoU • Business Integration effective discussion date Next Steps • Execution of a Share Purchase • Due diligence Agreement between Royal • Execution of a binding deﬁ nitive agreement Dutch Shell and Idemitsu • Approval at respective shareholders’ meetings

* 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.

8 Showa Shell Sekiyu K.K. Corporate Report 2016 agreement. After this agreement is approved at both companies’ I believe it is extremely important for both companies’ employees to General Shareholders’ Meetings, we will launch the new company learn the background behind these values from a historical context on April 1, 2017. and to discuss what kind of relationship they want to have with Because of fair competition laws, we have not yet been able their customers and society at the new company. Through these to hold in-depth discussions related to businesses. However, we efforts, we are advancing preparations so that we can promptly have been communicating with each other so that we are able to integrate our businesses upon completing legal procedures, and understand each company’s culture and values. Before creating a the new company can start smoothly with a strong sense of new culture that maintains the superior aspects of both companies, solidarity from the ﬁ rst day.

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

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, of energy to Japan, Idemitsu Kosan has been competing with we energize the future,” was created involving all Group global oil companies. On the other hand, although we are a employees. The words “our energy” are the essence of this company affi liated with the Shell Group, we are rooted in Japan philosophy, meaning we will provide society with not only the and have a history of discussing and negotiating with the Shell energy we supply through our business, but also the energy Group to develop our business independently, as a company generated by each and every employee. Even if society changes needed by Japanese customers and Japanese society. I believe that or customers’ needs change, we believe that, if we maintain the the spirit of both companies fi ghting to fulfi ll our mission is a mindset that this philosophy instills, we can supply energy that management asset that is required to make the new company a meets the needs of society and continue to grow. The basic philosophy “Japan-originated energy company.” of Idemitsu Kosan also places emphasis on the ideas of each Group Management Philosophy employee as well as leadership. While the wording may be different, “With our energy, we energize the future.” I believe that both philosophies derive from the same mindset. Conversely, some may say there are differences in origin: Five Corporate Principles Showa Shell is a foreign-based company and Idemitsu Kosan is a Social Customer Sustainable Responsi- Innovation Vitality Japan-originated company. But I believe we have many things in Focus Growth bility common. With a strong commitment to providing a stable supply

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. extremely important for meeting the diverse needs of customers. Therefore, I believe we need an organization that can make Furthermore, I believe the efforts in optimizing the operations decisions quickly; in other words, a management execution of the entire value chain that Showa Shell has pursued are structure with clear responsibilities and an appropriate empowerment extremely important. By creating value beyond departmental and system. A ﬂ at organization is also crucial. Having each employee business boundaries, business opportunities for the new company express his or her opinion from their own individual values and will increase even further. engage in active discussions gives rise to excellent ideas. This is

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 I have a strong desire to create a new company in which our energy and to be proud of their company. I would like to create a employees, contract dealers, and partner companies feel positive working environment where employees feel that it is possible to about the business integration. In addition, I want our new, young suffi ciently demonstrate their strengths and work together to create employees to feel confi dent that they made the right choice in signifi cant value in response to the needs of society. joining the new company.

Showa Shell Sekiyu K.K. Corporate Report 2016 9 Q8 Could you elaborate on the newly reinforced corporate governance systems?

We have separated the business execution and management oversight functions and enhanced transparency in director nominations.

Even before the introduction of Japan’s Corporate Governance the Board chairman, thereby clearly separating that role from the Code, we have been making efforts to improve management role of CEO. Furthermore, to decide on the right people for top oversight functions and transparency as well as to protect the management through an objective evaluation, we transformed the interests of minority shareholders. As part of these efforts, we have Compensation Advisory Committee into the Nomination and been appointing independent outside directors, and three years Compensation Advisory Committee, aiming to improve management ago, we established the Compensation Advisory Committee, transparency. While executives obviously set plans to develop which comprises primarily independent directors. candidates to succeed them, we now share those plans with the In addition, we have decided on medium- to long-term Nomination and Compensation Advisory Committee, which business strategies and carried out control functions at the Board consists mainly of outside executives, and have the Committee of Directors, while authority related to business execution was members evaluate the plans from an outside perspective. In doing delegated to operating divisions. However, the chairman of the so, we have established a highly transparent nomination process. Board of Directors was also the CEO. So in 2015, to further I believe that the reinforcement of corporate governance enhance management quality by separating business execution systems promotes self-discipline among executives and, as a result, and management oversight, we appointed an outside director as earns the trust of stakeholders.

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

Active discussions are critically important for improving corporate value.

Outside directors not only offer a disciplined approach in overseeing In addition to the Board of Directors’ meetings, our outside management, they also provide input from perspectives that differ directors and auditors also participate in meetings held only for from our commonly accepted values. While our foreign outside outside executives. In this way, they are focusing on their strengths directors offer opinions from international perspectives, our Japanese and commitment to improving our corporate value. Furthermore, outside directors counter with their own opinions, stating whether regarding the business integration, we established the Special or not such international ideas will work in Japan. The ideas I Committee, consisting of four independent outside executives, as propose as CEO are discussed in this fashion and are put into an advisory body to the Board of Directors to ensure transparency practice after gaining the support of the outside directors. We and fairness in the decision-making process. proceed in this manner because our shareholders will not accept Idemitsu Kosan and Showa Shell agreed to appoint two or ideas that are opposed by the outside directors. In this sense, I more independent outside directors after the business integration. believe we have established a very sound Board of Directors.

Q10 It seems that Showa Shell has been intensively promoting the active role of female employees. Could you elaborate on this issue?

Diversity is absolutely essential in making a strong company.

We have set out our numerical target for women in managerial on gender or nationality, and I am repeatedly saying that diversity positions and are accelerating internal efforts to promote the active and inclusiveness are essential for the Company to grow. I believe role of women in the workplace. In general, our basic way of that it makes the Company more competitive and allows us to thinking on this issue has not changed signiﬁ cantly. In saying that, produce better output by exchanging diverse ideas among people Showa Shell has never dealt with any employee differently based with various senses of values. Diversity also helps generate new

10 Showa Shell Sekiyu K.K. Corporate Report 2016 ideas by listening to minority opinions and understanding diverse active role of women, it is necessary for us to change the mindset points of view. In other words, what is important is not gender of women in managerial positions and improve their leadership itself, but rather diversity. This is the culture Showa Shell maintains ability going forward. As one effort to accomplish this, we train our for the long term. My job as CEO is to create an environment female employees in management positions by appointing executive where Group employees can openly and freely express their offi cers as their mentors. This often leads to changes in the mindset opinions regardless of their nationality, gender, age, or responsibility. of the executive offi cers, creating synergistic effects. We also have As for the systems we have in place, we are improving these in place the Showa Shell Women’s Network, which was established frameworks and support for women, particularly when giving birth, primarily by women in managerial positions to promote the active a major life event, so that female employees can return to work role of female employees. However, as we are shifting back to the after childbirth. Many of our female employees are making use of basic idea that diversity, which includes the active role of female these systems according to their individual circumstances, and there employees, makes a company more competitive, we are currently are very few female employees who retire because of childbirth. spending our efforts to focus on activities for all employees to play However, the active role of women in our corporate culture active roles. has not been at a satisfactory level, and we need to improve both After the integration, the scope of our business and the regions the Companywide mindset to accept the active role of women in where we operate will expand. Naturally, our sense of values will the workplace and female employees’ mindset to pursue such a become more diverse. I would like to forge a corporate culture role. Yuri Inoue, a female corporate executive offi cer, assembled a where these diverse values are naturally accepted and where all group of women in managerial positions and asked them if they the employees can positively demonstrate their own strengths were satisfi ed with their current positions. Many of the women without feeling any constraint from their company origin or were startled when asked this question. To better promote the personal attributes.

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

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 value, risks, and expected returns in accordance with our internal policy for the well-balanced allocation of funds into the following guidelines before we actually decide to invest. three areas: (1) capital investment to maintain our operations and Our shareholder return policy is to provide stable and implement our future growth strategies; (2) maintaining a strong attractive dividends, and we have realized this policy through balance sheet; and (3) providing returns to shareholders. Since the disciplined fi nancial management. Going forward, we are implementation of the Medium-Term Business Action Plan, we have forecasting steady cash fl ows from operating activities and are realized robust operating cash fl ows and have been carrying out expecting to maintain a sound fi nancial structure even after strategic growth investments. carrying out our planned growth investments under the Medium- We emphasize sound investment discipline when making Term Business Action Plan. Accordingly, we plan to provide investment decisions. Even for projects planned under the Medium- dividends at ¥38 per share in fi scal 2016, the same amount as in Term Business Action Plan, we carefully evaluate their strategic the previous year.

Dividends per Share Five-Year Operating Cash Flow Forecast and Fund Allocation (Yen) Plan under the Medium-Term Business Action Plan (Yen Billion) 500 48 Operating cash Additional dividends, further strengthening 38 38 38 400 flow from Energy 36 financial position, Solutions Business 36 additional strategic 300 investment

24 Strategic investment 18 18 18 200 for future growth

12 100 Operating cash Care & maintenance flow from Oil Business Dividends 0 0 20102011 2012 2013 2014 2015 2016 Cash in Cash out (Forecast)

Showa Shell Sekiyu K.K. Corporate Report 2016 11 CORPORATE GOVERNANCE

Our Basic Stance on Corporate Governance Aspiring 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

J K L M

H C F D E G I

A B

12 Showa Shell Sekiyu K.K. Corporate Report 2016 Board of Directors and Audit & Supervisory Board Members (As of May 31, 2016)

Representative Directors Name Position / background A Tsuyoshi Kameoka Representative Director, President, Group CEO After 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 Representative Director, Vice President Since he joined the Company, Mr. Okada had been engaged mainly in the production, supply, and logistics segments. He was involved in managing research and (newly appointed) 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.

Outside Directors Name Position / background Reason for appointment C Chairman of the Board of Directors Mr. Takeda was selected for his extensive operational experience and knowledge in global business management Minoru Takeda Resigned from positions as President and that he had developed when working at oil companies in Japan and overseas, as well as his experience as the Outside Director since March 2013 Representative Director of Shell Japan K.K. and Chairman of the Board of Directors to appropriately manage the Board of Directors, reinforce the management Attended 12/12 Board of Directors Representative Director of Shell Chemicals Japan Ltd. supervisory function and corporate governance, and offer business strategic advice. For these reasons, the meetings in fi scal 2015 in May 2015 Company believes that he will execute the duties of Outside Director appropriately. D Independent Director Mr. Masuda has abundant experience gained through his long-time career in the energy business sector of Yukio Masuda Advisor, Mitsubishi Corporation Mitsubishi Corporation and extensive knowledge in the energy business in Japan and overseas. Based on this Outside Director since March 2009 background, he has demonstrated appropriate supervision of the management of the Company by proactively Attended 12/12 Board of Directors expressing his opinions to enhance the transparency and fairness in managing the Company while serving as a meetings in fi scal 2015 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 Independent Director Mr. Nakamura has experience in managing the human resource division at Ricoh and in managing the company’s Takashi Nakamura Former Director and Deputy President, Ricoh domestic and European subsidiaries. Based on this background, his extensive knowledge of global management Outside Director since March 2014 Company, Ltd. (resigned in June 2012) at Japanese companies, his appropriate management supervision, and his track record of contributing proactively Attended 12/12 Board of Directors to enhancing management transparency and fairness as Chairman of the Company’s Nomination and meetings in fi scal 2015 Compensation Advisory Committee, the Company believes that he will execute the duties of Outside Director appropriately. F Ahmed M. Alkhunaini 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 Outside Director since March 2014 the oil business in the United States, Saudi Arabia, and Japan, and these assignments have included both strategic Attended 12/12 Board of Directors and operational leadership roles. Given this management experience and his track record of providing advice to meetings in fi scal 2015 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-Nuaim President and CEO, Aramco Far East (Beijing) Mr. Al-Nuaim has knowledge in the downstream oil and power generation business sectors, including strategy Outside Director since March 2014 Business Services Co., Ltd. (China) development, policy-oriented business analysis, and operations. Given this background and his track record of Attended 10/12 Board of Directors providing advice to management of the Company and implementing appropriate supervision for the execution of meetings in fi scal 2015 business, the Company believes that he will execute the duties of Outside Director appropriately. H Christopher K. Gunner President and Representative Director, Shell Japan Mr. Gunner has broad knowledge on both the upstream and downstream sectors of the oil and gas business, including Non-Executive Director since March 2015, K.K.; President and Representative Director, Shell extensive management experience in Japan, South Korea, Malaysia, Australia, and the United Kingdom. Given this Outside Director since March 2016 Chemicals Japan Ltd. background and his track record of providing advice to management of the Company and implementing appropriate Attended 10/10 Board of Directors supervision for the execution of business as Non-Executive Director, the Company believes that he will execute the duties meetings in fi scal 2015 of Outside Director appropriately. President, Shell International Eastern Trading Company Mr. Choi has broad experience and sophisticated management knowledge covering both the upstream and I Philip Choi (Singapore); Director, Shell Eastern Trading (Pte) Ltd. downstream sectors of the oil and gas businesses, as well as knowledge of the oil business in Japan. Given this Outside Director since March 2016 (Singapore); Director, Shell Chemicals Japan Ltd. background, the Company believes that he will be able to provide advice to management of the Company and will (newly appointed) exercise appropriate supervision for the execution of business.

Audit & Supervisory Board Members Name Position / background J Kiyotaka Yamada Audit & Supervisory Board Member After 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 Audit & Supervisory Board Member Since joining the Company, Mr. Takahashi has worked mainly in human resources, general affairs, and procurement. He was Chief of Industrial Relations, the General (newly appointed) Affairs Division, and the Internal Audit Division before his current position.

External Audit & Supervisory Board Members Name Position / background Reason for appointment L Midori Miyazaki Independent Audit & Supervisory Board Member Ms. Miyazaki was selected for her broad insights obtained from her careers at Chiba University of Commerce as Professor and Dean, Faculty of Global Studies, Chiba a professor and in policy making as a member of a tax system research commission, with the expectation that her External Audit & Supervisory Board University of Commerce perspective from outside the oil industry would help strengthen the auditing function. Given this background, Member since March 2006 coupled with her track record on the Nomination and Compensation Advisory Committee in proactively Attended 11/12 Board of Directors expressing her opinion to enhance transparency and fairness in management of the Company, the Company meetings and 11/13 Audit & Supervisory believes that she will execute the duties of external Audit & Supervisory Board Member appropriately. Board meetings in fi scal 2015 M Kenji Yamagishi Independent Audit & Supervisory Board Member In addition to his activities as an attorney, Mr. Yamagishi has held important posts at the Bar Association and has Attorney deep understanding in a broad range of fi elds. He has also exercised his auditing capabilities to assist in the External Audit & Supervisory Board sound development of the Group and has a track record on the Nomination and Compensation Advisory Member since March 2008 Committee in proactively expressing his opinion to enhance transparency and fairness in management of the Attended 12/12 Board of Directors Company. For these reasons, the Company believes that he will execute the duties of external Audit & Supervisory meetings and 13/13 Audit & Supervisory Board Member appropriately. Board meetings in fi scal 2015 Overview of Liability Limitation Agreements Outside 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.

Independence Standards the requirements to be independent external Audit & Supervisory The Company has formulated Independence Standards* to bolster Board Members. its management transparency and ensure objectivity. Two or more * http://www.showa-shell.co.jp/english/proﬁ le/mp/corporate_ Independent Outside Directors satisfy these requirements. In governance.html addition, all external Audit & Supervisory Board members satisfy

Showa Shell Sekiyu K.K. Corporate Report 2016 13 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 Minoru Takeda establishing this system, the Company held workshops for the Board of Directors to reafﬁ rm the importance of Outside Director, Chairman of the directors’ responsibilities pertaining to management oversight as well as enhance the Board’s effectiveness. In Board of Directors addition, the Company enhanced transparency in processes for determining director remuneration and Outside Director of Showa Shell nomination. For example, in the Nomination and Compensation Advisory Committee, which comprises since March 2013 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.

Efforts to Build a Corporate Governance System

1999 Number of directors reduced from 18 to 11, executive 2005 Number of outside directors increased by 1 ofﬁ cer system introduced 2007 Retirement allowance system for directors abolished 2003 Executive ofﬁ cer system revised, Management 2009 Number of outside directors increased by 1 (4 of 8 Executive Committee established, number of outside directors became outside directors) directors increased by 1

14 Showa Shell Sekiyu K.K. Corporate Report 2016 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 Midori Miyazaki in the Company’s management or whatever? External Audit & Supervisory I feel that Showa Shell has enhanced its ability to proactively adapt itself to an ever-changing business Board Member environment, not just in terms of governance but in every other aspect of business. In particular, while Professor and Dean external pressure for industrial reform has been mounting, the Company has prepared well and is ready to Faculty of Global Studies, Chiba play a leading role in that regard as a result of its efforts to increase its competitiveness. University of Commerce External Audit & Supervisory Showa Shell employees freely voice their opinions from their own perspectives and are proactive in Board Member at Showa Shell their actions without being inﬂ uenced by the opinions of others or feeling pressured in any way. These since 2006 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.

2013 Number of outside directors increased by 1 2015 Positions of chief executive ofﬁ cer (Group CEO) and Directors’ term shortened from 2 years to 1 year chairman of the Board of Directors separated Compensation Advisory Committee established 2016 Number of outside directors increased by 1 (7 of 9 2014 Number of outside directors increased by 1 directors became outside directors) Nomination and Compensation Advisory Committee established

Showa Shell Sekiyu K.K. Corporate Report 2016 15 Corporate Governance System and Internal Control System

Board of Directors Risk Management Committee In June 2015, the Company separated the roles of chief executive ofﬁ cer (CEO) and the chairman of the Chaired by the Group CEO, this Board of Directors in the aim of further enhancing the effectiveness of management supervision and committee assesses the achieving more timely and more aggressive business execution. Recognizing the role that the chairman of effectiveness of activities with the Board of Directors must play in supervising management, Minoru Takeda, a non-executive outside regard to compliance and risk director, was selected for this position. management, based on the Basic The Board of Directors consists of nine directors, seven of whom are outside directors. Board meetings Policy on Internal Control System are also attended by the four Audit & Supervisory Board members, of whom two are the external Audit & and the Group’s Basic Policy for Supervisory Board members. The outside executives, who have international business experience and Health, Safety, Security and extensive knowledge in a variety of ﬁ elds, offer suggestions and advice for maximizing corporate value Environment (HSSE). The results of based on their diverse and objective viewpoints. discussions by this committee are To ensure that the outside executives can fully participate in discussions at meetings of the Board of provided as suggestions or Directors, materials used at these meetings are distributed in advance, and pre-meetings are held to brief reported to the Board of Directors, on the content of the agenda. as necessary.

Nomination and Compensation Advisory Committee To 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.

General Shareholders’ Meeting

Nominations Reports

Board of Directors Advice Nomination and [Management Supervision] [Business Execution] Compensation Advisory Chairman of the Board of Directors Representative Director, Reports Committee 7 Outside Directors (Including 2 Independent Directors) Group CEO, Executive Directors

Reports Auditing

Group Executive Committee Risk Management Committee

Reports Reports Reports Reports Reports Group CEO Vice President Information Disclosure Compliance Committee Sub-Committee Executive Ofﬁ cer, Reports Reports Reports Oil Business COO

Showa Shell Group HSSE Reports Conference VOP VOP internal consulting external consulting Oil Business Reports service service Executive Ofﬁ cers Harassment consulting service

Auditing Notice Notice Notice Reports Instructions

Business Divisions and Afﬁ liated Companies

Information Disclosure Sub-Committee Compliance Committee This committee, which serves beneath the Risk Management This committee receives compliance-related reports and consultation requests Committee, conducts deliberations aimed at ensuring timely from Group companies, the “Voice of People (VOP)” employee help line, and and appropriate information disclosure by the Group. 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.

16 Showa Shell Sekiyu K.K. Corporate Report 2016 Audit & Supervisory Board Accounting Auditor The Company has adopted the Audit & Supervisory Board system. The board is The Company has appointed PricewaterhouseCoopers made up of two standing Audit & Supervisory Board members and two external Aarata as its accounting auditor to perform auditing, and Audit & Supervisory Board members (independent Audit & Supervisory Board pays compensation for their work. members). External Audit & Supervisory Board members in particular are selected for their broad-based knowledge, as well as the objectivity, neutrality, and Audit Compensation specialized expertise that the auditing process requires. Audit & Supervisory (Year Ended December 31, 2015) Board members attend meetings of the Board of Directors and other important Compensation based on audit certifi cation activities meetings, and receive reports on the status of operations from directors and Showa Shell (Yen million) Consolidated subsidiaries executive offi cers, as well as from audit divisions, offi ces, subsidiaries, and other (Yen million) organizations. Audit & Supervisory Board members also receive reports from the 116 54 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 Compensation based on non-audit activities well as accounting audits. They also monitor and consider the establishment and Showa Shell (Yen million) Consolidated subsidiaries operational status of internal controls for the Group, including subsidiaries. (Yen million) To ensure that external Audit & Supervisory Board members can suffi ciently —2 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.

Nominations Reports Nominations Reports

Auditing

4 Audit & Supervisory Board Accounting Members (Including 2 Audit & Coordination Auditor Supervisory Board Members) Audit & Supervisory Board Reports Auditing

Group Executive Committee Audit Committee The Company has introduced the executive offi cer system and has established the Group Executive Reports Planning approval Committee to serve as the highest decision-making body for business Executive Offi cer, Energy execution. In addition to approving Solutions Business COO Internal Audit Division Coordination business execution policies for each business, the committee seeks to maximize inter-business synergies. Energy Solutions Business Executive Offi cers Committee members include the heads of the business segments—the Executive [Business Execution] Offi cer and Oil Business COO, the Instructions Auditing Executive Offi cer and Energy Solutions Business COO, and the executive offi cers responsible for each of their business areas.

Special Committee In 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.

Showa Shell Sekiyu K.K. Corporate Report 2016 17 Director and Audit & Supervisory Board Member Remuneration

The Nomination and Compensation Advisory Committee is The total remuneration to all Audit & Supervisory Board composed of independent outside offi cers and others. The objective, members decided by the resolution of the General Shareholders’ transparent, and performance-based Basic Policy for Directors Meeting held on March 28, 2008, was ¥10 million or less per Compensation was formulated based on reports by this committee, month. Within the limit of the total amount, remuneration to each and this policy was adopted following approval by the Board of auditor is determined by the mutual agreement among all Audit & Directors at a meeting held on November 5, 2013. This policy Supervisory Board members. Bonuses for Audit & Supervisory called for the portion of director remuneration linked to business Board members were abolished in 2013. performance to be increased and the fi xed payment portion to be Retirement allowances to directors and Audit & Supervisory reduced in order to clearly link director performance with remuneration. Board members were abolished as of the General Shareholders’ In accordance with this basic policy, the upper limit for total Meeting held on March 29, 2007. fi xed remuneration paid to directors was reduced from ¥65 million Director and Audit & Supervisory Board Member to ¥45 million per month by a resolution at the General Shareholders’ Remuneration (Year Ended December 31, 2015) Meeting held on March 27, 2014. Within the limit of the total Executive category Total Total remuneration by Number of amount, monthly base remuneration to each director is determined remuneration category (Yen million) executives (Yen million) subject to using a remuneration table by rank, except for Douglas Wood Fixed Bonuses bonuses remuneration (People) (who stepped down on March 29, 2016), for whom base Directors (excluding outside 273 235 38 3 remuneration was determined by a secondment contract with the directors) Shell Group. Performance-linked bonuses for directors are to be Audit & Supervisory Board members (excluding external Audit & 72 72 — 4 determined each year by resolution at the General Shareholders’ Supervisory Board members) Meeting in consideration of the operating environment and Outside directors and Audit & 112 110 2 7 performance during the applicable fi scal year. Supervisory Board members

Internal Control System

The Company has established the Basic Policy on Internal Control* top management takes various to confi gure an effective internal control system for the Group and opportunities to communicate the increase management transparency and effi ciency. Based on importance of compliance, and we partial revisions to the Companies Act of Japan in 2015, the distribute our Compliance Book to all Company, as well as its subsidiaries, revised this policy, thereby employees and post its content on putting in place an even more effective internal control system and our website so that they can access it ensuring its operation throughout the Group. at any time. To ensure the system’s effectiveness, the Risk Management To foster awareness and Committee, chaired by the Group CEO, meets quarterly to enhance knowledge of compliance, improve and strengthen the internal control system by discussing we conduct compliance training for Compliance book corporate risks and other issues. each employee grade and worksite and operate e-learning programs. In addition, through the “Room Compliance of Compliance” intranet site for providing information to Group The Showa Shell Group recognizes that compliance, together with companies we regularly post examples of violations that have corporate ethics, is essential to achieving sustainable growth while occurred at other companies and share cases of violations at fulfi lling its social responsibility. Accordingly, we work to entrench Group companies to prevent their recurrence and similar violations compliance throughout all areas of the Group. from occurring. Furthermore, we seek to ensure fairness and The Group has formulated its Code of Conduct* as a transparency in our procurement activities. To this end, we have universal code covering the development of corporate activities. In established the General Rule for Procurement,* which highlights addition to legal compliance, this code clarifi es the high degree of legal and corporate ethical compliance, as well as resource ethics required of the Group to fulfi ll its social responsibilities. The protection, environmental preservation, and other social and Group has established other compliance-related regulations, as environmental considerations, and we seek to promote an well, including the Compliance Rules for the Antitrust Law, understanding of these guidelines among our suppliers. Government Anticorruption Rules, Insider Trading Control Rule, As a whistle-blowing system, we have introduced an Environmental Preservation Guidelines, and Export Control Rule. employee consultation service, “Voice of People (VOP),” which In order to enhance employees’ understanding of compliance, encourages Company and Group employees to raise concerns

18 Showa Shell Sekiyu K.K. Corporate Report 2016 about legal and Code of Conduct violations; this system enables and misconduct discovered at subsidiaries since 2014. Subsidiaries employee input both within and outside the Company. After and related departments together worked to clarify and analyze risks investigating and considering any information employees have specifi c to subsidiaries and revised their operational manual and shared, we take whatever measures are deemed necessary in operational fl ow concerning the control of risks. accordance with our internal regulations. We have formulated With regard to risks that need to be checked from a Rules of the Group Companies’ Help Line, “Voice of People,” Companywide perspective, such as the compliance and HSSE covering the system’s operation, and systems are in place to protect promotion structures and the business control structure, we have the confi dentiality of people undergoing consultation and to established business control checklists (BCCs) to enable prevent them from adverse impacts. comprehensive monitoring. Relevant executives and division heads Showa Shell’s policy with regard to criminal organizations is use these BCCs to evaluate the risk management systems of their to handle them through a Companywide approach. The divisions on a yearly basis, creating a uniform management departments in charge of related matters have been designated, system. In 2015, we concentrated on measures targeting and contact is maintained with the police and other external subsidiaries, such as the Board of Directors sharing information specialist institutions. about risk evaluation. With regard to information management, in order to better instill at the workplace level the handling of Risk Management intellectual property and compliance with regulations, we To address risk characteristics of individual departments and introduced new department-wide discussion and evaluation subsidiaries that could affect the Group’s corporate and business processes, in addition to evaluations by executives and value, each year Showa Shell prepares a business control matrix departmental heads. (BCM). We use the BCM to identify the risks associated with The results of BCM and BCC evaluations and analyses are business targets and ascertain the level of impact and control status reported to the Risk Management Committee. of these risks. We promote control activities, introduce improvements, and perform monitoring to ensure that the BCM is functioning For details on HSSE risk management, please refer to pages 36–37. consistently and effectively. In 2015, we addressed legal violations

Information Disclosure and Dialogue with Shareholders and Investors

The Company has formulated the Basic Policy for Information When announcing business performance each quarter, the Disclosure.* Based on this policy, to promote an understanding Company holds large meetings and telephone conferences for and fair evaluation of the Group among various stakeholders, we securities analysts and institutional investors in Japan. We provide work to ensure that important information is disclosed equitably, audio recordings of these sessions on our website along with accurately, and in a timely manner. We also make a proactive presentation materials. We communicate proactively with effort to disclose other information. The Information Disclosure institutional investors in Japan and overseas, visiting investors and Sub-Committee deliberates on the handling of information for participating in conferences held by securities companies. For disclosure. individual investors, we are working toward providing more With regard to IR activities targeting shareholders and information, mainly on our website. Furthermore, we publish a investors, we aim to fulﬁ ll our accountability to our shareholders semi-annual business report booklet entitled To Our Shareholders, and sustainably increase our corporate value by engaging in and we conduct shareholder questionnaires to enhance the active and constructive dialogue with our shareholders and dialogue. The shareholder and investor opinions obtained through investors. Therefore, we have formulated the Policy on Constructive such communications are reported to directors and Audit & Dialogue with Shareholders under the Basic Policy on Corporate Supervisory Board members, which are incorporated into Governance.* We disclose these policies on our website and management activities in the aim of enhancing corporate value. conduct IR activities based on them.

* 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

Showa Shell Sekiyu K.K. Corporate Report 2016 19 SPECIAL FEATURE

New Facilities on Stream TO THE NEXT GROWTH STAGE

WWee havehave startedstarted ooperationsperations aatt nnewew ffacilitiesacilities iinn eeachach bbusinessusiness aass ppartart ooff oourur MMedium-Termedium-Term BusinessBusiness ActionAction Plan.Plan. OIL BUSINESS

TDP Unit (Yokkaichi Reﬁ nery)

Role within the Medium-Term Business Action Plan While 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 unit The 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.

Forecast of Northeast Asian Demand for Paraxylene (Thousand tons/Year) 40,000

30,000

Overview of the Toluene Disproportionation Process (TDP) Unit 20,000 • With an annual production capacity (mixed xylene) of 200,000 tons, the TDP unit increases the production capacity for mixed xylene at Group 10,000 reﬁ neries by about 30%. • The TDP unit effectively utilizes existing facilities, allowing this investment to be efﬁ cient by limiting 0 initial investment. 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 20222023 2024 2025 Forecast

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

20 Showa Shell Sekiyu K.K. Corporate Report 2016 SOLAR BUSINESS Tohoku Plant

Role within the Medium-Term Business Action Plan Striving 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 Plant Tohoku Plant integrates the latest and most advanced technologies developed at Atsugi Research Center, enabling it to achieve global Overview of Tohoku Plant best-in-class cost. The new factory will serve as the technological • Annual production capacity of 150 MW foundation on which Solar Frontier will expand into global markets. • 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

ELECTRIC POWER BUSINESS Keihin Biomass Power Plant Third Unit of Ohgishima Power Station

Role within the Medium-Term Business Action Plan The 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 facilities Overview of Keihin Biomass Power Plant These two power plants expand the scale of the Company’s power • Generation capacity: 49,000 kW generation, further ensuring a stable supply and allowing more proﬁ t • Fuel: Wood pellets and palm kernel shells opportunities. While the Company has been striving to expand retail sales • Constructed on the former site of Ohgimachi Factory of high-voltage electricity as well as wholesale, the Company started retail of Keihin Reﬁ nery, which was closed in 2011 sales to households to pursue synergies with the oil business, fully • The largest power plant in Japan exclusively using capitalizing on the competitiveness of these facilities. These efforts will help woody biomass the Company establish a sales portfolio with even more stable earnings over the medium to long term.

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

Showa Shell Sekiyu K.K. Corporate Report 2016 21 OIL BUSINESS

* 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.

As the state-owned oil company of Saudi Arabia, one of While maintaining a stable supply of oil products the world’s most dominant oil producers, Saudi Aramco for the domestic market, Showa Shell is also is able to supply Showa Shell with a wide variety of engaged in exports. In cooperation with the Shell crude oil at a single loading port, thus realizing the Group, one of the world’s largest trading networks, effi cient transport of oil. Showa Shell imports crude oil Showa Shell fl exibly exports its oil products relative that best suits its Group refi neries’ confi guration and to both domestic and overseas market environments market trends, mainly from the Middle East. in order to maximize its profi ts.

Crude oil Reﬁ ning EExport procurement Gasoline, kerosene, diesel ooil, heavy fuel oiloil,, ppetrochemicals, and LPLPGG

Transportation

At its three Group refi neries,* the Showa Shell Group refi nes crude oil By pursuing both effi ciency and safety to produce fuels such as gasoline, kerosene, diesel oil, heavy fuel oil, when transporting oil products over land and jet and marine fuels, as well as petrochemical products such as and by sea, as well as at our storage mixed xylene, benzene, and propylene. In addition, we purchase oil facilities, we provide a stable supply of products from Fuji Oil Co., Ltd., a business alliance partner. products to customers throughout Japan.

* Showa Shell Group Refi neries Keihin 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)

22 Showa Shell Sekiyu K.K. Corporate Report 2016 Business Environment Due to a declining population and the increasing trend toward energy conservation, the demand for oil products in Japan has Domestic Refi ning Capacity and Fuel Demand declined from its peak levels in the 1990s. On the other hand, as Refi ning capacity (Thousand barrels/Day) there has been little progress in refi ning capacity reduction in Japan, 6,000 the supply glut has long been a problem for the oil industry. 4,500 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 3,000 Energy Supply Structures Law.* As a result of each company’s efforts

1,500 to reduce its refi ning capacity in accordance with this law, the refi ning capacity of the industry in 2014 declined roughly 20% 0 compared to 2008. Moreover, oil companies are required to further 2008 2014 2017 (Forecast) Refi ning capacity Fuel demand enhance the effi ciency of their facilities by March 2017 in an Source: Showa Shell Sekiyu K.K. (based on documents disclosed by the Agency for attempt to continue to improve the supply glut situation. However, Natural Resources and Energy, Ministry of Economy, Trade and Industry) depending on the pace of the decline in demand, the supply glut Asian Oil Demand Forecast may once again become an issue. (Million tons) On the other hand, global oil demand is increasing, especially 1,600 in Asia where the overall economy is rapidly growing. In light of this development, Japanese oil companies are increasing their exports of 1,200 oil products to improve the domestic supply glut. Although competition

800 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 400 grow in the future. Accordingly, having a business foundation that can ﬂ exibly and promptly respond to such changes in supply- 0 2013 2020 (Forecast) 2025 (Forecast) demand as well as in crude prices is indispensable for us to ensure

Source: International Energy Agency (IEA), World Energy Outlook Special Report 2015 a stable supply and sustainable growth.

*As of December 31, 2015 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. Customers

Storage Sales

Manufacturing Lubricants and asphalt

Electric Power Business

Sales synergies

Showa Shell Sekiyu K.K. Corporate Report 2016 23 Business Strategy and Progress of the Medium-Term Business Action Plan

Goal: Become the most proﬁ table oil company in Japan 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

Masayuki Kobayashi Executive Ofﬁ cer Oil Business COO

Leveraging Strengths to Bolster Competitiveness across Supply Chain Amid Rapidly Changing Business Environment

As a pioneer in the industry, Showa Shell has been making efforts consumption and leveraging the Group’s world-leading trading since the late 1990s to increase its business effi ciency according to network for product export, quickly and fl exibly responding to the changes in the business environment. For example, in refi ning, we market dynamics between Japan and overseas. The Toluene closed Niigata Refi nery in 1999 as well as Keihin Refi nery’s Disproportionation Process (TDP) unit that commenced operations Ohgimachi Factory in 2011. We have achieved strong in 2016 at Yokkaichi Refi nery will help further enhance the competitiveness by optimizing refi ning capacity against the size fl exibility in our production. of demand, and now have the most sophisticated facilities in the Furthermore, we are working to optimize our supply structure industry. In order to fl exibly and quickly respond to the rapidly by region in the form of alliances with partners beyond Group changing business environment, maintain a solid supply system, and boundaries. From 2013, we have been promoting a business boast one of the highest profi tabilities, we are implementing a alliance with TonenGeneral Sekiyu K.K. for refi ning and product strategy to bolster our competitiveness across the supply chain by supply in Kawasaki, Kanagawa Prefecture. In addition, in 2015 leveraging our strengths to their fullest extent. we reached an agreement with Cosmo Oil for an alliance between Our highly sophisticated refi neries can allow us great fl exibility the refi neries in Yokkaichi, Mie Prefecture, and preparations are in crude oil selection. Our challenge is to secure the best crude oil currently under way. This alliance will also satisfy our mandate for in the world from numerous sources in terms of both cost and profi t. compliance with the second round of the Sophisticated Methods of In addition, at Group refi neries, we are working to improve Energy Supply Structures Law. For more effi cient logistics, we have productivity while maintaining safe and stable operations. We are continued to introduce large product trucks while pursuing alliances also working to maximize profi tability by reducing our energy with other companies. In 2015, we began collaborative asphalt

Bolstering Competitiveness across Supply Chain

Strategic crude oil procurement Improvement of reﬁ nery productivity

• Flexible crude oil • Improvement of cost procurement and energy effi ciency • Diversifi cation of • Maximization of profi ts suppliers through nimble response to market conditions

24 Showa Shell Sekiyu K.K. Corporate Report 2016 Progress of Major Projects

Project 2013 2014 2015 2016 2017

Structural cost competitiveness improvements ¥34.5 billion achieved, exceeding the target ahead of schedule (target of ¥26.0 billion) / Dantotsu Project

Agreement to Integration Joint-venture company established, businesses integrated Integration of LPG operations examine agreement reached concluded

Surveys and Investment Construction Operation Mixed xylene production capacity increases examination approved completed

Overseas petrochemical operations feasibility examination Surveys and examination

Agreement Business alliance with TonenGeneral Sekiyu geared toward to examine Evaluation and implementation streamlining supply reached

Preparation as well as consideration Commencement of Agreement for Business alliance with Cosmo Oil geared toward for additional areas to streamline alliance alliance strengthening competitiveness in Yokkaichi region reached

distribution with Cosmo Oil in Takamatsu, Kagawa Prefecture. need for energy conservation, longer product lifespans, and high In sales, we are reinforcing our customer foundation with environmental performance. By focusing on consultative sales, we differentiated products and services. In the shrinking high-octane are steadily growing the sales of our value-added products. gasoline market, in order to respond to the needs of customers In LPG business, we established Gyxis Corporation in who cherish their cars, we have launched a new product, Shell April 2015, integrating the LPG wholesale operations of four V-Power, at our service stations in 2014. In addition, to become companies, to increase effi ciency and expand profi t opportunities service stations where customers wish to visit again and again, we through economies of scale. Gyxis is aspiring for sustainable are enhancing our credit card services. Collaborating with our growth through enhancing profi tability through rationalization in contract dealers who are highly familiar with the needs of local wholesale and logistics networks, reinforcement in purchasing customers, we have exceeded the industry average in sales growth power, and overseas trading expansion. for our mainstream high-value-added products such as gasoline, The underlying factor behind our ability to realize a stable kerosene, and diesel oil. Furthermore, in April 2016 we began supply while pursuing effi ciency lies in our corporate culture, which electricity sales to households targeting gasoline and diesel oil consistently places the utmost emphasis on the safety of operation. users, pursuing synergies with the electric power business. Through Going forward, we will continue to give priority to our corporate these initiatives that offer high added value, we are working to culture as an indispensable element for business competitiveness in further reinforce our customer foundation. Also, in lubricants and our goal toward becoming the most profi table oil company in Japan. asphalt, we are bolstering the sales of high-value-added products that address the needs of customers and society, including the

Logistics that pursues safety and efﬁ ciency Differentiation of products and services

• Advanced alliances with • Creation of customer other companies needs • Improvement in efﬁ ciency • Pursuit of new synergies through large-size trucks within the Group

Showa Shell Sekiyu K.K. Corporate Report 2016 25 Reﬁ ning and Supply Group reﬁ neries with further improvement in productivity

Superiority of Group Refi neries Established through Prompt Response to Changes in the Operating Environment Showa Shell has reinforced the competitiveness of Group refi neries our competitiveness in refi neries and bolster the profi t structure of by implementing strategies ahead of other companies in the the oil business.

industry to respond to changes in the operating environment, which * For details on TDP units, please refer to page 20. 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 vs. Crude Distillation Capacities installation ratio of residue processing units (equipment that (%) produces high-value-added oil products from residual oil of lower 59.4 60 value generated during the process of refi ning.) As a result, we 50 have developed facility structures to produce more high-value- 40 added oil products from the low-priced heavy crude oil than other 30 companies in the industry. To further improve the production ratio of 20 the value-added products, we commenced operations of TDP units* in 2016 at Yokkaichi Refi nery to increase the production of 10 0 mixed xylene, whose demand is expected to grow, switching from Showa Shell Group Company A Company B Company C Company D

gasoline, whose domestic demand is declining. This will enhance Source: METI (as of March 31, 2016)

Pursuing High Efﬁ ciency and Stable Operations By reducing excess reﬁ ning facilities, Showa Shell has decreased 70,000 kiloliters of crude oil, equivalent to about a 180,000 ton

fi xed costs and has maintained a high capacity utilization ratio reduction in CO2 emissions. across Group refi neries. The safe and stable management of our Capacity Utilization Ratio of Domestic Refi neries refi neries has contributed to this high utilization. We have kept (%)

equipment trouble and unplanned operation suspensions due to 100 93.2 94.6 accidents at an extremely low level by prioritizing operation safety 91.6 91.5 90 86.3 86.6 and constantly improving overall safety levels. 84.2 80 82.5 In addition, we have invested in energy conservation 80.8 77.3 75.7 77.0 initiatives in our efforts to be eco-friendly, and have improved cost 70 74.6 75.3 effi ciency. As a result, we have successfully reduced unit energy 60 consumption to a much lower level than the industry average. We 0 have also undertaken a project that promotes energy conservation 2009 2010 2011 2012 20132014 2015 by linking our Yokkaichi Refi nery with the adjacent Yokkaichi Plant Group refi neries (Keihin Refi nery, Yokkaichi Refi nery, and Yamaguchi Refi nery) Industry of Mitsubishi Chemical Corporation. Since linking the facilities in Source: Petroleum Association of Japan 2013, we have reduced energy consumption by approximately

Further Strengthening Competitiveness through Collaboration Outside the Group to Optimize Supply Structure As demand is expected to fall, Showa Shell is promoting the collaboration between Cosmo Oil’s Yokkaichi Refi nery and our optimization of its refi ning and supply structure through collaboration Yokkaichi Refi nery. While Cosmo Oil will reduce its refi ning with other companies to enhance competitiveness and establish a capacity by suspending operations at one of its crude oil regarding supply structure. In 2013, we formed a business alliance distillation units, Showa Shell will provide Cosmo Oil with oil within our supply system with TonenGeneral Sekiyu. We are products and feedstock. Furthermore, we are examining the boosting the effi ciency of facility operation at both companies’ feasibility of promoting effi ciency among other facilities, such as refi neries in Kawasaki by effectively leveraging an existing storage tanks. These efforts will lead to a signifi cant increase in underground pipeline for the mutual exchange of feedstock. In competitiveness of both companies through synergistic effects. In addition, we are extending this collaboration to logistics, including addition, we are extending our collaboration with Cosmo Oil by crude vessel operation and storage terminal management. commencing the joint use of asphalt terminals in Takamatsu, In 2015, we also reached an agreement for a business Kagawa Prefecture from 2015.

26 Showa Shell Sekiyu K.K. Corporate Report 2016 Sales Developing Differentiation Strategies that Promptly Respond to the Changing Needs of Customers Within the shrinking domestic fuel market, competition from both offering customers attractive and easy-to-understand electricity plans, inside and outside the industry is becoming increasingly severe. we are trying to further reinforce our customer foundation. Under these conditions, we have developed cooperative initiatives Showa Shell Credit Card Lineup and Member Refueling Volumes with our contract dealers, sales outlets, and service stations with the Progress in solidifying customers through an enhanced card lineup goal of “acquiring overwhelming levels of customer satisfaction Introduction of Shell- Renewal of Ponta credit card through differentiation” in order to promptly and accurately meet the Shell Starlex Card needs of our customers. Beginning in 2010 with the introduction of Ponta, a joint point Introductiontroddu of Shell EasyPay Introduction program among various industries, we have since introduced a new of Ponta 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 20102011 2012 2013 2014 2015 programs. In this way, we offer an industry-leading credit card lineup. Refueling volumes of card members Refueling volumes of non-card members For products, we launched the new high octane gasoline Shell Note: Average among Showa Shell service stations that have introduced POS V-Power in 2014, which draws on the “Clean & Protect Technology” Showa Shell’s High Octane Gasoline that the Shell Group has cultivated through a technical partnership Sales Ratio (%) with Ferrari S.p.A. In 2015, we expanded the sales area of Shell 14 Introduction of Shell V-Power, and the product has earned a high reputation among V-Power customers. As a result, Shell V-Power has expanded the ratio of high 12 octane gasoline sales within our overall gasoline sales. In addition to these initiatives, we commenced household 10 electricity supply with the gasoline price discount program “Drivers’ 8 Plan,” targeting gasoline and diesel oil users following the deregulation of the low-voltage electricity retail market in April 0 20122013 2014 2015 2016. By leveraging synergies with our electric power business and Industry Showa Shell Group Source: Showa Shell

Strengthening Sales of High-Value-Added Lubricants and Asphalt Showa Shell sells lubricants for transportation and industrial use that signifi cantly improve driving performance. primarily through its contract dealers. While demand for lubricants As both lubricants and asphalt require a high level of is infl uenced by the conditions of factory operations in Japan, sales expertise to manage, we are focusing our efforts on cultivating of products that meet the needs for effi ciency and energy human resources with sophisticated knowledge and an ability to conservation have been increasing. We have developed and propose appropriate solutions. In this way, we are working to reinforced sales for lubricants that use synthesized GTL*1 base oil, bolster sales for lubricants and asphalt going forward. which takes advantage of the resilience to degeneration that is characteristic of oil made with GTL technologies. These products Sales of High-Value-Added Products help lengthen the interval between oil changes, conserve energy, Growth rate of new XHVI Growth rate of value-added asphalt sales 2 and extend the lifespan of machinery and engines. product* sales (using 2014 in 2015 (compared to 2014 results) as 100) For asphalt, demand is expected for social infrastructure (%) Increase of renewal accompanying national resilience improvement plans as 200 approximately 75% 100 well as infrastructure development for the 2020 Tokyo Olympic 150 90 and Paralympic Games. Accordingly, there is a continued need for a stable supply of asphalt. To meet this need, we are strengthening 100 80 the development and sales of asphalt products that help resolve 50 70 social issues. Examples of such products include highly durable 0 0 asphalt, eco-friendly asphalt with improved installation features that 2014 2015 Industry Showa Shell Group allow the asphalt to be paved at lower temperatures, and products Source: Showa Shell

*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 Details on each of the Company’s products and services are sulfur and fewer odors than oil fuels. provided in CSR Book 2016. *2 New XHVI products: Products that use the Shell Group’s proprietary chemical synthetic oil, created through GTL, as a base oil

Showa Shell Sekiyu K.K. Corporate Report 2016 27 ENERGY SOLUTIONS BUSINESS

Forecast for Global Power Generation Capacity (GW) 10,000

7,500

5,000

2,500

0 2013 20202025 2030

Coal Oil Gas Nuclear Hydro Bioenergy Wind Geothermal Solar Other Source: International Energy Agency (IEA) World Energy Outlook Special Report 2015

In addition to copper, indium, Solar modules are manufactured primarily at the fl agship Kunitomi Plant, which boasts an annual and selenium, which are the key production capacity of 900 MW, making it one of the largest in the world. It also realizes high materials used in Solar Frontier’s levels of production effi ciency through high levels of automation. Tohoku Plant, which has been CIS thin-fi lm solar module, we equipped with the latest technologies, commenced commercial production in June 2016.

also procure glass substrates and Solar Frontier K.K. • Miyazaki Plant (Miyazaki Prefecture, annual production capacity of 60 MW) frames. Solar module production plants • Kunitomi Plant (Miyazaki Prefecture, annual production capacity of 900 MW) • Tohoku Plant (Miyagi Prefecture, annual production capacity of 150 MW)

Procurement Manufacturing

Solar Business

Synergies between technologies Manufactured solar modules

Electric Power Business Power plant operation

Oil Business

Asset synergies

Byproduct fuel Former business facility sites

28 Showa Shell Sekiyu K.K. Corporate Report 2016 Business Environment

Solar Business power, mainly in developed countries, global selling prices are With global demand for energy expected to increase, especially in declining and manufacturers with low levels of competitiveness are developing countries, balancing energy supply and greenhouse gas gradually being eliminated. As companies continue to implement emissions has become a worldwide issue. At COP21 in 2015, technological innovations and reduce costs in order to compete, we numerous countries agreed on establishing targets and initiatives to will soon enter an era where only manufacturers with industry-leading reduce greenhouse gas emissions. Renewable energy is essential to cost structures and high-value-added business models can achieve achieve these goals. In countries and regions around the world, sustainable growth. there are particularly high expectations for solar energy. It is relatively easy to install and serves as a self-sustaining energy source. Under Electric Power Business the feed-in tariff (FIT) scheme in Japan, which was introduced in After the Great East Japan Earthquake in 2011, nuclear power 2012, the total power generation capacity of solar power facilities plants under operation in Japan decreased and various issues exceeded 25 GW as of 2015. The demand profi le in Japan, emerged, including the self-suffi ciency of energy, the cost of power however, is changing. With the decline in purchasing price and the generation, and the amount of CO2 emissions. These issues forced introduction of new control regulations by a number of utility the government to review energy policies, and nuclear power plants companies, construction of new, large-scale solar power plants is are expected to resume operations toward 2030. Furthermore, the expected to gradually slow down. On the other hand, demand in complete deregulation of the electricity retail market in April 2016 the low-voltage electricity sector, which includes households, is will cause an infl ux of new power plants and new retailers into the expected to be steady in the future. Electricity prices in this sector are market. Accordingly, competition is expected to intensify in both generally higher and solar power is expected to achieve grid supply and sales. Due to the volatile natural resource prices parity*1 in the near future. In addition, under Japan’s Basic Energy signifi cantly impacting the electricity market, strategies for balancing Plan, the government aims to make the majority of newly constructed a stable supply and profi tability will become increasingly important. 2 houses net-zero energy* by 2020. In light of this future *1 Grid parity occurs when the cost of generating solar power is equivalent to the cost of development, energy self-suffi cient households using solar energy are electricity sourced from the grid. anticipated to substantially increase. *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- Meanwhile, against a backdrop of policies to promote solar ances as well as energy generated by solar power.

In Japan, Solar Frontier sells solar Solar Frontier provides comprehensive support, from modules to households and solar ﬁ nancing and design to construction, for large-scale power plants, primarily through solar power plants that use Solar Frontier’s solar distributors. In addition, we sell solar modules. In addition to owning completed power modules to customers around the plants and selling the electricity they generate, we world through our subsidiaries in the also sell the power plants themselves to electricity United States and Germany. suppliers, investors, and other third parties. Customers

Solar modulee sales

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

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. Oil Business Electricity sales • Ohgishima Power Station, a natural-gas-fi red thermal power plant (25% stake), with Tokyo Gas, on a former Sales synergies 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 There are several different channels of electricity sales, byproducts of off-gas and residue materials, within the including wholesale to electric power companies and other Keihin Refi nery site electricity suppliers, retail sales to households and • Solar power plants that use Solar Frontier modules, commercial users, and sales through the Japan Electric primarily on former oil terminal sites Power Exchange. We focus on wholesale and retail sales.

Showa Shell Sekiyu K.K. Corporate Report 2016 29 Business Strategy and Progress of the Medium-Term Business Action Plan

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

Misao Hamamoto Executive Ofﬁ cer Energy Solutions Business COO

Solar Business Pursuing Cost Competitiveness and Value-Added Sales through Innovative Technologies

The Showa Shell Group’s source for growth in the solar business is we are focusing our efforts on sales to households. In 2015, we Solar Frontier’s proprietary thin-fi lm solar module technology. collaborated with sales distributors to set up dedicated stores that In addition to being eco-friendly and generating more energy in offer a full range of services, from making proposals for optimal real-world conditions, CIS thin-fi lm solar modules can be used in a module installations to providing follow-up support. Going forward, wide range of applications. Leveraging this technology, we are we will strengthen our provision of systems that support effi cient offering high-value-added solar solutions that people from all over energy consumption, including storage batteries and energy the world can easily and confi dently install and use. management systems. Furthermore, as we advance further into In 2015, we commenced operations at Tohoku Plant, where overseas markets, especially in the United States, we are we introduced our latest and most cutting-edge technologies. This comprehensively developing large-scale solar power plants and will enable us to realize global best-in-class module production selling them to utility companies and investors. We plan to continue cost. Also serving as a model plant for future overseas factories, to expand this high-value-added business, which leverages the Tohoku Plant began commercial operation in June 2016. In superior power generation of our CIS thin-fi lm solar modules addition, Atsugi Research Center developed a cell with world- without being directly affected by module price competition. record conversion effi ciency for thin-fi lm solar technologies. By reinforcing our earnings base through technological Through achievements such as these, we are steadily advancing innovations as well as high-value-added systems, we are realizing technological innovations geared toward medium-term growth. a prompt return to profi tability again and advancing toward Our strategy for sales extends from module supply to the becoming a global leader in the solar industry. provision of high-value-added power generation systems. In Japan,

The Keywords for Solar Frontier’s Medium-Term Strategy

Leap in Technology Win in Japan

Technology Sales

Enhance Production Cost and Efﬁ ciency Go Global

30 Showa Shell Sekiyu K.K. Corporate Report 2016 Progress of Major Projects

Project 2013 2014 2015 2016 2017

Investment Construction Operation Solar: Tohoku Plant approved

Electric power: Third unit of Ohgishima Construction Operation Power Station

Investment Construction Operation Electric power: Keihin Biomass Power Plant approved

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

Under the diffi cult domestic business environment to forecast, our medium- to long-term perspective. In addition, within the area fundamental strategy for the electric power business is to ensure where Tokyo Electric Power Company has its power grid and we both growth and stable profi ts by establishing long-term relationships operate power plants, we commenced retail sales of low-voltage with customers based on our highly competitive power plants. electricity to households in April 2016 by leveraging the service Strengths of our electric power business are the capabilities of station network of the oil business as well as the sales agent leveraging assets of the oil business and consistently controlling network of the LPG business. We will pursue cross-business operations from power generation to sales. Capitalizing fully on synergies, such as further expanding electricity retail sales and these strengths, we are pursuing stable and strong profi tability. reinforcing the customer base of the oil business. At the same time, As a comprehensive energy company, we are pursuing we will improve the balance between power generation and sales synergies with other businesses to develop highly competitive by increasing our power supply in the nighttime, and thereby make power plants while paying attention to the environment. We started our sales structure even more stable. up Keihin Biomass Power Plant in November 2015 and the third Going forward, we will further refi ne our strengths and more unit of Ohgishima Power Plant in February 2016, thereby effectively integrate strategies between power generation and sales expanding our overall power generation capacity from in pursuit of further profi t growth. 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

Comprehensive Management Structure

Highly Competitive Power Supply Optimal Sales Portfolio

• Large-scale, highly efﬁ cient, and eco- • Sales segment targeting and sales friendly power plants activities ﬁ tting in well with power Appropriate Supply/ • Stable power plant operations plant strengths and operation policy Demand Balance • Expansion of power generation capacity • Sales activity according to power that can remain competitive under the generation capacity expansion changing business environment

Showa Shell Sekiyu K.K. Corporate Report 2016 31 SOLAR BUSINESS Source of Growth / Unique Technologies Solar Frontier’s CIS Thin-Film Solar Modules are Distinctly Different

Resource Conserving and Cadmium-Free

CIS thin-fi lm solar modules are a type of solar Crystalline Silicon Monocrystalline Solar Frontier’s CIS module that uses copper (C), indium (I), and Polycrystalline thin-fi lm solar selenium (S) as its key materials. Only a small HIT (Heterojunction with intrinsic thin layer) modules amount of these materials is required as the Spherical semiconductor layer is only about one-hundredth of Thin-fi lm Compound CIS (CIGS) Does not contain cadmium the thickness of a crystalline silicon solar module. Cadmium telluride Contains cadmium In addition, CIS thin-fi lm solar modules are Silicon Amorphous silicon cadmium- and lead-free, enabling safe use for a Microcrystalline wide range of uses. Organic Dye sensitization Hybrid

Organic thin-ﬁ lm

Energy Conservation through an Advanced Manufacturing Process

Compared to crystalline silicon solar modules, the manufacturing EPT Comparison of CIS thin-fi lm solar modules—from raw materials to fi nished (When annual production volume is approximately 100 MW) (Years) Signifi cant products—all takes place under a single roof. CIS thin-fi lm solar 2.0 EPT = approx. reduction modules offer a shorter energy payback time (EPT), which refers 1.5 yrs. EPT = approx. to the time required for a module to generate the same amount of 1.1 yrs. EPT = approx. 0.9 yrs. energy spent in its production. 1.0

0 Crystalline silicon solar Amorphous CIS thin-ﬁ lm solar module silicon module Source: Investigation on Solar Power System Generation, New Energy and Industrial Technology Development Organization (NEDO)

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

Conversion efﬁ ciency rates for solar modules are calculated using Temperature Performance of When looking at rated output, CIS Thin-Film Solar Modules* the output loss of a CIS a set of standard testing conditions. However, solar modules thin-ﬁ lm solar module heated react differently depending on their technology and their ) 1.2 CIS modules to 75 is approximately 5% Crystalline silicon modules less than the loss of a standard installation surroundings. As a result, this set of testing conditions 1.1 crystalline silicon module under the same conditions. output = 1

doesn’t necessarily refl ect how a solar module will perform in the d 1.0 Rate fi eld. The strength of CIS thin-fi lm solar modules lies in their ability ( 0.9

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

O 0.8 e More details on this strength are introduced below. l u d

o 0.7

M 0 25 50 75 100

1. Better Performance at Higher Temperatures Module Temperature ( C)

On a sunny summer day, solar modules installed on roofs can * Diagram compares a CIS (SF170-S) module with a temperature coeffi cient of reach temperatures of 60–80°C, which can adversely affect –0.31%/ and a standard crystalline silicon module with a temperature coeffi cient of –0.41%/ when using a light source intensity of 1000 W/m2. output. CIS thin-fi lm solar modules have a lower temperature

32 Showa Shell Sekiyu K.K. Corporate Report 2016 coeffi cient than standard crystalline silicon modules, meaning Crystalline silicon solar module energy output is less affected by high temperatures. Flow of electricity Shade When a cell in the module ceases to generate electricity, 2. Better Shadow Tolerance the overall output of the When a standard crystalline silicon module is partially shaded, module drops signifi cantly. 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. CIS thin-fi lm solar module

Shade Shade may cause a 3. Light Soaking Effect Flow of electricity temporary drop in Exposure tests have shown that the output of CIS thin-ﬁ lm solar output but has only a modules rises above initial output ﬁ gures following exposure to light. limited effect on the entire module. Technological Development Steadily Establishing Technologies Geared Toward Business Growth

Compared to crystalline silicon modules, which are the current Track Record in Energy Conversion Effi ciency Development market standard, CIS thin-fi lm solar modules have high potential at Atsugi Research Center for further improvements in energy conversion effi ciency.* At Solar 2015 22.3% 0.5cm2 cell Frontier’s Atsugi Research Center, we have been conducting research based on 30cm x 30cm submodules as opposed to 2014 20.9% 0.5cm2 cell 1cm x 1cm cells, which is the general practice. This helps ensure 2 faster application of R&D efforts in actual commercial 2013 19.7% 0.5cm cell manufacturing lines. In 2015, we achieved a world record for 2012 30cm x 30cm submodule thin-fi lm cell conversion effi ciency of 22.3% on a 0.5cm2 cell cut 17.8% from the 30cm x 30cm submodule. 2011 17.2% 30cm x 30cm submodule

2010 16.3% 30cm x 30cm submodule

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

Solar Frontier’s fl agship Kunitomi Plant is one of the world’s largest verifi ed. At the same time, we will work to transfer the new solar module manufacturing plants. It can now manufacture technologies to Kunitomi Plant as we aspire to further reduce the 1 GW of solar modules per year, surpassing its 900 MW plant’s production costs. nameplate capacity. By leveraging Solar Frontier’s proprietary Please refer to page 21 for more details on Tohoku Plant. 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 Kunitomi Plant additional factories overseas once the new technologies are

Showa Shell Sekiyu K.K. Corporate Report 2016 33 Sales Reinforcing Sales of High-Value-Added Solar Power Generation Systems for Households

In Japan, we are reinforcing the sale of high-value-added solar we plan to increase the number of stores to 50, expanding our power generation systems to households. Applying the nationwide network while further accumulating know-how and advantages of our CIS thin-ﬁ lm solar modules, we will collaborate experience. 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 Pro Shop Solar Frontier. Five of these stores opened in 2015. In 2016,

*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.

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

In the fi eld of large-scale solar power plants, Solar Frontier is and sold the 15 MW Morelos Del Sol Solar Project as well as the reinforcing its BOT* business. This deals with all aspects of solar 20 MW Calipatria Solar Project in 2015 and 2016, respectively. power plant projects, from plant design and construction to the Through these accomplishments, Solar Frontier is enhancing its eventual sale of the power plants themselves. Developing a solar reputation as a solar power plant developer, reinforcing its business power plant is a time-consuming process with many steps involved, foundation in the U.S. market. Positioning the BOT business as a including negotiation on power distribution equipment, fi nancing, driver for future profi ts, we will continue to make progress with material procurement, design, and construction. Therefore, by remaining projects and also draw upon our accumulated know- comprehensively managing the whole projects, our BOT business how to promote the development of new projects.

is able to deliver high added value. Additionally, as the economic * BOT: Acronym for build, own, and transfer 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 Morelos Del Sol Solar Project

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

Solar Frontier aims to signifi cantly expand into global markets countries we ship our products to surpassed 50. where steady demand growth is expected. While establishing new Solar Frontier aims to become a true global leader in solar technologies at the model Tohoku Plant, in terms of sales, we are energy, solving energy-related issues on a global scale by promoting expansion into new markets. Specifi cally, we are providing high-value-added solar power systems. To this end, we making new inroads into the Middle East, including Turkey, as well will continue to grow the business, meeting specifi c market as into Asia, including India and Thailand. In 2015, the number of requirements for each region.

34 Showa Shell Sekiyu K.K. Corporate Report 2016 ELECTRIC POWER BUSINESS Power Generation Capacity Expansion Focusing on Competitiveness and Eco-Friendliness

By leveraging synergies with the oil business, Showa Shell has stands on the site of a former Company facility—Keihin Refi nery’s expanded its power generation capacity focusing on competitiveness. Ohgimachi Factory. Keihin Biomass Power Plant realizes high cost In 2003, we began operations at Mizue Power Station, which is competitiveness due to its location, neighboring the major energy- operated by the subsidiary Genex Co., Ltd. and effectively utilizes consumer Keihin area and having good access to existing infrastructure off-gas and residue materials coming down from the oil refi ning such as harbor facilities, water systems, and power grid. Furthermore, processes at Keihin Refi nery. In 2010, we launched the fi rst and we intend to not only achieve economic effi ciency but also curtail second units of Ohgishima Power Station, a highly effi cient large- our environmental footprint as much as possible when developing scale LNG-fi red power plant, together with Tokyo Gas Co., Ltd. on new power plants. In other words, we aim to strike a balance the vast site of a former crude oil storage facility. In addition, we between high economic competitiveness and eco-friendliness. Going commenced operations at the third unit of the power station in forward, always monitoring the changing business environment, we February 2016 in response to the tight supply situation for electricity will seek ways to further expand our power sources that are well following the Great East Japan Earthquake. Keihin Biomass Power competitive in both environmental and economic performance. Plant, which commenced operations in November 2015, also (10,000 kW) • Generation capacity: Approximately 30,000 kW (Company’s stake) 70 Track Record in • Constructed on idle lands Third unit of Ohgishima Our Power Plant 60 • Demonstrate high levels of power generation, Power Station employing Solar Frontier’s solar modules Keihin Biomass Power Plant 50 Development Solar power plants 40

30 First and second units of Ohgishima Power Station

20 • Generation capacity: Approximately 270,000 kW Genex’s Mizue 10 • Fuel: Off-gas and residue materials via oil refi ning processes at Keihin Refi nery Power Station • High level of economic effi ciency through the use of off-gas, which comes down from oil refi ning processes and cannot be upgraded 0 2003 2010 2014 2015 2016 Sales For more details on Ohgishima Power Station and Keihin Biomass Plant, please refer to page 21.

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

Leveraging the stability and cost competitiveness of our power plants Company’s service area we are expanding retail sales to households, to establish profi tability that has little vulnerability to changes in the which were deregulated in April 2016, by leveraging the sales business environment, we are focusing efforts on creating stable, network of the oil business, specifi cally our service stations and LPG long-term supply relationships with our customers. The wholesale of sales agents. Going electricity to other energy providers, such as utility companies, offers forward, we will pursue Trends in Sales Portfolio good earnings stability based on long-term contracts with fi xed terms further synergy between (%) and conditions. Our retail sales, which comprise high-voltage, expanding retail sales of 100 primarily to commercial users, and low-voltage, mainly to households, electricity and reinforcing 75 provide a foundation for earnings. By leveraging the strengths of our the customer base of our 50 power plants, we are expanding wholesale and retail sales, while oil business. That will also minimizing sales through the exchange market. These marketing lead to further improvement 25 efforts will establish a sales portfolio with stable profi tability, backed in profi tability of our entire 0 2013 2015 2020 (forecast) by continuously high power plant utilization. Furthermore, where we electric power business. High- Low- Wholesale Sale through the have our own power sources that coincide with Tokyo Electric Power voltage voltage exchange market

Power Sales with Gasoline Discount Program (Drivers’ Plan) 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. • Designed to target service station customers by leveraging the sales network of the oil business *1 Service basically provided in areas Features of • Differentiated from competitors’ services by offering an easy-to-understand plan where customers can conﬁ rm within the Tokyo Electric Power Drivers’ Plan discounts fuel when refueling Company’s power grid. • Allows Shell Starlex Card and Ponta Card holders to continue to enjoy loyalty programs *2 Discounts are up to 100 liters a month.

Showa Shell Sekiyu K.K. Corporate Report 2016 35 SAFE OPERATION AND STABLE SUPPLY 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.

Commitment to HSSE There 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 Tsuyoshi Kameoka the causes of the accidents and possible measures with the relevant divisions and operating sites to raise Representative Director, caution levels. This high consciousness and strenuous effort set the foundations for Showa Shell’s stable President, Group CEO supply of oil products, and we intend to build upon such initiatives going forward.

HSSE Promotion System matters discussed to the Board of Directors. Under the Risk We established the Risk Management Committee to serve as the Management Committee, there are three subcommittees devoted to highest HSSE decision-making body. This committee is responsible specifi c areas of discussion, and members of these subcommittees for all aspects of internal control, including HSSE and compliance. include leaders of departments in the Showa Shell head offi ce. In Matters discussed by the Risk Management Committee are all top addition, there are site-level teams at individual worksites and divisions. priorities for our business activities, which is why Group CEO Tsuyoshi Kameoka chairs this committee and reports important Total Recordable Case Frequency In 2015, the total recordable case frequency, which represents the Company level rate of incidents per 1 million labor hours, rose to 1.2, up 0.4 Product Safety Sub-Committee percentage point year on year. Nonetheless, we remain fi rmly Discusses the overall safety of products, from development to disposal, to ensure that the Company’s products do committed to reducing this fi gure to zero. We will therefore not have a negative impact on users, their property, or continue to advance Groupwide safety education and promotion the environment, either in their handling, use, or after use. Risk activities through the Goal Zero Movement while conducting Manage- Showa Shell Group HSSE Conference in-depth reviews of all accidents that result in lost work days. The ment Reports Committee Follows the Basic Policy for HSSE and discusses matters precautionary measures developed based on these reviews will be pertaining to the formulation of HSSE plans, progress Chair: monitoring, and performance reviews for the entire deployed throughout the Group. Group CEO Showa Shell Group. Total Recordable Case Frequency Security Liaison Committee Meeting (SLCM) 2.0 1.8 Discusses guidelines, policies, and proposals regarding 1.7 security (crisis management). 1.4 1.5 1.2 1.0 1.0 0.8 Goal Zero Site level 0.5 Safety and Hygiene Committees HSSE Conference (At all work sites) (Each workplace / offi ce) 0 2010 2011 2012 20132014 2015

Incident rates (%) per 1 million labor hours Figures 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.

36 Showa Shell Sekiyu K.K. Corporate Report 2016 Initiatives at Group Reﬁ neries

Show Shell manufactures oil products at the Group’s three the JIS mark and certifi cation under the ISO 9001 international refi neries: Keihin Refi nery, Yokkaichi Refi nery, and Yamaguchi quality management standard. Refi nery. These refi neries employ an HSSE management system To prepare for natural disasters, we hold comprehensive (HSSE-MS)* through which they implement comprehensive and disaster drills in cooperation with business partners and government continuous safety improvement measures. At worksites, we also organizations. These drills prepare employees for large-scale advance activities to share information about near-misses, a series earthquakes, tsunamis, and other disasters. In addition, oil clean-up of activities for encouraging employees to take steps to prevent the drills are used to train employees on how to respond in the event actualization of risks present in one’s everyday work that have the of a major oil leak. Conducting such drills on an ongoing basis potential to cause serious accidents or other incidents. In regard to enhances employees’ response skills and enables us to periodically quality, the refi neries have instated various thoroughly managed, revise and improve our systems to ensure the safety of operations product quality-related workfl ow procedures and have acquired even under extreme circumstances. certifi cations from third-party institutions. These certifi cations include * The comprehensive HSSE-related risk management system adopted by the Group

Transportation Division Initiatives—Sea Transport

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—Ground 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.

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

Showa Shell Sekiyu K.K. Corporate Report 2016 37 ENVIRONMENTAL PRESERVATION AND R&D VENTURES Showa 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 Plan Showa Shell has formulated its Environmental Preservation environment, we formulated the Medium-Term Environmental Action Guidelines in accordance with the Basic Policy for Health, Safety, Plan based on the approval of the Risk Management Committee. Security and the Environment. Based on these guidelines and the This plan covered the period from 2013 to 2015 and was guidance of the HSSE Division, Group companies employ and concluded with all of its goals met. A new plan was thus operate an HSSE-MS to improve environmental performance on a established for the period from 2016 to 2018. This plan defi nes continuous basis. In addition, refi neries and other worksites with targets for water usage, an area in which the Company is large environmental footprints have acquired certifi cation under the expected to enact responsible measures, as well as for the supply ISO 14001 international environmental management system of biomass power and other forms of renewable energy. These standard. The combined footprint of the worksites that hold this goals will be pursued over the medium term. certifi cation accounts for 99% of the total environmental impact The Basic Policy for Health, Safety, Security and the Environment from all work sites. Moreover, to perform focused and systematic can be found on the Company’s website. management of our concerted Group efforts to protect the http://www.showa-shell.co.jp/english/profi le/mp/hsse.html

Review of 2013–2015 Medium-Term Environmental Action Plan

Environmental strategy Activity themes Medium-term objectives Review

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 ： Introduced highly effi cient equipment and Promoting energy conserva- fi scal 2020 (Refi nery energy saving policy [total crude oil equivalent savings of 530 produced and sold ETBE compound biofu- tion and global warming megaliters per year within the industry], usage of ETBE bio-fuels [500 megaliters of els, as planned prevention crude oil equivalent for the industry in 2017])

Conserve energy and reduce consumption of resources in ofﬁ ces under the ECO TRY ： Promoted electricity conservation (lighting, 21 campaign (Management of temperature and lighting, Cool Biz, turning off PC Compliance PCs) and paperless operations monitors, reduced printing)

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

Preventing environmental Promote soil and groundwater contamination countermeasures (Surveys at time of change ： Instituted measures when conducting land pollution and reducing in land development, preventive measures against groundwater pollution) development waste

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

Present opportunities for stakeholders to think about the environment (Environmental Photo Contest, “Things to Preserve and Correct around Our Town”) ：Held photo contest (11th) Promoting environmental preservation activities and Promote environmental preservation projects conducted cooperatively with employees ： Promoted projects at reﬁ neries and CSR environmental and local communities (Area clean-up activities around various work sites) worksites communication Promote the environmental sciences, provide energy education program, Niigata ： Held participatory learning opportunities Yukigunigata Megasolar Power Plant tours for students

： Completed Tohoku Plant and constructed Expand use and sales of CIS thin-ﬁ lm solar modules megasolar power plants in Japan and Offering eco-friendly Business overseas products and services 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.

38 Showa Shell Sekiyu K.K. Corporate Report 2016 2016–2018 Medium-Term Environmental Action Plan

Environmental strategy Activity themes Medium-term objectives 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 Promoting energy conser- [total crude oil equivalent savings of 530 megaliters per year within the industry], usage of ETBE biofuels [500 megaliters of crude vation and global warming oil equivalent for the industry in 2017]) prevention Conserve energy and reduce consumption of resources in offi ces under the ECO TRY 21 campaign (Management of temperature Compliance and lighting, Cool Biz, reduced printing)

Achieve zero emissions at Group reﬁ neries (An industrial waste output rate of 1% or less) Preventing environmental Promote soil and groundwater contamination countermeasures (Surveys at time of land development, preventive measures against pollution and reducing groundwater pollution) waste Strengthen chemical substance management (Reduce use and storage of regulated chemicals)

Present opportunities for stakeholders to think about the environment (Environmental Photo Contest, energy education program, Promoting environmental Niigata Yukigunigata Megasolar Power Plant tours) preservation activities and CSR Promote environmental and biodiversity preservation projects conducted cooperatively between employees and local communities environmental (Participation in cleanup activities and forest and sea preservation activities around worksites) communication Contribute to the realization of a sustainable water environment (water usage monitoring and optimization)

Offer eco-friendly products Expand the use and sale of CIS thin-ﬁ lm solar modules Business and services Supply renewable energy (megasolar and biomass power generation)

Important Areas for Reducing Environmental Footprint The majority of the environmental impacts from Showa Shell’s treatment using fl occulating agents, or the use of activated sludge business can be attributed to either the oil product manufacturing treatment equipment. In this way, we ensure that wastewater meets processes at Group refi neries,* where all crude oil refi ning is environmental regulations related to chemical oxygen demand conducted, or the consumption of oil products by customers. These (COD) and oil content before it is expelled. two areas are therefore important in reducing our environmental Furthermore, the new Medium-Term Environmental Action Plan footprint. To lower the impact from Group refi neries, we are that began in 2016 contains goals aimed at realizing the making capital investments related to environmental preservation sustainable use of water resources, and the Group will band and instituting energy-saving measures. In regard to consumption, together in its ongoing quest to monitor water use at refi neries and we are reducing environmental impacts by promoting the use of other worksites and optimize usage practices. eco-friendly oil products and solar modules. This corporate report contains information on such efforts, with particular focus placed Atmospheric Pollution Prevention on initiatives at Group refi neries. The Group seeks to reduce emissions of sulfur oxides (SOx) and

* Keihin Refi nery, Yokkaichi Refi nery, and Yamaguchi Refi nery nitrogen oxides (NOx), which are produced by fuel oils and gases in refi nery furnaces and boilers. The Group strictly Water Usage maintains SOx emissions below regulated levels by using low- Showa Shell manufacturing plants and other worksites use water in sulfur fuel oil and sulfur-free fuel gas treated with gas-cleaning their operations, almost all of which is seawater primarily used to equipment. Efforts to prevent atmospheric pollution by NOx cool power generation facilities at refi neries. emissions include improved combustion methods achieved In addition, Showa Shell tracks the volumes of fresh water used through the introduction of low NOx burners and the installation (industrial water, underground water, and tap water) by work site. of fl ue gas denitration equipment. Through these efforts, we are The majority of fresh water used is the industrial water used at working to prevent atmospheric pollution. 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

Showa Shell Sekiyu K.K. Corporate Report 2016 39 Industrial Waste Reduction Amount and Rate of Final Industrial Waste Output The Showa Shell Group tracks industrial waste production volumes from Group Reﬁ neries (Tons/Year) (Waste output rate) at its 16 manufacturing plants. In 2015, the total volume of waste 2,000 5.0 produced was 53,238 tons, of which 80%, or 42,607 tons, was 1,800 from Group reﬁ neries (primarily disposable catalysts from 1,600 4.0

desulfurization, reforming, and other reﬁ ning processes; sludge 1,400

from cleaning tanks; and sludge retrieved from wastewater 1,200 3.0

treatment equipment). In the Medium-Term Environmental Action 1,000 Final waste output 32 tons Zero emissions achieved 800 / Waste output amount 2.0 Plan, we have defi ned our goal of achieving zero emissions, at refi neries industrywide 42,607 tons = (Waste output rate of 1% 600 Final disposal ratio 0.08% meaning an industrial waste output rate of 1% or less. This goal is or less) being pursued by reducing and detoxifying waste from refi neries 400 1.0 200 through intermediate treatment, such as combustion, dehydration, 0.08% 32 0 0 and dissolution, and actively recycling waste for use as raw 2007 2008 2009 2010 2011 2012 2013 2014 2015

materials for cement or other applications. In 2015, industrial Waste output amount Waste output rate 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 Conservation greenhouse gases regulated under the Act on Promotion of Global

The Group emits large quantities of greenhouse gases from energy Warming Countermeasures, namely CO2, methane (CH4), nitrous

use during the process of manufacturing oil products, namely the oxide (N2O), and sulfur hexafl uoride (SF6). We track emissions of consumption of purchased electricity and fuel for in-house these gases for each refi nery and report the resulting fi gures to the

generation. We therefore track the volume of CO2 emitted through appropriate authorities. fuel usage across all areas of the supply chain, from raw material

2 procurement to product sales. In 2015, total CO2 emissions CO Emissions and Unit Energy Consumption at Group Refi neries amounted to 6,009,000 t-CO2, of which 84%, or 5,068,000 (Kilotons/Year) (Unit energy consumption) t-CO2, was emitted by Group refi neries. For this reason, we 15,000 12.00 position energy conversation measures at refi neries as a high

10.19 priority for preventing climate change. 12,000 10.00 The Petroleum Association of Japan’s Action Plan for a 9.45

Low-Carbon Society sets the target of realizing a total reduction in 9,000 8.53 8.00 energy use among all companies in the association of 530,000 7. 4 6 6,000 KL (crude oil equivalent) by fi scal 2020. Showa Shell is 5,068 3,965 participating in this plan, as stipulated by the Medium-Term 6.00 3,000 Environmental Action Plan, which defi nes specifi c targets for the Company. Based on this plan, we are advancing energy 0 4.00 conservation measures, which include investing in equipment such 1990 2007 2008 2009 2010 2011 2012 20132014 2015

as heat exchangers, waste heat recovery boilers, and exhaust gas CO2 emissions Unit energy consumption (Industrywide) (Right axis) recycling equipment while also pursuing the optimization of refi ning Unit energy consumption (Showa Shell) (Right axis) facility operations. Furthermore, the Medium-Term Environmental Action Plan Detailed data on environmental and biodiversity initiatives prescribes measures targeting reductions in unit energy conducted outside of refi neries can be found in CSR Book 2016. consumption (kiloliters of crude oil equivalent ÷ megaliters of Detailed information on initiatives at Keihin Refi nery of Toa Oil refi ned crude oil and feedstock) of more than 1% annually on Co., Ltd.; Yokkaichi Refi nery of Showa Yokkaichi Sekiyu Co., average over the medium to long term, as mandated by the Act on Ltd.; and Yamaguchi Refi nery of Seibu Oil Co., Ltd. conducted in 2015 can be found on the websites for each company the Rational Use of Energy. In 2015, unit energy consumption at (Japanese only). 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

40 Showa Shell Sekiyu K.K. Corporate Report 2016 Showa Shell Total Adverse Environmental Impact for 2015

Procurement and transport •Energy 7,550 TJ (primarily crude oil) IN OUT •CO2 emissions 540 thousand t-CO2 (crude oil equivalent) 195 thousand KL

•Energy 71,970 TJ Manufacturing plants •CO2 emissions 5,068 thousand t-CO2 (crude oil equivalent) 1,857 thousand KL (reﬁ neries) •Total waste 42,607 t •General-use water 138,733 thousand KL IN OUT •Sulfur oxides (SOx) 3,018 t •Seawater 32,866 thousand KL •Nitrogen oxides (NOx) 2,262 t •Tap water 173 thousand KL •Soot dust 135 t •Wastewater 171,772 thousand t

•Energy 2,973 TJ Other manufacturing plants (crude oil equivalent) 77 thousand KL (for asphalt, lubricants, LPG, petrochemical •CO2 emissions 178 thousand t-CO2 •General-use water 1,800 thousand KL IN products, solar modules, etc.) OUT •Total waste 10,631 t •Seawater 116 thousand KL •Wastewater 3,906 thousand t •Tap water 1,990 thousand KL

Product transportation and storage Oil depots, ground and sea transport of oil •Energy 2,460 TJ IN products and solar modules, etc. OUT •CO2 emissions 170 thousand t-CO2 (crude oil equivalent) 63 thousand KL

Marketing Service stations •Energy 1,606 TJ IN (approx. 3,200 stations) OUT •CO2 emissions 53 thousand t-CO2 (crude oil equivalent) 41 thousand KL

•Gasoline 8,699 thousand KL •Jet fuel 1,794 thousand KL Consumption •Kerosene 2,625 thousand KL IN OUT •CO2 emissions 70,466 thousand t-CO2 •Diesel oil 5,366 thousand KL (usage of oil products by customers) •Heavy fuel oil 3,081 thousand KL •Other oil products 6,588 thousand KL

2015 carbon offset volume of * 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 aggregate OFFSET total of solar OFFSET modules set at 20 years and the volume of CO2 emission reductions per

modules produced as of module per year set at 524 g-CO2/kWh (from Voluntary Industry Rules Approx. 2,000,000 t-CO2* December 31, 2015 Related to Indication [Fiscal 2014 edition], Japan Photovoltaic Energy Association).

Showa Shell Sekiyu K.K. Corporate Report 2016 41 R&D Activities

R&D activities for the Oil Business and the Energy Solutions collaborating with universities and exchanging information with the Business (solar business) are conducted at the Group’s Central Shell Group with the goal of developing a technology for using Research Laboratory and Atsugi Research Center. We aim to fuel nonedible biomass to manufacture low-cost biofuel that emits

long-term improvements in corporate value through the development minimal amounts of CO2. The Company is also researching of next-generation energy sources and high-value-added products artiﬁ cial photosynthesis, a process that uses sunlight to create

that respond to customer needs and provide superior environmental beneﬁ cial chemical substances from water and CO2. performance. Artiﬁ cial Photosynthesis Process

Sunlight

H2, O2, etc. hydrocarbons, etc.

H2OCO2 Central Research Laboratory (Kanagawa Atsugi Research Center Photoelectrode Reducing Prefecture) electrode

Trends in R&D Costs Increase due to the expanding size of the solar business R&D Activities in the Energy Solutions Business (Solar (Yen Billion)

6.0 5.8 Business) 5.6 5.0 Solar Frontier’s Atsugi Research Center is advancing cutting-edge 4.7 4.6 4.5 4.3 R&D activities related to CIS thin-ﬁ lm solar modules, striving to improve energy conversion efﬁ ciency at both the research and 3.0 2.6 mass-production stages. We are also proceeding with the 2.2 development of new, state-of-the-art products with the potential to 1.5 open up new markets.

0 2008 2009 2010 2011 2012 20132014 2015 Bendable Modules Creating New Possibilities for Solar Power High-Value-Added Oil Product Development Solar Frontier’s bendable solar modules utilize the unique As part of the Shell Group’s R&D network, the Central Research characteristics of CIS thin-fi lm solar module technologies that Laboratory is creating systems for cutting-edge product development cannot be followed by conventional crystalline silicon module by exchanging human resources and conducting joint-development technologies. For example, compared to standard modules, a with R&D centers in the United States and Germany as well as the bendable and thin metal substrate is applied instead of the glass Shanghai center established in 2014. While pursuing coordination substrate, the cover glass is replaced with a high-performance resin between the refi ning, supply, distribution, and sales divisions, the fi lm cover, and the frames are removed. As a result, the bendable Company is fully leveraging the technologies it has created through solar modules weigh one-third less than standard modules, are ultrathin collaboration with the Shell Group to develop lubricants, grease, at only 1.5mm, and can be installed on curved surfaces. The ability asphalt, fuel, and other oil products that respond to customer needs to build these modules into various structures is expected to lead to and provide superior environmental performance. In 2015, we wider applications, and CIS thin-fi lm solar modules are thus thought accelerated our efforts to develop energy-saving, long-lasting to have big potential for creating new solar power markets. 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 Development At the Central Research Laboratory, we are actively allocating Bendable solar module prototype installed on new management resources to R&D ventures aimed at developing distribution terminal building in Singapore on trial next-generation energy sources, focusing on social issues, such as basis, in June 2015 the environment, and the future needs of customers. We are

42 Showa Shell Sekiyu K.K. Corporate Report 2016 STRENGTHENING OF HUMAN RESOURCES

The 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.

Initiative Talent Vision Realization of the Talent Vision Outbound Team Spirit

Development of Competency and Way of Improvement of Adaptability to Global Development of Professional Talent Other Education Thinking Business Environment HR Division & Business Support for HR Division Business Segments Test Systems Segments Self-Education

GMs Training Programs for General Managers

Training Programs for New Elective Elective Managers Managers, MBO, and Managers Domestic Overseas Off-Site Support for Off-Site Specialized Training Specialized Training Basic Management Training Skill Advanced Courses by Skill Shell TOEIC Test Development Correspondence Business Segment Development Overseas (Offered Leadership Training Courses by Education / Courses Training Companywide) Mid-Level Employees Business English Training Outside of the Segment by Schooling Basic Leadership Training Company

Studying Training Programs for New Abroad Basic Courses by Junior Employees Graduates and Based on Number Program HR Division (1–3 Years) of Years at the Company

Pre-Employment Training before Joining

Talent Vision and Education Systems Showa Shell established the Talent Vision in 2011, which defi nes worked and current position, such as junior employees in their fi rst the type of human resources needed by Showa Shell, and we are three years, mid-level employees, and managers, as well as voluntary constantly working to strengthen human resources in accordance training. Furthermore, in 2015 we deployed numerous initiatives with this vision. Specifi cally, we have restructured our employee with the aim of helping new employees come to embody the Talent education systems and revised employee evaluation frameworks. The Vision soon after they join the Company. These initiatives include three pillars of the Talent Vision are Initiative, Outbound, and Team systematizing new employee training, fi rst-year employee training, Spirit. These are the characteristics we intend for our employees to and mentor training programs and enhanced problem-solving skills share, regardless of age, qualifi cations, or position. Aiming to cultivate training programs. the type of employees described by the Talent Vision, we have Investment in Training (Non-Consolidated Basis) developed education systems based on the following three (Yen Million) development areas: development of competency and way of 200 thinking, development of professional talent, and improvement of adaptability to a global business environment. The education systems 150 contain a variety of programs designed to help employees more 100 actively work to acquire the skills that will be necessary for their individual career paths. Programs include seminars for specifi c 50 business fi elds, such as crude oil procurement, refi ning, logistics, legal affairs, and IT, which are held on a Groupwide basis, spanning 0 division boundaries to allow any employee to develop specialized 2011 2012 2013 2014 2015 skills. We also offer training arranged based on the number of years

Showa Shell Sekiyu K.K. Corporate Report 2016 43 Respect for Human Rights Showa Shell’s Code of Conduct requires us to conduct business as a Employment of Differently Abled People responsible member of society, observe laws, and respect fundamental We are actively developing a workplace environment in which human rights. We respect the human rights of our employees and of differently abled people can work to their fullest. As of December all our other stakeholders. We adhere to international labor standards, 31, 2015, differently abled employees represented 2.0% of such as those forbidding child labor, and promote initiatives to employees (non-consolidated), a level that satisﬁ es the minimal create opportunities for fair and impartial treatment, eliminating legally mandated requirement. Going forward, we will continue discrimination on many fronts: from hiring, transfers, treatment, and to provide employment opportunities for a diverse range of educational opportunities to retirement. As a hiring initiative and in individuals. accordance with the Policy for Diversity and Inclusiveness, we hire employees based on their compatibility with the Talent Vision, Employment Statistics (Non-Consolidated Basis) As of December 31, 2015 regardless of their nationality, gender, or disability status. Number of employees 808 Percentage of employees that are female 22.8% Discussions with Labor Unions Percentage of employees with disabilities 2.0% We engage in discussions with our labor unions on a regular basis. Number of managers (including executives) 206 These discussions are held on a variety of themes, including Percentage of managers that are female 4.4% management issues, workplace culture, workﬂ ow improvement, and Average age 44.0 years old work-life balance. Through intensive discussions, we exchange opinions Average length of employment 19.9 years regarding issues faced by management and employees, consider possible solutions, and otherwise seek out ways of creating a Hiring Statistics (Non-Consolidated Basis) workplace environment in which all employees can utilize their skills As of December 31, 2015 to the fullest extent. The results of such discussions are emailed to all Number of new graduates hired in 2015 20 employees, and these results can also be viewed on our intranet. Women among new graduates hired over past 5 years 29% Non-Japanese among new graduates hired over past 5 years 6% Reemployment of People Retiring at Retirement Age New graduate retention rate (percentage of new graduates hired in April 2012 that were still 100% We have in place a reemployment system for reemploying ambitious employed in April 2015) and capable people aged 60 and over, putting the knowledge and Number of mid-career personnel hired in 2015 4 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.

Employee Opinion Surveys Employee opinion surveys are instituted each year. These surveys Employee Opinion Survey: Improvement in Prioritized Items include questions related to issues with management or particular (1) Collaboration that spreads across departmental boundaries divisions and improving workplace environments. In 2015, the 2014 2015 survey response rate*1 was 95.6%. The results indicated +8 percentage points*2 improvement with regard to the three prioritized items described to 55% 63% the right, whose improvement had been positioned as an issue to be tackled by the entire Company during 2015. We have been (2) Improvement of workflow processes advancing projects for transforming our corporate culture and 2014 2015

reforming workﬂ ow processes since 2013, and we feel that the +13 percentage points*2 aforementioned improvements can be attributed to these projects. 57% 70% Moreover, the results of surveys are relayed back to each division (3) Learning from the successes of other employees and companies and, under the guidance of division heads, are utilized in 2014 2015 uncovering and improving issues at individual worksites. 48% 71% +23 percentage points*2

*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”)

44 Showa Shell Sekiyu K.K. Corporate Report 2016 Systems to Promote Work-Life Balance The Company is committed to establishing a workplace environment Work-Life Balance Support Systems and Usage Numbers that enables all employees to fully utilize their skills, and we supply a Figures in parentheses indicate number of men. range of support programs that exceeds legally required levels. In 2013 2014 2015 2008, we introduced a telecommuting system. In 2014, we Childcare or nursing care leave 23 (3) 20 (2) 40 (2) Shortened working hours for child- expanded the scope of our ﬂ extime system to make it available to 9 (1) 13 (1) 17 (1) care or nursing care employees working shortened hours for childcare or nursing care Leave to care for a sick child 35 (19) 41 (22) 34 (15) purposes in addition to employees working regular hours. The goal of this change was to provide an environment that facilitates more Family care leave of absence 23 (11) 20 (13) 13 (8) ﬂ exible work styles. To promote the usage of under-used programs Telecommuting 4 (0) 4 (0) 5 (0) going forward, we will continue to improve the programs themselves Self-development leave of absence 3 (0) 2 (0) 4 (1) while also cultivating a corporate culture their use is more acceptable.

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.

Four Priority Action Plans Overview of Showa Shell Women’s Network Activities

Phase 1 (Oct.–Dec. 2015): Activities targeting female employees (subcommit- • Female employee development tees, lectures, etc.) programs • Networking initiatives First Showa Shell Women’s Network Meeting (Feb. 2016) • Flexible workstyle promotion • Empowering corporate culture Phase 2 (Feb. 2016–Present): Expansion of Phase 1 activities and advance- cultivation ment of Companywide activities (male and female employees)

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. First Showa Shell Women’s Network Meeting

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

Showa Shell Sekiyu K.K. Corporate Report 2016 45 COMMUNITY AND SOCIAL

Support CONTRIBUTION ACTIVITIES education for next Showa Shell conducts environmental preservation and international community support activities generation 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 IInternationalnternational EEnvironmentalnvironmental ccommunityommunity ppreservationreservation different type of energy to local communities and society as a whole. Based on this policy, we ssupportupport aactivitiesctivities aactivitiesctivities conducted a robust program of community and social contribution activities in 2015.

Support Support Environmental education for next education for next preservation generation generation activities

Showa Shell Sekiyu Environmental Photo Contest 2015

Shell Art Award 2015 The 11th “Things to Preserve and Correct around Our Town” The Shell Art Award is an art contest that was ﬁ rst held in 1956 with the aim Environmental Photo Contest of discovering young artists capable of shaping the next generation of their This environmental photo contest is held as an educational event designed to medium. Young artists under the age of 40 are able to apply to this open provide children with an opportunity to think about environmental preservation competition, which has been held a total of 44 times. 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.

Environmental International Support preservation community education for next activities support activities generation

Photograph provided by TABLE FOR TWO International

Jointly Held Energy Sustainability Forum Participation in TABLE FOR TWO Cafeteria Charity Program Together with the Integrated Research System for Sustainability Science (IR3S), Through TABLE FOR TWO International, a portion of the price paid for operated by the University of Tokyo, Showa Shell held the 11th Energy Sustainability applicable meals purchased at employee cafeterias is donated to fund school Forum public symposium based on the theme of creating an ecologically sound society lunch programs for children in developing countries. by combining efforts related to energy, resources, and the environment.

Environmental International preservation community activities support activities

Teruha no Mori Ongaeshi Forest Support Project Provision of Ofﬁ ce Space for Refugees International Japan Solar Frontier employees participate in the thinning of Japanese cedar (Cryptomeria Showa Shell and Shell Chemicals Japan have been providing support in the japonica) and cypress (Chamaecyparis obtusa) trees that have been introduced into form of free ofﬁ ce space to Refugees International Japan (RIJ), an NPO the Aya no Shoyo Jurin Forest located in Miyazaki Prefecture, northwest of the Kunitomi dedicated to raising funds to assist refugees, since its inception in 1979. 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.

Details on community and social contribution activities and other activities conducted in 2015 can be found in CSR Book 2016.

46 Showa Shell Sekiyu K.K. Corporate Report 2016 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

Showa Shell Sekiyu K.K. Corporate Report 2016 47 Twelve-Year Summary of Selected Financial Data

Showa Shell Sekiyu K.K. and Consolidated Subsidiaries Years ended December 31 2015 2014 2013 2012 For the year: Net sales ¥2,177,625 ¥2,997,984 ¥2,953,808 ¥2,629,261 Oil Business 2,049,935 2,850,218 2,803,041 2,539,754 Energy Solutions Business 119,482 138,610 141,210 78,262 Other 8,207 9,156 9,556 11,245 Cost of sales 2,078,535 2,890,430 2,744,530 2,481,144 Gross profi t 99,089 107,554 209,278 148,117 Selling, general and administrative expenses 111,298 125,611 133,847 133,419 Operating income (loss) (12,209) (18,057) 75,430 14,697 Oil Business (3,812) (37,391) 56,114 28,128 CCS operating income (Oil Business)*1 51,014 13,839 21,742 26,678 Energy 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 12,674 CCS ordinary income (loss)*1 41,544 34,507 41,832 11,224 Net 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 ¥ 249,826 Total assets 957,665 1,176,282 1,295,831 1,233,193 Net interest-bearing debt*3 138,915 164,417 192,358 247,552 Depreciation and amortization 38,898 41,361 40,601 43,620 Capital expenditures 32,342 29,313 25,011 20,987 Capital 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 ¥ 41,922 Cash fl ow from investing activities (43,685) (28,151) (27,534) (17,747) Free cash fl ow*5 31,134 44,581 67,598 24,174 Cash 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 ¥ 2.69 Total shareholders’ equity per share (yen) 591.10 722.33 798.17 663.33 Dividends per share (yen) 38 38 36 18 Payout 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 0.0 Return on assets (%) (2.6) (0.8) 4.8 0.1 Return on equity (%)*2, 7 (11.1) (3.4) 21.9 0.4 Shareholders’ equity ratio (%)*2, 8 23.2 23.1 23.2 20.3 Current ratio (%)*9 93.5 100.1 107.0 104.3 Gearing ratio (%)*10 38.4 37.7 39.0 49.8 Number 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.

48 Showa Shell Sekiyu K.K. Corporate Report 2016 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 — ————— 65,79928,863—————— 10,33913,198—————— 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 87,26745,569—————— 55,47937,707—————— (28,895) (11,581) — ————— 1,9172,713—————— 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 40,426 23,110 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

Showa Shell Sekiyu K.K. Corporate Report 2016 49 Management’s Analysis of Financial Position and Operating Results

Business Results for 2015

Business Environment In 2015, despite some positive impacts from the depreciation of As a result, the price of Dubai crude oil started the year at roughly the yen, economic expansion in Japan was stalled by a slowdown US$54/bbl, recovering to US$67/bbl in mid-May in response to in demand from China and other Asian countries and sluggish the situation in the Middle East and a drop in U.S. crude oil reserves. private consumption. The price returned to a declining trend as oil reserves in the United The global crude oil market was once again subject to volatility States increased, ﬁ nishing the ﬁ scal year at US$32/bbl. due to concerns around the demand and supply similarly driven by In the foreign exchange markets, the USD/JPY rate started the factors such as Iran’s nuclear agreement with the international year at around ¥120 and reached ¥125 in early August. Overall, community, sustained shale oil production in the Unite States and a however, the rate remained relatively stable throughout the year, reduction in demand from China and other emerging economies. entering 2016 at the ¥120 level again.

Operating Results Consolidated 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

The Showa Shell Group reported consolidated net sales of excluding the impact of inventory valuation) totaled ¥41.5 billion, ¥2,177.6 billion, a decrease of 27.4% year on year. an increase of ¥7.0 billion from the previous fi scal year. The Group reported an operating loss of ¥12.2 billion, an The Group reported net extraordinary loss of ¥8.0 billion, with improvement of ¥5.8 billion from the previous fi scal year, and an extraordinary losses, such as losses on the disposal of fi xed assets ordinary loss of ¥13.2 billion, an improvement of ¥3.4 billion and expenses relating to damage to a submarine pipeline at year on year. These losses mainly refl ected inventory valuation Keihin Kawasaki sea berth, exceeding extraordinary income, such losses in the oil business due to the continued steep decline in as subsidy income and gain on changes in equity. There was a net crude oil prices from the previous fi scal year, as well as the loss before taxes of ¥21.2 billion, a decline of ¥5.9 billion year contraction in domestic fuel oil margin attributable to the time lag on year. As a result, net loss after taxes, corporation tax adjustments between the accounting cost excluding the impact of inventory and minority interests in income totaled ¥27.4 billion, a decrease evaluation and the cost upon which fuel oil wholesale prices are of ¥17.7 billion compared with the previous fi scal year. determined. CCS ordinary income (current cost of supply basis,

Net Sales Ordinary Income (Loss) (Yen Billion) (Yen Billion)

3,200 90

2,400 2,177.6 60 41.5

1,600 30

800 0

-13.2 0 –30 2011 2012 2013 2014 2015 2011 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

50 Showa Shell Sekiyu K.K. Corporate Report 2016 Segment Information

Net Sales by Segment Yen Billion Years ended December 31 2015 2014 Oil 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 2014 Oil 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 Business companies. As a result, the selling price for solar modules declined. The oil business reported net sales of ¥2,049.9 billion, a decrease of While the Company reinforced domestic sales of household-use 28.1% year on year, and an operating loss of ¥3.8 billion, an solar modules, which have comparatively high profi tability and are improvement of ¥33.5 billion, refl ecting factors such as declines in expecting solid demand in the future, the average unit selling price the prices of oil products due to the continued slide in crude oil for solar modules decreased due to the fact that the Company prices throughout the year as well as the resulting inventory valuation increased the shipping ratio of solar modules for overseas markets, losses. CCS ordinary income (current cost of supply basis, excluding which have relatively lower selling prices. The Company continued the impact of inventory valuation) totaled ¥51.0 billion, rising full operations at its core Kunitomi Plant throughout most of the year signifi cantly by ¥37.1 billion compared with the previous fi scal year. and worked to reduce module production and other costs. These Several factors were behind the substantial year-on-year increase efforts had limited effect, however, and operating income saw a in profi ts. These included the increase in comparatively high-value- signifi cant decline. added fuel oil, such as gasoline, diesel oil, and kerosene; the Turning to the electric power business, the Company maintained implementation of cost reductions; and the increase in oil product the stable operation of its power plants and commenced commercial exports, which all resulted from the positive effects of promoting operations at Keihin Biomass Plant in November ahead of schedule. differentiated product and service strategies and activities to improve In addition, the Company moved forward with initiatives to optimize competitiveness, as well as the improvement in oil product margins. its sales portfolio. These efforts allowed the Company to secure stable operating income. b) Energy Solutions Business As a result of the above, net sales in the Energy Solutions In the solar energy business, demand for new solar cells cooled in Business were ¥119.4 billion, down 13.8% year on year, and an Japan due to the signifi cant reduction in the electricity purchase price operating loss of ¥10.1 billion was recorded, a decrease of ¥27.8 under the renewable energy feed-in tariff scheme as well as to the billion year on year. introduction of a new output control regulation by certain utility

Net Income (Loss) after Taxes per Share CCS Operating Income (Loss) by Segment (Yen) (Yen Billion)

200 90

100 60 51.0 42.6 0 30

‒100 -72.93 0 -10.1 ‒200 ‒30 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015

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

Showa Shell Sekiyu K.K. Corporate Report 2016 51 c) Other Business reported net sales of ¥8.2 billion, a decrease of 10.4% year on Other business covers construction work, the sale of automobile year, and an operating income of ¥1.7 billion, an increase of accessories, the leasing of Company-owned ofﬁ ce buildings, and ¥0.1 billion. other businesses. In the ﬁ scal year under review, the segment

Financial Position

Assets, Liabilities, and Net Assets Yen Billion Consolidated 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 of ¥165.6 billion compared with the end of the previous year. billion, a decrease of ¥218.6 billion compared with the end of This was mainly attributable to the decrease in accounts payable, the previous year. This was mainly attributable to the decrease in owing to the drop in price of crude oil. Interest-bearing debts accounts receivable and inventories, owing to the drop in the price (borrowings, CP, and bonds) was ¥155.4 billion, a decrease of of crude oil and others. Consolidated net assets as of the end of ¥54.0 billion compared with the end of the previous ﬁ scal year. the year were ¥243.3 billion, a decrease of ¥52.9 billion As a result, shareholders’ equity ratio at the end of the year was compared with the end of the previous year. This was mainly 23.2%. Total shareholders’ equity per share based on the total attributable to dividend payments and the net loss. number of shares issued as of the end of the year was ¥591.1, Consolidated total liabilities were ¥714.3 billion, a decrease compared with ¥722.3 as of the previous year.

Fund-Raising The Group’s need for short-term fi nances is related primarily to the provided from operating activities to meet these fi nancial needs. As purchase of raw materials and manufactured goods, as well as the for any remaining fi nancial needs not covered by this cash fl ow, taxes that accompany these purchases. Long-term fi nance needs the Company procures funds through loans and bonds from are primarily related to capital expenditures for refi neries and solar fi nancial institutions while giving comprehensive consideration to module manufacturing plants. The Company allocates cash fl ow the business environment and interest rate trends.

Total Assets / ROA Total Net Assets / ROE (Yen Billion) (%) (Yen Billion) (%)

1,500 12 360.0 45

243.3 1,000 957.6 8 240.0 30

500 4 120.0 15

0 0 0 0 -2.6 -11.1

–500 ‒4 –120.0 –15 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015

Total assets (left scale) ROA (right scale) Total net assets (left scale) ROE (right scale)

52 Showa Shell Sekiyu K.K. Corporate Report 2016 Cash Flows

Consolidated Statement of Cash Flows (Summary) Yen Billion 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 ¥28.1 billion in net cash used in the same period of the previous the end of the year totaled ¥15.3 billion, a decrease of ¥28.5 year). This mainly refl ected the acquisition of property, plant and billion compared with the previous year. The details are as follows: equipment, including the establishment of solar module plants and Cash fl ow from operating activities new power generation facilities, net increase in short-term loans Operating activities provided net cash of ¥74.8 billion (compared receivable, and the acquisition of subsidiaries’ securities. with ¥72.7 billion in net cash provided in the same period of the Cash fl ow from fi nancing activities previous year). This mainly refl ected the factors contributing to Financing activities used net cash of ¥56.1 billion (compared with increases in cash, such as decrease in notes and accounts ¥28.1 billion in net cash used in the same period of the previous receivable trade and decrease in inventories, outweighing the year), mainly refl ecting a decline in interest-bearing debt and cash factors contributing to decreases in cash, such as decrease in notes dividends paid. As of the end of the fi scal year, interest-bearing and accounts payable trade. debt totaled ¥155.4 billion, a decrease of ¥54.0 billion Cash fl ow from investing activities compared with the end of the previous year. Investing activities used net cash of ¥43.6 billion (compared with

Outlook for 2016 (As of February 2016) In the oil business, we will strengthen retail initiatives and the volume business expands by the launch of new electric power plants, we growth of value-added products that address customers’ needs by expect to ensure stable profi ts by effi cient operations at electric focusing on our core strategy to differentiate our products and power plants and the optimization of our sales portfolio. services for the expansion of our customer base, as well as continue In consideration of the above, we estimate that consolidated net stable operations at our refi neries and improvements in supply chain sales will be ¥1,680.0 billion, consolidated ordinary income for effi ciency while ensuring fair margins. the period will total ¥36.0 billion, and consolidated net income will In the energy solutions business, domestic module selling prices be ¥16.0 billion. We expect that the relevant consolidated ordinary continued to decline, while we expect to improve profi tability by the income will be ¥54.0 billion, excluding the impact of inventory reduction of overall costs, including selling expenses, and developing valuation. The above forecast is based on a crude oil price the profi table business models “BOT” (Build-Own-Transfer of solar assumption of US$30/bbl and an exchange rate of ¥120 per power plants). In the electric power business, in which the scale of U.S. dollar.

Cash Flow Gain / Out Net Interest-Bearing Debts / Gearing Ratio (Yen Billion) (Yen Billion) (%)

100 320 60

74.8 75 240 38.4% 45

50 14.3 160 138.9 30

25 43.6 80 15

0 0 0 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015

Cash ﬂ ow from operating activities Net interest-bearing debt (left scale) Gearing ratio* (right scale) Cash ﬂ ow from investing activities *Gearing ratio: Net interest-bearing debt / Dividend payout (Total shareholders’ equity + Net interest-bearing debt)

Showa Shell Sekiyu K.K. Corporate Report 2016 53 Business Risks

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.

1. RISKS RELATED TO THE Domestic demand for oil products is affected by, and changes with, factors such as the economic EFFECTS OF ENERGY situation in Japan and domestic energy supply and demand. Moreover, Japan’s domestic oil product DEMAND AND MARKET market is affected by factors such as the demand trend, price competition with other companies in the CONDITIONS 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.

2. RISKS RELATED TO A) Impact on sales margin and working capital CHANGES IN PRICES Because the cost of sales on a yen basis of oil products the Group sells domestically is affected by OF CRUDE OIL AND changes in crude oil prices and foreign exchange rates, the basic policy is to refl ect these infl uences in its MATERIALS, AND sales prices. The cost of sales on a yen basis of solar modules is also affected by changes in raw material EXCHANGE RATES 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.

3. RISKS RELATED TO The Group procures crude oil from overseas, mainly countries in the Middle East. There is a possibility SOURCES OF CRUDE that the ﬁ nancial position and operating results of the Group will be affected by obstacles to its supply, OIL AND MATERIALS such as events in which the international political climate, primarily the political climate of oil-producing PROCUREMENT 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.

4. RISKS CONCERNING The Group is exposed to tough competition with other oil companies due to reﬁ nery overcapacity and COMPETITION WITH excess number of service stations in addition to declining domestic oil demand. With rapid technical OTHER COMPANIES innovation in the solar business, change in technical standards and our cost-competitive edge will affect OR TECHNICAL global competition. Although the Group will make efforts to maintain and improve competitiveness, there INNOVATION 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.

54 Showa Shell Sekiyu K.K. Corporate Report 2016 5. RISKS RELATED TO In the event that new environmental regulations regarding carbon dioxide emissions or fossil fuel ENVIRONMENTAL consumption are introduced in the future in Japan, there is a possibility that the fi nancial position and REGULATIONS AND operating results of the Group will be affected because additional capital expenditures or incremental TAX LEVIES 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.

6. RISKS RELATED TO The Group has enacted a basic policy concerning health, safety, security, and environmental conservation TERMINATION OR based on HSSE management rules, and strives to ensure safe operations and minimize risks that arise in RESTRICTION OF the event of a disaster or the spread of contagious diseases such as a new strain of infl uenza, through the BUSINESS ACTIVITIES use of appropriate insurance, including property and casualty insurance, as well as formulation of a risk AS THE RESULT OF control plan and a business continuity plan with its related discipline. There is a possibility, however, that DISASTER, ACCIDENT, each offi ce and facility of the Group, including its refi neries and plants for producing solar modules, could ETC. 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.

7. RISKS RELATED TO THE The Group strives to enhance compliance by means of the appointment of Directors in charge of the ESTABLISHMENT OF Code of Conduct, implementation of compliance rules for the antitrust law, establishment and operation INTERNAL CONTROL of risk management systems, implementation of internal audits, etc. However, when the established SYSTEMS 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.

8. RISKS RELATED TO In addition to competition in technological development, intellectual property rights strategies have INTELLECTUAL PROPERTY become more important. We established a dedicated department in order to strengthen the management RIGHTS 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.

9. RISKS RELATED TO The Group manufactures products based on strict quality control standards and obtains product liability 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.

10. RISKS RELATED TO The Group obtains and uses personal data, including information on its customers, in relation to its CONTROL OF businesses such as product sales, and has created in-house management systems for the administration of PERSONAL DATA 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.

11. RISKS RELATED TO The Group’s pension beneﬁ t obligations and costs are computed by actuarial calculation, and basic RETIREMENT BENEFITS 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.

Showa Shell Sekiyu K.K. Corporate Report 2016 55 Consolidated Balance Sheet

Showa Shell Sekiyu K.K. and Consolidated Subsidiaries Yen Million As of December 31, 2015 and 2014 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.

56 Showa Shell Sekiyu K.K. Corporate Report 2016 Yen Million 2015 2014 LIABILITIES 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 243,328 296,317 Total liabilities and net assets ¥957,665 ¥1,176,282

Showa Shell Sekiyu K.K. Corporate Report 2016 57 Consolidated Statement of Income

Showa Shell Sekiyu K.K. and Consolidated Subsidiaries Yen Million Years ended December 31, 2015 and 2014 2015 2014 Net sales (Notes 21 and 22) ¥2,177,625 ¥2,997,984 Cost of sales (Notes 11, 21 and 22) 2,078,535 2,890,430 Gross profi t 99,089 107,554 Selling, general and administrative expenses (Notes 11 and 15) 111,298 125,611 Operating 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 6,456 Non-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 5,121 Ordinary 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 7,487 Extraordinary 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 6,112 Income (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 1,021 Net income (loss) ¥ (27,467) ¥ (9,703) Yen 2015 2014 Per share data Net income (loss)–primary ¥ (72.93) ¥ (25.76) Not prepared due to Not prepared due to Net income (loss)–diluted having no dilutive shares having no dilutive shares Dividends 38.00 38.00 Net assets 591.10 722.33 The accompanying notes are an integral part of these fi nancial statements.

Consolidated Statement of Comprehensive Income

Showa Shell Sekiyu K.K. and Consolidated Subsidiaries Yen Million Years ended December 31, 2015 and 2014 2015 2014 Income (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) 1,293 Comprehensive income (26,838) (7,388) Total comprehensive income attributable to: Owners of the parent (28,886) (8,423) Minority interests ¥ 2,047 ¥ 1,034 The accompanying notes are an integral part of these fi nancial statements.

58 Showa Shell Sekiyu K.K. Corporate Report 2016 Consolidated Statement of Changes in Net Assets

Showa Shell Sekiyu K.K. and Consolidated Subsidiaries Yen Million Years ended December 31, 2015 and 2014 2015 2014 Shareholders’ 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 227,857 275,878 Accumulated 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

Showa Shell Sekiyu K.K. Corporate Report 2016 59 Consolidated Statement of Cash Flows

Showa Shell Sekiyu K.K. and Consolidated Subsidiaries Yen Million Years ended December 31, 2015 and 2014 2015 2014 Operating 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 72,733 Investing 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) 16,433 Cash and cash equivalents at beginning of the period 43,877 27,428 Increase due to inclusion in consolidation — 1 Increase (decrease) in cash and cash equivalents due to merger of subsidiaries — 13 Decrease 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 Yen Million and cash and deposits on the balance sheets 2015 2014 Cash and deposits ¥ 16,554 ¥ 45,081 Time deposit exceeding 3 months (1,198) (1,204) Cash and cash equivalents ¥ 15,355 ¥ 43,877

60 Showa Shell Sekiyu K.K. Corporate Report 2016 Notes to the Consolidated Financial Statements

1. BASIS OF PRESENTATION

The accompanying consolidated ﬁ nancial statements of Showa Shell which are different in certain respects from the application and Sekiyu K.K. (the “Company”) and its consolidated subsidiaries (together, disclosure requirements of International Financial Reporting Standards. the “Companies”) have been prepared in accordance with the As permitted by the Financial Instruments and Exchange Act of provisions set forth in the Financial Instruments and Exchange Act of Japan, fractions below ¥1 million are rounded off. This causes certain Japan and its related accounting regulations, and in conformity with totals in the ﬁ nancial statements to not be equivalent to the sums of accounting principles and practices generally accepted in Japan, each item.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(1) POLICIES OF CONSOLIDATION Cosmo Gas Co., Ltd. became a wholly-owned subsidiary. Due to the a) Consolidated subsidiaries as of December 31, 2015 decrease in the Company’s shareholding ratio of Enessance Holdings’ (21 companies) share, Enessance Holdings has been excluded from the scope of Showa Yokkaichi Sekiyu Co., Ltd. K.K. Rising Sun consolidation, and included in affi liates accounted for by the equity Nippon Grease Co., Ltd. Genex Co., Ltd. Leef Energy K.K. Showa Shell Business & IT Solutions Ltd. method. Wakamatsu Gas K.K. Showa Shell Sempaku K.K. As a result of the Company’s acquisition of shares of Gyxis Nissho Koyu K.K. Heiwa Kisen Kaisha, Ltd. Nagase Oil Ltd. Chuo Shell Sekiyu Hanbai K.K. Corporation by the formation of joint controlled entity, Gyxis Corporation Jonen Co. Tokyo Shell Pack K.K. has been included in affi liates accounted for by the equity method. Toa Oil Co., Ltd. Hayashi-Bussan Co., Ltd. Certain 20%- to 50%-owned companies, such as Kyoudo Gas Shoseki Kako Co., Ltd. Shoseki Engineering & Petro Star Kansai Co., Ltd. Construction Co., Ltd. K.K., are excluded from equity-method affi liates because their infl uence Nakagawa Oil Co., Ltd. Solar Frontier K.K. is immaterial to the consolidated fi nancial statements. During the period, Enessance Holdings Co., Ltd. (“Enessance Holdings”) When the end of the accounting period of equity-method affi liates conducted the share exchange, in which Enessance Holdings issued is different from that of the Company, the fi nancial statements of additional shares to the shareholders of Tohoku Cosmo Gas Co., Ltd. As affi liates as of their respective fi scal year end are used by the Company a result, Enessance Holdings became the wholly owning parent company in applying the equity method. and Tohoku Cosmo Gas Co., Ltd. became a wholly-owned subsidiary. Due to the decrease in the Company’s shareholding ratio of Enessance (3) VALUATION METHOD FOR MAJOR ASSETS Holdings’ share, Enessance Holdings has been excluded from the scope of a) Securities consolidation, and included in affi liates accounted for by the equity Marketable securities are carried at fair value with changes in method. unrealized holding gain or loss, net of the applicable income taxes, Certain subsidiaries, such as Rekisei Kagaku K.K., are excluded included directly in net assets. from consolidation because their infl uence is immaterial to the Non-marketable securities are stated at cost, determined by the consolidated fi nancial statements. moving average method. Cost of securities sold is calculated primarily b) The end of accounting period by the moving average method. The end of accounting period of the consolidated subsidiaries are as b) Derivatives and hedging activities follows. The Company and certain consolidated subsidiaries enter into various Account closing date Number of subsidiaries derivative transactions in order to manage certain risks arising from September 30 6 adverse fl uctuations in foreign currency exchange rates, interest rates, October 31 1 and commodity prices. Derivative fi nancial instruments are carried at December 31 14 fair value with changes in unrealized gain or loss charged or credited The consolidated fi nancial statements have been prepared by to operations, except for those which meet the criteria for deferral hedge using the accounts of the Company and other subsidiaries as of their accounting under which unrealized gain or loss is deferred as a respective fi scal year end. Signifi cant transactions between their component of net assets. respective fi scal year end and the consolidated balance sheet date are Deferral hedge accounting is adopted for derivatives which qualify adjusted for consolidation. as hedges, under which unrealized gain or loss is deferred. Hedging instruments are derivative transactions and hedged items are primarily (2) EQUITY-METHOD AFFILIATES forecast sales denominated in foreign currencies, and receivables and Equity-method affi liates as of December 31, 2015 (14 companies) payables denominated in foreign currencies. Hedge effectiveness is not Seibu Oil Co., Ltd. Joyo Shell Sekiyu Hanbai K.K. assessed if the substantial terms and conditions of the hedge instruments Japan Oil Network Co., Ltd. Mieseki Shoji K.K. Central Sekiyu Gas Co., Ltd. Dia Shoseki Co. Ltd. and those of hedging items are the same and changes in market rates Shell Tokuhatsu K.K. Niigata Joint Oil Stockpiling Co., Ltd. or cash fl ows are expected to perfectly offset. Ohgishima Power Co., Ltd. Marubeni Energy Corporation The interest rate swaps which qualify for hedge accounting and Toyotsu Petrotex Corporation Shell Sekiyu Osaka Hatsubaisho K.K. Enessance Holdings Co., Ltd. Gyxis Corporation meet specifi c matching criteria are not remeasured at fair value but the During the period, Enessance Holdings, which had been included in differential paid or received under the swap agreements are recognized the scope of consolidated subsidiaries, conducted the share exchange, and included in interest expense or income. Hedge assessment for any in which Enessance Holdings issued additional shares to the interest rate swap, which applies special method is abbreviated. shareholders of Tohoku Cosmo Gas Co., Ltd. As a result, Enessance The Companies manage their derivative transactions in accordance Holdings became the wholly owning parent company and Tohoku with the internal management policies.

Showa Shell Sekiyu K.K. Corporate Report 2016 61 Notes to the Consolidated Financial Statements

c) Inventories at the amount calculated based on the retirement benefi t obligation and Inventories are stated principally at the lower of cost or market, cost the fair value of the pension plan assets as of the balance sheet date. being determined by the weighted average method. The retirement benefi t obligation for employees is attributed to each period by the benefi t formula method. (4) DEPRECIATION AND AMORTIZATION OF MAJOR ASSETS Actuarial gain or loss is amortized in the year following the year a) Property, plant and equipment (Excluding lease assets) in which the gain or loss is recognized primarily by the straight-line The straight-line method has been adopted. The same standard as method over periods (mainly 10 years through 14 years), which are stipulated in the Corporate Tax Law is applied to the useful economic shorter than the average remaining years of service of the employees. lives and the residual values. The main refi ning facilities at the Yokkaichi Prior service cost is being amortized as incurred by the straight-line Refi nery of Showa Yokkaichi Sekiyu Co., Ltd., are depreciated with method over periods (mainly 10 years through 14 years), which are estimated useful economic lives of 20 years. shorter than the average remaining years of service of the employees. b) Intangible assets (Excluding lease assets) Transition differences due to accounting changes are amortized as The straight-line method has been adopted. Software for in-house use is incurred by the straight-line methods over periods (15 years), which are amortized by the straight-line method over the expected useful economic shorter than the average remaining years of service of the employees. life of 5 years. Certain consolidated subsidiaries use a simplifi ed method for c) Lease assets calculating retirement benefi t expenses and liabilities based on the Lease assets are depreciated using the straight-line method over the assumption that the benefi ts payable, which are calculated as if all lease terms without the residual value. eligible employees voluntarily terminated their employment at fi scal Financial lease transactions that do not transfer ownership to year-end, approximates the retirement benefi t obligation at year-end. lessees and whose commencement day falls prior to December 31, 2008, are accounted for in a similar manner with ordinary rental (7) CONSUMPTION TAX transactions. Transactions subject to consumption taxes are recorded at amounts exclusive of consumption taxes. (5) BASIS OF PROVISIONS a) Allowance for doubtful accounts (8) AMORTIZATION OF GOODWILL Allowance for doubtful debts are calculated based on an estimate of Goodwill is amortized by the straight-line method over periods not the collectability of receivables from companies in fi nancial diffi culty. exceeding 20 years, which is determined in consideration of its causes. For normal receivables, provisions are calculated based on the actual Immaterial amount of goodwill is charged in the year of acquisition. ratio of the past doubtful debt losses. b) Provision for employees’ bonuses (9) APPROPRIATION OF RETAINED EARNINGS Provision for employees’ bonuses is provided based on the estimated Under the Companies Act of Japan, the appropriation of retained bonuses to be paid in respect of service rendered by employees in the earnings in the current fi scal year is determined by resolution of the current fi scal year. shareholders’ meeting held after the fi scal year-end. Therefore, the c) Provision for Directors’ bonuses appropriation of the retained earnings for the current fi scal year is Provision for Directors’ bonuses is calculated based on the estimated not refl ected in these fi nancial statements. bonuses to be paid in respect of service rendered by Directors in the current fi scal year. (10) CASH AND CASH EQUIVALENTS d) Provision for special repairs Cash and cash equivalents in the consolidated statement of cash fl ows Estimated accrued expenses on inspections and maintenance on refi ning consists of cash on hand, cash in banks which can be withdrawn at machinery and oil tanks are provided. Periodical inspections on oil tanks any time, and short-term investments with a maturity of 3 months or less are required under the Fire Service Act. when purchased, which can easily be converted to cash and are e) Provision for damages to the submarine pipeline subject to little risk of change in value. Provision for damages to the submarine pipeline is estimated for restoration costs. (11) RECLASSIFICATION Certain comparative accounts in the consolidated fi nancial statements (6) ACCOUNTING METHOD RELATED TO RETIREMENT for the year ended December 31, 2014 have been classifi ed to conform BENEFITS to the 2015 presentation. Accrued retirement benefi ts for employees have been recorded mainly

3. ACCOUNTING CHANGES

The Company has adopted the main clause of Paragraph 35 of attributing projected benefi ts to each period has been changed from “Accounting Standards for Retirement Benefi ts” (ASBJ Statement No. 26 the straight-line method to the benefi t formula method, and the method of May 17, 2012) and the main clause of Paragraph 67 of “Guidance for determining the discount rate has been changed. on Accounting Standard for Retirement Benefi ts” (ASBJ Guidance No. The cumulative effect of changing the method for calculating the 25 of March 26, 2015) effective from January 1, 2015. As a result, retirement benefi t obligation and service cost was recognized by the methods for calculating the retirement benefi t obligation and service adjusting retained earnings at January 1, 2015 in accordance with cost have been revised in the following respects: the method for the transitional treatment provided in Paragraph 37 of the Standard.

62 Showa Shell Sekiyu K.K. Corporate Report 2016 As a result, the liability for retirement beneﬁ ts increased by income taxes and minority interests for the ﬁ scal year decreased by ¥10,182 million and retained earnings decreased by ¥6,236 million ¥574 million, respectively. at January 1, 2015, and operating loss, ordinary loss and loss before

4. STANDARDS ISSUED BUT NOT YET EFFECTIVE

Accounting standards for business combinations Implementation Guidance on Recoverability of Deferred On September 13, 2013, the ASBJ issued “Revised Accounting Tax Assets Standard for Business Combinations” (ASBJ Statement No. 21), On December 28, 2015, the ASBJ issued “Implementation Guidance “Revised Accounting Standard for Consolidated Financial Statements” on Recoverability of Deferred Tax Assets” (ASBJ Guidance No. 26). (ASBJ Statement No. 22), “Revised Accounting Standard for Business Divestitures” (ASBJ Statement No. 7), “Revised Accounting Standard for (1) OVERVIEW Earnings Per Share” (ASBJ Statement No. 2), “Revised Guidance on The Implementation Guidance basically continues to apply the Accounting Standard for Business Combinations and Accounting framework used in the Auditing Guidance No. 66 ”Auditing Treatment Standard for Business Divestitures” (ASBJ Guidance No. 10), and for Judgment of Recoverability of Deferred Assets”, issued by Japanese “Revised Guidance on Accounting Standard for Earnings Per Share” Institute of Certifi ed Public Accountants (JICPA) where recoverability of (ASBJ Guidance No. 4). deferred tax assets is assessed based on entities’ categories, but certain accounting treatments were changed. The Implementation Guidance (1) OVERVIEW includes the following: Under these revised accounting standards and guidance, the (i) accounting treatments for entities which are not included in any accounting treatment for any changes in a parent’s ownership interest in category, a subsidiary when the parent retains control over the subsidiary and the (ii) criteria as to the classifi cation of entities in the category 2 and the corresponding accounting for acquisition-related costs were revised. In category 3, addition, the presentation method of net income was amended, the (iii) accounting treatments of unscheduled deductible temporary reference to “minority interests” was changed to “non-controlling differences for entities in the category 2, interests,” and provisional accounting for these accounting standards (iv) accounting treatments for deductible temporary differences for were also defi ned. entities in the category 3, which are scheduled to be deductible after 5 years, and (2) SCHEDULED DATE OF ADOPTION (v) accounting treatments for entities in the category 4 in the current The Company expects to adopt these revised accounting standards fi scal year, which are expected to be included in the category 2 or and guidance from the beginning of the fi scal year ending December 3 in the following year. 31, 2016. The provisional accounting for business combinations are expected to be adopted from the beginning of the fi scal year ending (2) SCHEDULED DATE OF ADOPTION December 31, 2016. The Implementation Guidance is effective from the beginning of the fi scal year ending December 31, 2017. (3) IMPACT OF ADOPTING REVISED ACCOUNTING STANDARDS AND GUIDANCE (3) IMPACT OF ADOPTING THE ACCOUNTING GUIDANCE The Company is currently evaluating the impact of adopting these The Company is currently evaluating the impact of adopting the revised standards on its consolidated fi nancial statements. guidance on its consolidated fi nancial statements.

5. CHANGES IN PRESENTATION

Consolidated statement of cash fl ows “Purchase of subsidiaries’ share” included in “Other, net” in the “Increase (decrease) in accounts payable‒other” included in “Other, investing activities for the previous year is reported separately for the net” in the operating activities for the previous year is reported current year due to its materiality. In order to refl ect this change in separately for the current year due to its materiality. In order to refl ect presentation, consolidated statement of cash fl ows for the previous year this change in presentation, consolidated statement of cash fl ows for the have been restated. previous year have been restated. As a result, the amount of ¥(2,710) million included in “Other, net” As a result, the amount of ¥10,725 million included in “Other, net” in the investing activities in the previous year is restated to ¥(228) in the operating activities in the previous year is restated to ¥20,906 million of “Purchase of subsidiaries’ share” and ¥(2,481) million of million of “Increase (decrease) in accounts payable‒other” and “Other, net.” ¥(10,181) million of “Other, net.”

6. ADDITIONAL INFORMATION

Business Integration with Idemitsu Kosan Co., Ltd. (hereinafter the “MoU”) for the Business Integration based on a spirit of The Company and Idemitsu Kosan Co., Ltd. (collectively, the equal partnership (hereinafter the “Business Integration”), which shall not “Companies”) entered into a Memorandum of Understanding be legally binding, as of November 12, 2015. The Companies will

Showa Shell Sekiyu K.K. Corporate Report 2016 63 Notes to the Consolidated Financial Statements

discuss and formally enter into a legally binding defi nitive agreement parties, and the launch of the NewCo in October 2016–April 2017. (hereinafter the “Defi nitive Agreement”) through necessary procedures However, changes to the schedule may be made upon consultation including a resolution by the Board of Directors. between the Companies for certain reasons such as delays in the review process by the relevant competition law authorities, delays (1) OBJECTIVES OF THE BUSINESS INTEGRATION concerning the progress of post-merger integration preparation required The Companies agreed, in the MoU, to create an industry-leading for a smooth start of operation on Day 1, and others. player unparalleled competitive position by combining the strengths and the management resources of both companies. The new company (the (4) NAME OF THE NEWCO “NewCo”) will lead the effort of solving the industry’s various structural The name of the NewCo is currently undetermined and is scheduled to issues with the aim at improving the lives of Japanese citizens through be decided upon further discussion between the Companies. effi cient and stable energy supply. (5) LOCATION OF THE HEAD OFFICE OF THE NEWCO (2) METHOD OF THE BUSINESS INTEGRATION The Companies have yet to decide the location of the head offi ce of The Companies have set a merger as the base structure of the Business the new company but are planning to fi nd a location different from the Integration, subject to further discussions and an offi cial agreement. current offi ces of the Companies by the effective date of or as soon as possible after the Business Integration. (3) SCHEDULES OF THE BUSINESS INTEGRATION The schedule of the Business Integration will be discussed further with (6) STRUCTURE OF BOARD OF DIRECTORS the following target timeline: commencement of due diligence of the While the structure of the Board of Directors will be decided upon Companies and their subsidiaries upon signing of the MoU, followed further discussions between the Companies, representative directors by the signing of the Defi nitive Agreement incorporating the defi nitive and executive directors will consist of an equal number of details and terms, approval at the shareholders’ meetings of both representatives from each company.

7. SECURITIES (1) INVESTMENT SECURITIES Yen Million 2015 2014 Investment securities ¥ 8,927 ¥ 9,516 Investment in unconsolidated subsidiaries and afﬁ liates 58,349 30,927 [Including investment in entities jointly controlled] [18,212] — ¥67,277 ¥40,444

(2) MARKETABLE SECURITIES For 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 ¥2,876 Securities whose carrying value does not exceed their acquisition cost: Equity securities 60 65 5

For the year ended December 31, 2014 Yen Million 2014 Acquisition cost Carrying amount Unrealized gain (loss) Securities whose carrying value exceeds their acquisition cost: Equity securities ¥3,188 ¥6,187 ¥2,999 Securities whose carrying value does not exceed their acquisition cost: Equity securities 11(0)

(3) SECURITIES SOLD Yen Million 2015 2014 Proceeds from sales of securities during the year ¥67 ¥49 Realized gains 17 5 Realized losses 3 4

64 Showa Shell Sekiyu K.K. Corporate Report 2016 (4) NON-MARKETABLE SECURITIES Yen 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, respectively, and the net gains (loss) on sales and disposal of those such as ofﬁ ce buildings and commercial facilities including land in properties for the years ended December 31, 2015 and 2014 were Tokyo and other areas. The net of rental income and operating ¥32 million and ¥2,836 million, respectively. An impairment loss for expenses for those rental properties for the years ended December 31, the years ended December 31, 2015 and 2014 were ¥231 million 2015 and 2014 were ¥1,329 million and ¥1,293 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 value December 31, 2014 Increase (Decrease) December 31, 2015 December 31, 2015 ¥23,786 ¥563 ¥24,350 ¥49,580

Yen Million Carrying amount Fair value December 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 DEBTS Yen Million 2015 2014 Short-term loans payable ¥51,645 ¥58,862 Short-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 DEBTS Yen Million 2015 2014 Loans from banks, other ﬁ nancial institutions, etc. ¥ 83,825 ¥130,636 Long-term lease obligations 1,764 2,105 0.97 percent unsecured straight bond due in 2017 10,000 10,000 0.29 percent unsecured straight bond due in 2019 10,000 10,000 ¥105,589 ¥152,741 Less: 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.

Showa Shell Sekiyu K.K. Corporate Report 2016 65 Notes to the Consolidated Financial Statements

Annual maturities of bonds Yen 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 — ¥10,000 More than three years and less than four years 10,000 — More than four years and less than ﬁ ve years — 10,000 More than ﬁ ve years — — ¥20,000 ¥20,000

Annual maturities of long-term debts (Excluding bonds) Yen Million 2015 2014 Within one year ¥ 620 ¥ 50,811 More than one year and less than two years 9,308 1,444 More than two years and less than three years 31,151 9,178 More than three years and less than four years 44,300 31,077 More than four years and less than ﬁ ve years 139 40,158 More than ﬁ ve years 68 71 ¥85,589 ¥132,741

(3) COMMITMENT-LINE CONTRACTS The 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 LIABILITIES Yen 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 ¥ 60,804 Deferred 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 RATE Disclosures 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 2016 and for the temporary differences expected to be realized or for Partial Amendment of the Local Tax Act, etc.” were promulgated on settled from January 1, 2017, respectively. March 31, 2015. As a result, the effective statutory tax rate used to The effect of the announced reduction of the effective statutory tax measure the Company’s deferred tax assets and liabilities was changed rate was to decrease deferred tax assets, after offsetting deferred tax from 35.6% to 33.1% and 32.3% for the temporary differences liabilities, by ¥5,205 million and income tax–deferred was to increase expected to be realized or settled in the year beginning January 1, by ¥4,915 million for the year ended December 31, 2015.

66 Showa Shell Sekiyu K.K. Corporate Report 2016 11. RETIREMENT BENEFITS

The Companies have both defi ned benefi t plans (including defi ned corporate pensions, Smaller Enterprise Retirement Allowance Mutual Aid benefi t corporate pensions, corporate pension fund and lump-sum System, and specifi c mutual aid) included as part of the total retirement retirement plans) and defi ned contribution plans (defi ned contribution 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 ¥102,113 Cumulative 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 2014 Yen 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 2014 Yen Million 2015 2014 Funded retirement benefi t obligation ¥108,773 ¥103,418 Plan assets at fair value (19,725) (22,349) 89,047 81,069 Unfunded retirement benefi t obligation 969 912 Net liability for retirement benefi ts in the balance sheet 90,016 81,982 Liability for retirement benefi ts 90,143 82,097 Asset for retirement benefi ts (126) (115) Net liability for retirement benefi ts in the balance sheet ¥ 90,016 ¥ 81,982 Note: 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 2014 Yen Million 2015 2014 Service cost ¥1,474 ¥1,707 Interest cost 958 1,509 Expected return on plan assets (817) (871) Amortization of actuarial loss 1,407 2,238 Amortization of prior service cost (128) (118) Amortization of transition difference due to accounting changes 29 117 Retirement benefi t expense adopting a simplifi ed method 515 415 Retirement benefi t expense for defi ned benefi t plan ¥3,439 ¥4,999

Showa Shell Sekiyu K.K. Corporate Report 2016 67 Notes to the Consolidated Financial Statements

(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 2014 Yen 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 2014 Yen Million 2015 2014 Unrecognized actuarial loss ¥11,678 ¥11,126 Unrecognized prior service cost (730) (801) Unrecognized transition difference due to accounting changes — 29 Total ¥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 OBLIGATIONS The 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 OBLIGATIONS The 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 OBLIGATIONS Yen Million 2015 2014 Balance at beginning of year ¥3,821 ¥3,636 Additional provisions associated with the acquisition of property, plant and equipment 286 190 Reconciliation associated with passage of time 55 58 Increase due to changes in estimation — 22 Reduction 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

68 Showa Shell Sekiyu K.K. Corporate Report 2016 13. FINANCIAL INSTRUMENTS AND RELATED DISCLOSURES (1) GROUP POLICY FOR FINANCIAL INSTRUMENTS (3) RISK MANAGEMENT FOR FINANCIAL INSTRUMENTS The Companies, based on their capital investment plans, raise necessary Credit risk management funds through bank loans, issues of corporate bonds, and other sources. Credit risk is the risk of economic loss arising from a counterparty’s In addition, to obtain short-term working capital, the Companies raise failure to repay or service debt according to the contractual terms. funds through bank loans, issues of commercial paper (CP), and other The Companies manage their credit risk from receivables by sources. The Companies use derivatives to reduce the risk of fl uctuations monitoring of payment terms and balances of each customer and in commodity prices, foreign exchange rates, and interest rates. recognizing credit standing of major customers to identify the default Derivatives are not used for speculative purposes. risk of customers at an early stage. Market risk management (Foreign exchange risk and (2) NATURE AND EXTENT OF RISKS ARISING FROM interest rate risk) FINANCIAL INSTRUMENTS Foreign currency trade payables are exposed to market risk resulting from Receivables, such as trade notes and trade accounts, are exposed to fl uctuations in foreign currency exchange rates. Such foreign exchange customer credit risk. Investment securities are mainly equity instruments risk is hedged principally by foreign currency forward contracts. of customers and suppliers of the Companies. Interest rate swaps are used to manage exposure to market risks Payment terms of payables, such as trade notes and trade accounts, from changes in interest rates of loan payables. Investment securities are less than three months. Moreover, payables in foreign currencies are managed by monitoring the market values and fi nancial positions are exposed to the market risk of fl uctuation in foreign currency of issuers on a regular basis. To manage the risk of derivatives, the exchange rates. Companies have prepared a set of internal rules and implemented them Maturities of bank loans, commercial paper, and bonds, which in line with only real demand. are for the purpose of capital investment and working capital, are less than seven years after the balance sheet date. Moreover, variable (4) SUPPLEMENTARY EXPLANATION OF THE ESTIMATED FAIR interest rate debt is exposed to market risks from changes in variable VALUE OF FINANCIAL INSTRUMENTS interest rates. The fair value of fi nancial instruments is based on their quoted market In addition to foreign currency forward contracts and interest rate prices, if available. When there is no quoted market price available, swaps, derivatives mainly include options, which are used to hedge fair value is reasonably estimated. Since various assumptions and foreign exchange risk associated with receivables and payables in factors are refl ected in estimating the fair value, different assumptions foreign currencies, and swaps, which are used to hedge market price and factors could result in different fair value. In addition, the notional fl uctuations risk associated with crude oil and petrochemical products. 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 INSTRUMENTS Fair 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 instruments Yen 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 20,191 191 Long-term loans payable (Note 1) 83,825 85,854 2,029 Total liabilities ¥520,506 ¥522,726 ¥2,220 Derivative transactions (Note 3) ¥ (204) ¥ (204) ¥ —

Showa Shell Sekiyu K.K. Corporate Report 2016 69 Notes to the Consolidated Financial Statements

Yen Million December 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 20,299 299 Long-term loans payable (Note 1) 130,636 133,232 2,596 Total liabilities ¥698,585 ¥701,481 ¥2,895 Derivative 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. ASSETS LIABILITIES Cash and deposits and Notes and accounts Notes and accounts payable–trade, Accounts payable– receivable–trade other, and Short-term loans payable Their carrying values approximate fair value because of their short Their carrying values approximate fair value because of their short maturities. maturities. Investment securities Bonds payable The fair value of investment stocks is measured at their quoted market The fair value of bonds payable is based on the present value of price of the stock exchange for the equity instruments. The information principal and interest discounted by the interest rates determined taking of the fair value for the investment securities by classiﬁ cation is included into account the remaining period of each bond and current credit risk. in Note 7. Long-term loans payable The 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.

DERIVATIVES The 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 Due after one year Due after ﬁ ve years December 31, 2015 Due in one year or less through 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 Due after one year Due after ﬁ ve years December 31, 2014 Due in one year or less through 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 TRANSACTIONS These instruments include foreign exchange contracts, foreign In the normal course of business, the Companies use derivatives currency options, interest rate swaps, futures, forward contracts, to manage their exposures to market risks in compliance with and options of crude oil and oil products. their internal policies. All such derivatives involve risks, including the credit risk of The Companies do not use derivatives for speculative purposes. nonperformance by counterparties. In order to minimize the

70 Showa Shell Sekiyu K.K. Corporate Report 2016 credit risk of nonperformance by counterparties, the Companies not necessarily indicative of the actual amounts that may be enter into derivative contracts with major ﬁ nancial institutions realized or settled in the future. and trading companies that have a high credit rating. The notional amounts of the swaps are not direct measures (2) SUPPLEMENTAL EXPLANATION ON QUANTITATIVE of the Company’s risk exposure in connection with its swap INFORMATION transactions. The 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

(3) CURRENT VALUE OF DERIVATIVES Derivative transactions to which hedge accounting is not applied as of December 31, 2015 and 2014 Yen Million December 31, 2015 Notional amount due Notional amount 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 62 Total ¥(154) ¥(154) Commodity-related transactions—Crude oil futures contracts To sell ¥ 1,058 ¥ — ¥ 244 ¥ 244 Commodity-related transactions—Oil products futures contracts To buy 820 — (185) (185) Total ¥ 58 ¥ 58

Yen Million December 31, 2014 Notional amount due Notional amount 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 ¥221 Commodity-related transactions—Crude oil futures contracts To sell ¥ 427 ¥ — ¥ 87 ¥ 87 Commodity-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, 2015 Yen Million Notional amount due December 31, 2015 Hedge accounting method Hedged item Notional amount after one year Fair value Forward foreign exchange contracts To buy (US$) Deferral hedge Foreign forecasted ¥3,411 ¥ — ¥ (36) accounting transactions To sell (US$) Deferral hedge Foreign forecasted 5,477 — 59 accounting transactions Total ¥ 23 Interest rate swap Special hedge Interest of long-term ¥7,000 ¥7,000 ¥ (37) (ﬁ xed rate payment, ﬂ oating rate receipt) accounting treatment loans payable Total ¥ (37) Commodity-related transactions— Crude oil forward contracts To buy Deferral hedge Crude oil ¥1,982 ¥ — ¥(223) accounting Commodity-related transactions— Oil products forward contracts To sell Deferral hedge Oil products ¥2,956 ¥ — ¥ 92 accounting Total ¥(130)

Showa Shell Sekiyu K.K. Corporate Report 2016 71 Notes to the Consolidated Financial Statements

Derivative transactions to which hedge accounting is applied as of December 31, 2014 Yen Million Notional amount due December 31, 2014 Hedge accounting method Hedged item Notional amount after one year Fair value Foreign currency forward contracts To buy (US$) Deferral hedge Foreign forecasted ¥ 8,213 ¥ — ¥ 221 accounting transactions To sell (US$) Deferral hedge Foreign forecasted 23,108 — (626) accounting transactions Total ¥ (405) Interest rate swap Special hedge Interest of long-term ¥11,000 ¥7,000 ¥ (57) (ﬁ xed rate payment, ﬂ oating rate receipt) accounting treatment loans payable Total ¥ (57) Commodity-related transactions— Crude oil forward contracts To buy Deferral hedge Crude oil ¥ 9,787 ¥ — ¥(1,011) accounting To sell Deferral hedge Crude oil 3,879 — 524 accounting Commodity-related transactions— Oil products forward contracts To sell Deferral hedge Oil products ¥11,506 ¥ — ¥ 975 accounting Total ¥ 488

15. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Major elements of selling, general and administrative expenses for the years ended December 31, 2015 and 2014 Yen Million 2015 2014 Transportation ¥ 35,389 ¥ 37,473 Salaries 25,766 34,142 Rents 3,795 5,403 Depreciation 4,935 6,658 Research and development expenses 5,606 4,632 Other 35,805 37,301 ¥111,298 ¥125,611

16. IMPAIRMENT LOSS

As a minimum unit for generating cash fl ows, service stations were Impairment loss was recorded at the amount by which the carrying assessed for impairment individually, and other property, plant and amount of each asset group exceeded its recoverable value. equipment were grouped by segments of management accounting. For the year ended December 31, 2015, the Companies recognized Assets used for rent and idle assets were assessed individually. an impairment loss of ¥6,669 million on 110 groups (¥1,575 million Recoverable value was assessed by comparing the net realizable on 71 groups in 2014) of impaired property, plant and equipment, value and value in use. The realizable value was mainly adopted for which was accounted for as an extraordinary loss. Impairment loss idle assets and value in use for other assets. recorded primarily related to the signifi cant decrease in the market Material assets were estimated in accordance with real estate value of the Companies’ land as well as to the overall deterioration appraisal standards. of their business environment. Impaired asset groups consisted of the To calculate value in use, future cash fl ows were discounted by following: 6.0% (6.0% in 2014).

For the year ended December 31, 2015 Yen Million 2015 Land Others Total Service stations (92 groups) ¥2,309 ¥1,275 ¥3,585 Factories 430 1,860 2,291 Idle assets (17 groups) 551 240 791 ¥6,669

72 Showa Shell Sekiyu K.K. Corporate Report 2016 For the year ended December 31, 2014 Yen Million 2014 Land Others Total Service stations (65 groups) ¥ 64 ¥1,295 ¥1,360 Idle 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 to the submarine pipeline of ¥6,589 million, has been recorded for (Higashi-Ohgishima offshore, owned by the Company and managed restoration costs as extraordinary losses for the year ended as of by Toa Oil Co., Ltd.) occurred in May 2015. A loss on damages to the December 31, 2015. submarine pipeline of ¥7,275 million, including provision for damages

18. COLLATERAL ASSETS (1) COLLATERAL ASSETS Yen Million 2015 2014 Cash and deposits ¥ — ¥ 3,396 Notes and accounts receivable–trade — 1,640 Raw materials and supplies — 89 Buildings and structures 11,142 12,749 Tanks 4,838 4,701 Machinery, equipment and vehicles 28,968 41,996 Land 22,955 23,154 Other 7 12 ¥67,912 ¥87,740

(2) SECURED DEBTS Yen Million

2015 2014 Long-term loans payable ¥ 85 ¥ 1,749 Short-term loans payable 1,360 1,457 Accounts 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 actions will not materially affect the Companies’ ﬁ nancial position or which arise in the ordinary course of business. In the opinion of results of operations and cash ﬂ ows. management, the amount of the ultimate liability with respect to those

Showa Shell Sekiyu K.K. Corporate Report 2016 73 Notes to the Consolidated Financial Statements

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) ¥ 570 Unrealized 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) ¥ 800 Retirement 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 The Company discloses material balances and transactions with than 10% of the consolidated sales proceeds, or 10% of the total related parties when such balances and transactions represent more amount of the consolidated cost of sales and selling, general and than 1% of the consolidated total assets. administrative expenses, they are disclosed.

(1) RELATED PARTIES–CORPORATIONS For the year ended December 31, 2015

Advanced purchase of — Accounts receivable–trade 7,667 crude oil Marubeni Energy Corporation ¥2,350 Direct 33.4% Sale of oil products 125,783 Accounts receivable–trade 11,669 Shell Chemicals Japan Ltd. ¥ 250 NA Sale of oil products and 239,140 Accounts receivable–trade 12,425 petrochemicals Shell Eastern Trading (Pte), Ltd. US$714 NA Purchase of crude oil and 178,027 Accounts payable–trade 5,964 oil products

For the year ended December 31, 2014

Capital Voting right share Yen Million Name (Million) owning (Shares owned) Transactions Closing balances Saudi Arabian Oil Co., Ltd. ¥ — Indirect 15.0% Purchase of crude oil and ¥946,770 Accounts payable–trade ¥50,273 oil products Seibu Oil Co., Ltd. ¥8,000 Direct 38.0% Purchase of oil products 571,378 Accounts payable–trade 53,283 Advanced purchase of — Accounts receivable–trade 13,992 crude oil Marubeni Energy Corporation ¥2,350 Direct 33.4% Sale of oil products 169,680 Accounts receivable–trade 14,870 Shell Chemicals Japan Ltd. ¥ 250 NA Sale of oil products and 266,179 Accounts receivable–trade 22,715 petrochemicals Shell Eastern Trading (Pte), Ltd. US$714 NA Purchase of crude oil and 247,684 Accounts payable–trade 11,719 oil products

74 Showa Shell Sekiyu K.K. Corporate Report 2016 (2) RELATED PARTIES–INDIVIDUALS There 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 SEGMENTS (2) METHODS OF MEASUREMENT FOR THE AMOUNTS OF The Companies’ reportable segments are those for which separately SALES, PROFIT (LOSS), ASSETS, LIABILITIES, AND OTHER ﬁ nancial information is available and the Board of Directors carries out ITEMS FOR EACH REPORTABLE SEGMENT periodic review to allocate management resources and evaluate The accounting policies of each operating segment are consistent with business performance. those disclosed in Note 2, “SUMMARY OF SIGNIFICANT The Companies are mainly engaged in the manufacture and sale ACCOUNTING POLICIES.” of energy-related products including oil products, solar modules, and Segment proﬁ t (loss) is stated on an operating income basis. Inter- electricity. The Company and its subsidiaries, serving as independent segment sales and transfers are recorded at the same prices used in management units of each business, create comprehensive strategies transactions with third parties. and implement business activities about its products and services. As stated above in the “Accounting Changes,” the methods of The companies’ activities are composed of two reportable calculating the retirement obligation and service cost in the business segments, “Oil business” and “Energy solutions business,” each of segment have been changed in accordance with accounting changes. which is involved in the sale of products and services. The businesses As a result, operating loss in the oil business is decreased by which are not included in reportable segments are shown in “Other.” ¥541 million, operating loss in the energy solutions business is The “Oil business” manufactures and sells gasoline, naphtha, decreased by ¥26 million and operating income in the other business kerosene, diesel oil, fuel oil, lubricants, LP gas, asphalt, and petrochemical is increased by ¥5 million compared with the previous accounting products. The “Energy solutions business” incorporates the manufacture methods. and sale of solar modules and wholesale supplies of electricity.

(3) INFORMATION ABOUT SALES, PROFIT (LOSS), ASSETS, LIABILITIES, AND OTHER ITEMS For the year ended December 31, 2015 Yen Million Reportable segment Energy solutions Oil business 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) ¥2,177,625 Segment 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) ¥ 957,665 Other: Depreciation and amortization ¥ 20,818 ¥ 17,542 ¥ 38,360 ¥ 537 ¥ 38,898 — ¥38,898 Amortization of goodwill and (162) (28) (191) 5 (185) — (185) negative goodwill Equity in net earnings (losses) of (1,161) 35 (1,126) — (1,126) — (1,126) afﬁ liates 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.

Showa Shell Sekiyu K.K. Corporate Report 2016 75 Notes to the Consolidated Financial Statements

For the year ended December 31, 2014 Yen Million Reportable segment Energy solutions Oil business 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) ¥2,997,984 Segment 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) ¥1,176,282 Other: Depreciation and amortization ¥ 23,585 ¥ 17,268 ¥ 40,854 ¥ 507 ¥ 41,361 — ¥ 41,361 Amortization of goodwill and (162) (28) (191) 2 (188) — (188) negative goodwill Equity in net earnings (losses) of 875 (2) 873 — 873 — 873 afﬁ liates 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 INFORMATION a) Information for each product and service Disclosure of this information is not presented since similar information is included in segment information. b) Geographic segment information 1) 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 customer For 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.

76 Showa Shell Sekiyu K.K. Corporate Report 2016 23. BUSINESS COMBINATIONS

JOINT CONTROLLED ENTITY (iii) Effective date Absorption-type company split regarding LP (Liquid Petroleum) gas April 1, 2015 import and wholesale operation (iv) Company split method Based on the resolution at the Board of Directors’ meeting held on This is an absorption-type split in which the Company is the splitting December 16, 2014, Cosmo Petroleum Gas Co., Ltd. (“Cosmo company and Cosmo Petroleum Gas is the successor company. Petroleum Gas”) has succeeded the LP gas import and wholesale (v) Name of post-combination enterprise operations effective as of April 1, 2015. Gyxis Corporation (formerly known as Cosmo Petroleum Gas Co., Ltd.) (vi) Basis of judgment as joint controlled entity (1) OVERVIEW OF THE COMPANY SPLIT The Four Corporate Group entered into the Shareholders’ Agreement (i) Contents of the business to be split regarding the joint controlled entity, and allocated voting shares as The LP gas import and wholesales operations compensation for the business combination. In addition, there is no (ii) Purpose of the company split certain fact indicating the existence of other controlling relationships. The Company, the Cosmo Oil Co. Ltd., Sumitomo Corporation and Tonen General Sekiyu K.K. (the “Four Corporate Group”) concluded in (2) OVERVIEW OF THE ACCOUNTING METHOD the business integration as to the LP gas import and wholesale The Company adopted ASBJ Statement No. 21 Accounting Standard operations as of August 5, 2014. The Four Corporate Group aimed to for Business Combinations (released on December 26, 2008) and create one of Japan’s top-class LP gas import and wholesale ASBJ Guidance No. 10 Guidance on Accounting Standard for companies, by the integration of the LP gas import and wholesale Business Combinations and Accounting Standard for Business operations, including the importing of LP Gas, the management of Divestitures (released on December 26, 2008). shipping, logistics and wholesales in domestic market, and overseas As a result of the business combination, Gyxis Corporation has been trading operation by four corporate groups. included in afﬁ liates accounted for by the equity method. The company split has been carried out as a part of the business integration.

Showa Shell Sekiyu K.K. Corporate Report 2016 77 Independent Auditor’s Report

78 Showa Shell Sekiyu K.K. Corporate Report 2016 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

Showa Shell Sekiyu K.K. Corporate Report 2016 79 Network (As of April 1, 2016)

3 Hokkaido Branch

Niigata Petroleum Import Terminal Niigata Yukigunigata Megasolar Power Plant and Niigata Second Megasolar Plant

Solar Frontier Tohoku Plant

5 Yokkaichi Reﬁ nery of Showa Tohoku Branch Yokkaichi Sekiyu Co., Ltd.

Yamaguchi Reﬁ nery of Seibu Oil Co., Ltd. Chubu Branch Ishioka Training Center

Chugoku Branch Head Offi ce 1, 8 Metropolitan Branch Kinki Branch Kanto Branch 10 2 Solar Frontier K.K. Head Offi ce 6 9 Central Research Laboratory Atsugi Research Center 7 Keihin Refi nery of Toa Oil Co., Ltd. Mizue Power Station of Genex Co., Ltd. Kyushu Branch Ohgishima Power Station of Ohgishima Power Co., Ltd. Keihin Biomass Power Station

Solar Frontier Head Ofﬁ ce Miyazaki Plant Internal Audit Division Energy Solutions Business Center Kunitomi Plant Integration Preparation Ofﬁ ce • Power Demand and Supply Division Oil Business Center • Power Sales Division • Commercial Sales Division • Solar Frontier K.K. • Crude Oil & Marine Division • Distribution & Operations Division Group Functions • Lubricants & Bitumen Division • Health, Safety, Security and Environ- • Manufacturing Division ment (HSSE) Division • Marketing Planning Division • Credit & Financial • New Business Promotion Division Risk Management Team • Oil Products Division • General Affairs Division • Petro Chemical Business Promotion Team • Integrated Corporate Planning • Research & Development Division Division • Retail EPOCH Project Team • Internal Control Promotion Division • Retail Sales Division • IT Planning Department • Sales Division • Integrated Finance & • Supply Division Control Division • Integrated Legal Division • Integrated Human Resources Division • Procurement Team • Public Affairs Division • Secretariat Department

80 Showa Shell Sekiyu K.K. Corporate Report 2016 Refi neries, import terminals, and power plants Offi ces, depots, and asphalt terminals Head Offi ce, branches, R&D center, and other business locations

Solar Frontier Europe (Germany)

Solar Frontier Alcobar Ofﬁ ce (Saudi Arabia) Solar Frontier Americas (United States) Saudi Aramco (Saudi Arabia)

Abu Dhabi Representative Ofﬁ ce (UAE)

Ishioka Training Center Depots Solar Module Plants and Research Center • Kushiro Nishiko Central Research Laboratory • Shiogama • Atsugi Research Center • Sado • Miyazaki Plant Branches • Hiroshima • Kunitomi Plant • Hokkaido Branch • Karatsu • Tohoku Plant • Tohoku Branch • Metropolitan Branch Group Refi neries Power Plants • Kanto Branch • Chubu Branch • Yokkaichi Refi nery of Showa Yokkaichi • Mizue Power Station of • Kinki Branch Sekiyu Co., Ltd. Genex Co., Ltd. • Chugoku Branch • Keihin Refi nery of Toa Oil Co., Ltd. • Ohgishima Power Station of • Kyushu Branch • Yamaguchi Refi nery of Seibu Oil Co., Ltd. Ohgishima Power Co., Ltd. • Keihin Biomass Power Station Niigata Petroleum Import Terminal • Niigata Yukigunigata Megasolar Asphalt Terminals Power Plant and Niigata Second Lubricants Blending Plants • Yokohama 8 Megasolar Plant • Yokohama • Takamatsu 9 • Kobe • Mie 10

Showa Shell Sekiyu K.K. Corporate Report 2016 81 Major Subsidiaries and Afﬁ liates (As of December 31, 2015)

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 operation Shipping 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 materials Manufacture and sales of oil products and bitumen paving materials K.K. Rising Sun Automobile parts sales Equipment lease Insurance agent Wakamatsu Gas K.K. Sales of oil products City 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 gas Construction related to high-pressure gas and oil Sales of residential and offi ce automation equipment Gyxis Corporation Manufacture, storage, transport, sale, and import/export of LP gas

82 Showa Shell Sekiyu K.K. Corporate Report 2016 Investor Information (As of December 31, 2015)

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 Sumitomo Mitsui Trust Bank, Limited Transfer Agent: 2-8-4, Izumi, Suginami-ku, Tokyo 168-0063, Japan Independent Auditors: PricewaterhouseCoopers Aarata General Shareholders’ Meeting: March

Percentage of total common Major shareholders Number of shares held 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

Stock Price Range Stock price (left) TOPIX (right) (Yen) 1,200 2,000

900 1,500 600 1,000 300

0 500 2012 2013 2014 2015 1 2 3 4 5 6 7 8 9 10 1112 1 2 3 4 5 6 7 8 9 10 1112 1 2 3 4 5 6 7 8 9 10 1112 1 2 3 4 5 6 7 8 9 10 1112 (Month)

Trading Volume (Thousand shares) 100,000

75,000

50,000

25,000

0 2012 2013 2014 2015 1 2 3 4 5 6 7 8 9 10 1112 1 2 3 4 5 6 7 8 9 10 1112 1 2 3 4 5 6 7 8 9 10 1112 1 2 3 4 5 6 7 8 9 10 1112 (Month)

Showa Shell Sekiyu K.K. Corporate Report 2016 83 Inclusion in SRI Index (As of May 31, 2016) June 2016 Printed in Japan

Showa Shell Sekiyu has been selected for the FTSE4Good Index (a socially responsible investment index) for twelve consecutive years starting in 2004.

Caution Regarding Business Forecasts and Forward-Looking Statements Business 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.