Challenge for Change - JXTGホールディングス · 2018. 3. 22. · Contents Performance &...

Annual Report 2008Year Ended March 31, 2008

Challenge for

Change

NIPPON

OIL CORPORATION Annual Report 2008

We have beenchanging

Corporate Milestones

1888 Nippon Oil established.1921 Nippon Oil merged with Hoden Oil.1931 Mitsubishi Oil established jointly by three Mitsubishi group companies (headquarters, mining, trading) and

Associated Oil (later known as Getty Oil) in the United States.1933 Koa Oil established.1941 Nippon Oil merged with Ogura Oil.1951 Nippon Petroleum Refining established jointly by Nippon Oil and Caltex.1984 All the Getty Oil-owned Mitsubishi Oil shares transferred to Mitsubishi group companies.

Business alliance formed between Nippon Oil and Mitsubishi Oil.1995 Business alliance formed between Nippon Oil and Idemitsu Kosan.1996 Nippon Oil terminated business alliance with Caltex and acquired a full stake in Nippon Petroleum Refining.1999 Nippon Oil and Mitsubishi Oil merged to form Nisseki Mitsubishi.

Business alliance formed between Nisseki Mitsubishi and COSMO Oil.2002 Nisseki Mitsubishi renamed Nippon Oil.2006 Business alliance formed with Japan Energy.

Capital tie-up formed with INPEX Holdings.2007 Business/capital alliance formed with SK Corporation (South Korea).

A memorandum of understanding regarding long-term collaboration with China National Petroleum Corporation is concluded.

2008 Fourth Medium-term Management plan - Challenge for Change - launched.

1914 Outbreak of World War I

1939 Outbreak of World War II

1973 First oil crisis1978 Second oil crisis

1991 Start of Gulf War

2003 Start of Iraq War2005 The Kyoto Protocol came into effect

nippon oil Corporation Annual Report 2008

Contents

Performance &

StrategyReview

of OperationsM

anagement System

Financial SectionCorporate Inform

ation

2 nippon oil—At A GlAnCe 4 FinAnCiAl HiGHliGHts 6 CHAirmAn’s messAGe 8 presiDent’s reVieW 10 speCiAl FeAture Challenge for Change—The Fourth Medium-Term Management Plan (Fiscal 2008 to Fiscal 2010)

16 interVieW WitH tHe presiDent

Performance & Strategy

Review of Operations

Management System

Financial Section

Corporate Information

2

24

42

51

84

24 oil AnD nAturAl GAs eXplorAtion & proDuCtion (e&p) 27 reFininG & petroCHemiCAls 30 mArKetinG 34 oVerseAs operAtions 37 neW teCHnoloGY Businesses 39 reseArCH AnD DeVelopment

42 CorporAte soCiAl responsiBilitY (Csr) 46 CorporAte GoVernAnCe

52 inDustrY trenDs AnD nippon oil’s position 58 mAnAGement’s DisCussion AnD AnAlYsis oF operAtions 66 ConsoliDAteD BAlAnCe sHeets 68 ConsoliDAteD stAtements oF inCome 69 ConsoliDAteD stAtements oF CHAnGes in net Assets 70 ConsoliDAteD stAtements oF CAsH FloWs 71 notes to ConsoliDAteD FinAnCiAl stAtements 83 report oF inDepenDent AuDitors

84 prinCipAl nippon oil Group CompAnies 85 oVerseAs BAses 86 orGAnizAtion CHArt 87 inVestor inFormAtion

Annual Report 2008 nippon oil CorporAtion 1

nippon oil—At A GlAnCe

Based on its philosophy, “Creating the energy future and promoting prosperity and harmony with nature,”

the Nippon Oil Group will make sustained growth possible by becoming an integrated energy company.

Market Sector Market Environment Market Data

oil and natural Gas exploration & production (e&p)

refining and marketing

petrochemicals

petroleum products

new technology Businesses

•Historic surge in crude oil prices •Fierce competition for natural resources

with the increasing participation of such rising economic powers as China and India

•Japanese domestic markets: Oil still main primary energy source but demand declining

•Asian markets: Demand growing from countries centered on China

•Demand growing in Asian markets centered on China

•Despite growth in production capacity in Asia and the Middle East, continued capacity shortfalls for paraxylene and propylene, etc.

•Rising expectations regarding the potential of next-generation energy systems for counter-ing global warming

04CY

100

60

80

40

20

005CY 06CY 07CY

Crude oil prices (Wti)($/Barrel)

04CY 07CY 10CY0

10

20

30

projected Demand for paraxylene in Asia(Millions of tons)

07CY 10CY 20CY0

3

6

9

12

Japanese Government installation targets of stationary Fuel Cells(Million kW)

04CY 10CY0

10

20

30

04FY 10FY0

100

50

200

150

250

projected Demand for oil in Asia(Million BD)

projected Demand for petroleum products in Japan (Million kL)

See Pages 24-26

See Pages 27-33

See Pages 27-29

See Pages 37-38

Source: IEA Source: Ministry of Economy, Trade and Industry

Source: Ministry of Economy, Trade and Industry

A Cautionary note on Forward-looking statementsThe financial forecasts, management targets, and any other estimates and projections of the Company presented in this report are based on information available to management as of the date set forth within. Please note that actual results may vary significantly from projected forecasts due to various uncertain factors, and, as such, readers should take care when making investment decisions based solely on the forecasts herein. The factors affecting actual results include but are not limited to economic conditions, crude oil prices, demand for and market conditions of oil-related products, and exchange rate and interest rate trends.

* ”FY 2007“ refers to the fiscal year ended March 31, 2008, and other fiscal years are referred to in a corresponding manner.

nippon oil CorporAtion Annual Report 20082

Performance &

StrategyNippon Oil Nippon Oil Data*

• Increase investment in exploration and development of existing projects

• Take a long-term view to expand business through ongoing improvement of technology and expertise, centered on our core regions

expand volumes

•Establish an optimal production and marketing framework Pursue best mix under new production system Expand exports Look at domestic and overseas markets as one

•Bolsteroilrefinerycompetitiveness

•StrengthenpetrochemicalsbusinessAugment basic chemicals capacityExpand global niche products

0

60

120

180170

04FY 07FY 10FY(Target)

oil/Gas production Volume(Thousand BOED)

0

600

1,200

1,800


production Capacity for paraxylene(Thousands of tons)

0

4,000

8,000

12,000


export Volume of petroleum products (Thousand kL)

installation of Fuel Cells(Units)

0

5,000

2,500

7,500

10,0009,000


• Promotedevelopmentofnewenergieswithalow environmental impact

• Aimtodeviseahomeenergystrategycen-tered on fuel cells (FC)

Chemical Refinery Integration (CRI) Project

Strategic Products•Paraxylene (material for polyester fiber etc.)•Propylene (material for plastic and acrylic fiber etc.)•Benzene (material for nylon fiber and plastic etc.)

* Based on consolidated results.


FinAnCiAl HiGHliGHts (YeArs enDeD mArCH 31)

Millions of yenThousands of U.S. dollars

2002 2003 2004 2005 2006 2007 2008 2008

Net sales .................................................................................... ¥3,949,571 ¥4,187,392 ¥4,279,751 ¥4,924,163 ¥6,117,988 ¥6,624,256 ¥7,523,990 $75,239,900Cost of sales .............................................................................. 3,555,907 3,785,291 3,928,505 4,437,411 5,521,192 6,176,656 6,982,966 69,829,660Selling, general and administrative expenses .......................... 318,432 305,514 295,328 285,281 292,866 287,915 277,061 2,770,610Operating income ...................................................................... 75,231 96,586 55,918 201,470 303,930 159,684 263,962 2,639,620Ordinary income ........................................................................ 71,023 90,796 57,089 212,435 309,088 186,611 275,666 2,756,660 (excluding inventory valuation factors) .................................... 54,400 42,700 81,300 151,700 142,700 195,800 107,800 1,078,000Net income (loss) ...................................................................... 24,006 32,281 (133,526) 131,519 166,510 70,221 148,306 1,483,060Total shareholders’ equity ......................................................... 924,140 929,987 821,202 953,240 1,130,328 – – –Total net assets ......................................................................... – – – – 1,259,280 1,331,981 1,429,266 14,292,660Total assets ............................................................................... 3,444,742 3,350,237 3,265,503 3,514,352 4,215,611 4,385,533 4,594,197 45,941,970Total current assets ................................................................... 1,419,282 1,329,230 1,395,336 1,569,328 2,128,558 2,262,528 2,487,526 24,875,260Total current liabilities .............................................................. 1,411,434 1,388,397 1,433,424 1,536,810 1,933,592 2,072,145 2,258,130 22,581,300Working capital ......................................................................... 7,848 (59,167) (38,088) 32,518 194,966 190,383 229,396 2,293,960Capital expenditures ................................................................. 122,500 148,500 136,900 153,000 189,800 204,800 268,300 2,683,000Depreciation and amortization .................................................. 113,461 99,358 107,045 110,031 135,133 131,872 152,350 1,523,500R&D expenditures ..................................................................... 10,449 10,037 9,685 11,440 10,103 12,632 12,693 126,930Net interest-bearing debt ......................................................... 830,800 940,200 837,800 820,700 997,900 1,024,700 1,120,700 11,207,000

Yen U.S. dollars

Amounts per share: Net income (loss) per share .................................................. 16.11 21.03 (88.76) 86.72 114.08 48.12 101.49 1.01 Shareholders’ equity per share ............................................ 610.43 615.89 544.04 631.77 775.62 829.64 896.06 8.96 Cash dividends per share ..................................................... 7.00 7.00 7.00 10.00 12.00 12.00 12.00 0.12

%

ratio: ROA (Return on assets) ......................................................... 0.65 0.95 (4.04) 3.88 4.30 1.63 3.30 ROE (Return on equity) .......................................................... 2.6 3.5 (15.2) 14.8 16.0 5.9 11.8 (excluding inventory valuation factors) .............................. – 0.3 (13.6) 10.7 6.6 6.4 3.9 Net debt-equity ratio ............................................................ 90 101 102 86 88 84 84

macro information: Crude oil (CIF) price (U.S.$/barrel)* ...................................... 23.84 27.40 29.43 38.77 55.81 63.50 78.69 Exchange rate (Yen/U.S.$) .................................................... 125 122 113 108 113 117 114* Sources: Ministry of Finance, Trade Statistics

Capital expenditures and Depreciation and Amortization(Millions of yen)

2004 2005 2006 2007 20080

50,000

100,000

150,000

200,000

250,000

300,000

350,000

2004 2005 2006 2007 20080

50,000

100,000

150,000

200,000

250,000

300,000

350,000

ordinary income (excluding inventory Valuation Factors) and ordinary income (Millions of yen)

Ordinary income (excluding inventory valuation factors) Ordinary income

Capital expenditures Depreciation and amortization


Performance &

Strategy


2002 2003 2004 2005 2006 2007 2008 2008

Net sales .................................................................................... ¥3,949,571 ¥4,187,392 ¥4,279,751 ¥4,924,163 ¥6,117,988 ¥6,624,256 ¥7,523,990 $75,239,900Cost of sales .............................................................................. 3,555,907 3,785,291 3,928,505 4,437,411 5,521,192 6,176,656 6,982,966 69,829,660Selling, general and administrative expenses .......................... 318,432 305,514 295,328 285,281 292,866 287,915 277,061 2,770,610Operating income ...................................................................... 75,231 96,586 55,918 201,470 303,930 159,684 263,962 2,639,620Ordinary income ........................................................................ 71,023 90,796 57,089 212,435 309,088 186,611 275,666 2,756,660 (excluding inventory valuation factors) .................................... 54,400 42,700 81,300 151,700 142,700 195,800 107,800 1,078,000Net income (loss) ...................................................................... 24,006 32,281 (133,526) 131,519 166,510 70,221 148,306 1,483,060Total shareholders’ equity ......................................................... 924,140 929,987 821,202 953,240 1,130,328 – – –Total net assets ......................................................................... – – – – 1,259,280 1,331,981 1,429,266 14,292,660Total assets ............................................................................... 3,444,742 3,350,237 3,265,503 3,514,352 4,215,611 4,385,533 4,594,197 45,941,970Total current assets ................................................................... 1,419,282 1,329,230 1,395,336 1,569,328 2,128,558 2,262,528 2,487,526 24,875,260Total current liabilities .............................................................. 1,411,434 1,388,397 1,433,424 1,536,810 1,933,592 2,072,145 2,258,130 22,581,300Working capital ......................................................................... 7,848 (59,167) (38,088) 32,518 194,966 190,383 229,396 2,293,960Capital expenditures ................................................................. 122,500 148,500 136,900 153,000 189,800 204,800 268,300 2,683,000Depreciation and amortization .................................................. 113,461 99,358 107,045 110,031 135,133 131,872 152,350 1,523,500R&D expenditures ..................................................................... 10,449 10,037 9,685 11,440 10,103 12,632 12,693 126,930Net interest-bearing debt ......................................................... 830,800 940,200 837,800 820,700 997,900 1,024,700 1,120,700 11,207,000

Yen U.S. dollars

Amounts per share: Net income (loss) per share .................................................. 16.11 21.03 (88.76) 86.72 114.08 48.12 101.49 1.01 Shareholders’ equity per share ............................................ 610.43 615.89 544.04 631.77 775.62 829.64 896.06 8.96 Cash dividends per share ..................................................... 7.00 7.00 7.00 10.00 12.00 12.00 12.00 0.12

%

ratio: ROA (Return on assets) ......................................................... 0.65 0.95 (4.04) 3.88 4.30 1.63 3.30 ROE (Return on equity) .......................................................... 2.6 3.5 (15.2) 14.8 16.0 5.9 11.8 (excluding inventory valuation factors) .............................. – 0.3 (13.6) 10.7 6.6 6.4 3.9 Net debt-equity ratio ............................................................ 90 101 102 86 88 84 84

macro information: Crude oil (CIF) price (U.S.$/barrel)* ...................................... 23.84 27.40 29.43 38.77 55.81 63.50 78.69 Exchange rate (Yen/U.S.$) .................................................... 125 122 113 108 113 117 114* Sources: Ministry of Finance, Trade Statistics

¥6,862,067

¥370,974¥56,058

¥234,889

net sales(Millions of yen)

2004

16.014.8

-15.2

5.9

11.8

18

12

6

0

–6

–12

–18

2005 2006 2007 2008

return on equity

(%)

¥126,349

¥126,699

¥6,062 ¥4,850

operating income(Millions of yen)

Refining and Marketing Oil and Natural Gas E&P Construction Other

Total¥7,523,990

Total¥263,962

2004 2005 2006 2007 20080

200,000

400,000

600,000

800,000

1,000,000

1,200,000

net interest-bearing Debt

(Millions of yen)

2004 2005 2006 2007 20080

200

400

600

800

1,000

shareholders’ equity per share

(Yen)


CHAirmAn’s messAGe

“We have a long, proud history of contributing to Japan’s economy and society, and we want to continue this legacy well into the future.”

Fumiaki WatariRepresentative Director, Chairman of the Board


Realize our Group Philosophy and Become an Integrated Energy Company. Guided by our Group Philosophy, “Creating the energy future and promoting

prosperity and harmony with nature,” we hope to transform into an integrated

energy company that society will consider vital to its needs well into the future.

This year, Nippon Oil celebrated its 120th anniversary. This impressive milestone would never have been possible without the steadfast support of our shareholders, other investors and all other stakeholders over the years, for which we are truly grateful.

Looking back at our corporate history, since day one Group operations have always given the highest priority to stably and efficiently supplying Japan with the petroleum products needed to support its economic development and improve the lives of its citizens. Furthermore, with environ-mental consciousness growing worldwide as the economies of more developed nations mature, we have worked to respond quickly to social needs in terms of both quantity and quality. We were first in the world to produce completely lead-free gasoline, and we supply sulfur-free gasoline and diesel to Japan on a nationwide basis. As actions like these suggest, the Nippon Oil Group has constantly strived to fulfill its corporate social mission by meeting society’s needs in definitive ways.

Today, the energy industry finds itself in an operating environment marked by unprecedented and dramatic changes. It is fair to say that the field of energy is undergoing a paradigm shift on a global scale. Intensifying competition for natural resources and historically high crude oil prices are perhaps indicative of this transformation. As demand for petroleum declines in Japan’s domestic market in this context, it is widely expected to climb across mainland Asia, most notably in China and India. Trends of this kind indicate that the demand structure for petroleum is also experiencing a massive shift. To continue to conduct business as corporate citizens, companies them-selves must place more importance on contributing to the emergence of a truly sustainable society. This is particu-larly the case concerning measures for addressing the prob-lem of global warming, where we recognize that companies involved in energy like Nippon Oil have both a role and a responsibility that grow larger by the moment.

In responding to these changes in our business environ-ment and creating the next major breakthrough, I believe that we must continue our “Challenge for Change.” Even as we take advantage of our 120 years of experience, we must not become complacent with our history. In our recently formulated Fourth Medium-Term Management Plan, too, we are promoting bold business development, with an eye on growing Asian markets. At the same time, though, we are aggressively channeling resources into and strengthening our hand in fuel cells and solar power generation businesses to make these new, environmentally friendly energy sources commercially viable. Through these initiatives, we are striv-ing to bring our Group Philosophy of “Creating the energy future and promoting prosperity and harmony with nature” to life. In so doing, we hope to transform Nippon Oil into an integrated energy company that society will consider vital to its needs well into the future.

Nippon Oil’s business environment has seen many changes over the Company’s 120-year history. With that said, I believe that our ability to accurately grasp these changes and realign our business structure accordingly is the reason that the Nippon Oil Group has continued to achieve growth to the present. Although major changes must be confronted as we look to a new era of business, we will make every effort to constantly anticipate change to ensure that Nippon Oil remains one of the top names in Japan’s energy industry for the next 120 years.

In closing, I would again like to thank our shareholders and investors for their support and understanding as we move forward.

Performance &

Strategy


presiDent’s reVieW

Change the Business Structure to Put Nippon Oil on a Growth TrackAdapt business structure to weather changes in the business environment by

meeting the “Challenge for Change” of the Fourth Medium-Term Management Plan.

Fiscal 2007 resultsThe fiscal year ended March 31, 2008, was the final year of our Third Medium-Term Management Plan. It was also a year in which the effects of sharply higher crude oil prices were widely felt. The price of Dubai crude oil, which started the year at around $60 per barrel, kept rising for most of the year, reaching successive record highs to finally end the fiscal year at roughly $100 per barrel. This dramatic climb served only to exacerbate the decline in petroleum demand in Japan. Excluding a temporary spike in demand for heavy fuel oil C used in electric power production, due to operating trouble at a nuclear power plant, petroleum demand fell in Japan by about 5% for the second straight year. Moreover, we were unable to fully reflect the actual extent of the much higher crude oil prices in retail prices for our products.

In this context, we reported consolidated ordinary income of ¥275.7 billion, an increase of ¥89.1 billion over the previous fiscal year. Consolidated ROE was 11.8%, surpassing the 10% goal we set for the Third Medium-Term Management Plan. This positive outcome, however, was largely the result of inventory valuation factors. Inventory valuation factors refer to the effect on the cost of goods sold from the valuation of inventory using the gross average method to reflect changes in the price of crude oil. Excluding these factors, consolidated ordinary income was actually ¥107.8 billion, ¥88.0 billion lower year on year. Given our goal of ¥190.0 billion, ordinary income fell ¥82.2 billion short of target on this basis.

Challenge for Change—View environment Changes as Business opportunities and enact structural reformsThe changes in Nippon Oil’s business environment—soaring crude oil prices and declining domestic demand, in particular—have been more extensive and dramatic than we predicted. What’s more, growing concern about environmental problems could spur further decline in demand for petroleum products in Japan. These conditions notwithstanding, we have no intention of abandoning our quest for growth. Our strong conviction is that

if the business environment is changing, then so should we. With this mindset, we made “Challenge for Change” the slogan of our three-year Fourth Medium-Term Management Plan launched in April 2008 (refer to “Special Feature: Challenge for Change” on page 10 for more details).

The key point of the plan rests on turning our Refining and Marketing business around. We plan to fundamentally over-haul the structure of our business to optimize our production and marketing systems. At the same time, we will continue to strengthen refinery competitiveness and reinforce our petrochemical business.

Elsewhere, we aim to expand production volume in Oil and Natural Gas Exploration & Production (E&P), which will continue to be a pillar of our growth strategy. By expanding investment in exploration, and coupling this with additional development work at our existing blocks, we aim to stimu-late business growth.

Growing environmental consciousness presents another business opportunity for Nippon Oil. In our Fourth Medium-Term Management Plan, we have set reductions in specific energy consumption at our refining operations as a new target alongside our financial objectives. In order to meet this target, we will advance measures to enhance energy efficiency at refineries and this will take the form of efforts to enhance cost competitiveness, which will make our refin-eries more competitive overall. As a plank in our future growth strategies, we are also vigorously pursuing R&D of fuel cells, solar power generation systems and other energy equipment with lower environmental impact.

Our commitment to the “Challenge for Change” will see us put Nippon Oil on a growth track by adapting its business structure to changes in the business environment. At the same time, we will use new technologies for helping to create a rich society that is in harmony with nature. Through these and other initiatives, we are determined to grow the corporate value of Nippon Oil.


“We will overhaul our business structure and strengthen refinery competitiveness to seize the business opportunity in Asia.”

Performance &

Strategy

Shinji NishioRepresentive Director, President


Nippon Oil’s First Medium-Term Management Plan covered fiscal 1999 to

fiscal 2001, and saw the Company strive to realize concrete results from the

merger of Nippon Oil and Mitsubishi Oil. Thanks to a host of cost reductions

and improved efficiency, the plan delivered over ¥120 billion in savings,

putting Nippon Oil on a more solid financial footing for future growth.

From fiscal 2002 to 2004, we embarked on the Company’s Second

Medium-Term Management Plan, with a determination to use the three-

year period as a time for gaining footholds and creating strong positions.

The plan oversaw notable progress in efforts to lay the foundations for

our development into an integrated energy company and fundamentally

improved the Company’s profit structure. Among other accomplishments,

we alleviated facility overcapacity with the start of commissioned refin-

ing operations on behalf of oil firms Idemitsu Kosan Co., Ltd. and China

National Petroleum Corporation (CNPC); we also expanded oil and natu-

ral gas production volumes and commercialized the world’s first LPG-

powered residential-use fuel cell system. In fiscal 2003, Nippon Oil took

speCiAl FeAture

decisive action to shore up its balance sheet by taking a roughly ¥170

billion charge related to early application of impairment accounting.

During our Third Medium-Term Management Plan, which ran from

fiscal 2005 to fiscal 2007, we aimed to lay solid foundations for a future

surge in corporate development. In the plan’s final year, however, we wit-

nessed dramatic changes in our business environment, among them declin-

ing demand for petroleum products in Japan and sharply higher crude oil

prices. Recognizing the need in light of these changes to take firmer steps

to promote future growth from a medium- to long-term perspective, we

launched Nippon Oil’s Fourth Medium-Term Management Plan. We have

positioned the plan’s three-year period as a time to restructure existing

businesses and establish a firm base for new business—a move that

should enable Nippon Oil to weather the expected harsh business climate.

Guided by the slogan, “Challenge for Change,” our aim is to develop a

business structure that can more flexibly adapt to the immense changes in

our business environment today.

Role of the Fourth Medium-Term Management Plan

Aiming to Be an Integrated Energy Company

medium-term management plans and topics

Challenge for Change—The Fourth Medium-Term Management Plan (Fiscal 2008 to Fiscal 2010)

Realize the benefits of the merger

Gain footholds and create strong positions

Build the foundation for future development

Restructure existing businesses and establish base for new ones

100

0

200

300

1st Medium-Term Plan 2nd Medium-Term Plan 3rd Medium-Term Plan 5th Medium-Term Plan4th Medium-Term Plan

Contribution of overseas business

Expansion of Oil and Natural Gas E&P

Contribution of new technology businesses

Turnaround of Refining & Marketing via structural reforms

ROE10%

ROE8%

Deteriorating Refining & Marketing earnings

Toward a sustainable growth path as an

integrated energy company

Medium/long term

• ¥122.1 billion in cost reductions and improved efficiency

• Development of ENEOS brand

• Start of commissioned refining for Idemitsu Kosan/CNPC

• Promotion of Chemical Refinery Integration (CRI)

• Early application of impairment accounting (¥171.5 billion charge)

(Billions of yen)

ordinary income excluding inventory Valuation Factors


FY2007(original plan)

FY2007(results) Difference

Crude oil price: Dubai crude oil price (U.S.$/barrel)Exchange rates (¥/U.S.$)

35 105

77 115

+42 +10

roe 10% met 11.8% +1.8%(Billions of yen) (Billions of yen)

ordinary income (excl. inventory valuation factors) 190 unmet 107.8 -82.2

refining & marketingPetroleum productsPetrochemicals

oil and natural Gas e&pConstruction & other

110.062.048.065.015.0

-14.0-36.622.6

111.310.5

-124.0-98.6-25.4+46.3

-4.5

Cost reductions, improved efficiency 33.0 unmet 17.5 -15.5

Capital expenditures 500 662.9 +162.9

interest-bearing debt (net D/e ratio) 900 or less (70%) 1,331.6 (84%) +431.6 (+14%)

• Completion of advanced CRI facility at Sendai refinery• Merger of Nippon Petroleum Refining and

Nippon Petrochemicals• Strengthened network and sales company integration

centered on ENEOS Frontier• Entered alliances with Japan Energy, SK Energy (South

Korea) and CNPC Group (China)• Constructed and commenced production at lubricant

manufacturing plants in USA and China

• Acquired oil and gas interests in U.S. Gulf of Mexico from Devon Energy and Anadarko Petroleum

• Commenced commercial crude oil production at Blane oil field in the U.K. North Sea

• Moved to development stage at Phuong Dong oil field in Vietnam

• Acquired exploration blocks in U.K. North Sea, Libya, offshore Vietnam and Malaysia

• Signed a joint business contract for LNG project in Papua New Guinea

• Completion of Power Plant No. 1 at Kawasaki Natural Gas Power Plant

• Start of operations at Mizushima and Hachinohe LNG bases

• Commercialization of ENEOS ECOBOY kerosene-powered residential-use fuel cell system

• Conducted joint project for commercialization of second-generation biodiesel

refining & marketing oil and natural Gas e&p electricity, Gas and Fuel Cell research & Development

Consolidated ROE in fiscal 2007 was 11.8%, surpassing the 10% target set

in the Company’s Third Medium-Term Management Plan. In contrast, con-

solidated ordinary income (excluding inventory valuation factors) was

¥107.8 billion, short of our ¥190 billion target. This result was due to wors-

ening profitability in the Refining and Marketing business, reflecting a

failure to sufficiently pass on cost increases, precipitated by a sudden and

sharp rise in crude oil prices, to retail prices. The Oil and Natural Gas E&P

business, however, reported earnings that exceeded initial plans, benefiting

from higher crude oil prices. This outcome came despite lower-than-

expected production volumes as we opted to emphasize profitability in our

investment strategy for this business.

Third Medium-Term Management Plan—Achievements and Issues

* Japan average (Company calculation)

Performance &

Strategy

Achievement of numerical targets and Goals

specific Achievements of third medium-term management plan measures

spread (retail Gasoline price—Crude oil CiF price) oil and Gas production Volume

04FY

30

27.4 27.0

26.5 25.220

007FY 04FY

200

150

100

007FY 07FY

(Initial target)

111

145

180

(Yen/L) (Thousand BD)

•Sharplyhighercostsformaterials and equipment

•Safetymeasures

•Increaseinstrategicinvestments

Increase in working capital due to higher crude oil price

In-house fuel costs

Spread excluding in-house fuel costs *

•Unabletopassonhighercrudecosts in prices

•Troubleatrefineries


oil market

Continued high oil prices on the back of firm demand

Demand is expected to remain robust against a backdrop of economic

growth in Asia.

petroleum products

Declining demand in Japan, growing demand in Asia

While exports present opportunities, lifting the Japanese

market is a key issue

speCiAl FeAture

Business Outlook in a Rapidly Changing Business Environment

A shift to gas, electricity and coal, as well as increased energy conserva-

tion, will likely ensure an inevitable and continued decline in demand for

petroleum products in Japan. In contrast, ongoing economic growth in

other parts of Asia is expected to spur increased demand for petroleum

products. In terms of production, highly accurate plant upgrades should

bring production volumes virtually in line with anticipated demand

growth. Accordingly, market conditions outside Japan are expected to

remain robust until at least 2010.

For Nippon Oil, this climate will likely present both risks and opportu-

nities. On the one hand, export opportunities should abound. At the same

time, there remains room for additional expansion in the domestic market.

petrochemicals market

Firm demand in Asia, particularly China

Temporary softening in market conditions due to increased

supply (followed by recovery)

Against a backdrop of economic growth in Asia, most notably China,

petrochemical demand should remain firm. At the same time, supply is

likely to increase as new plants become operational, leading to a tem-

porary softening in market conditions. Conditions are expected to

recover soon after, however, buoyed by healthy demand.

environmental problems (Global Warming Countermeasures)

Growing importance of confronting environmental problems

The problems of global climate change have captured tremendous

attention. Global warming, in fact, was the main topic of discussion at

the Toyako Summit held in Hokkaido, Japan, in July 2008. Since Japan

was host for the event, all eyes will be on specific measures being

taken by the country and its industries to combat global warming.

05FY 06FY 07FY

20

10

15

5

0

Spread - Overseas spot price and Dubai crude oil price Domestic spot price and Dubai oil price

($/BBL)

overseas and Domestic market Conditions *2

paraxylene supply/Demand outlook for Asia*

07CY 10CY 15CY

40

20

30

10

0

Demand Production capacity

(millions of tons)

Asia-pacific supply/Demand outlook*1

2007 to 2010: Domestic demand – 2.0%/yearAsian demand(Excluding Japan) +3.2%/year

2007 to 2010: Demand +8%/year., production +9%/year2010 to 2015: Demand +6%/year., production +4%/year

(Million BD)

*2 Company calculation

07CY 10CY 15CY

30

20

10

0

Diesel

Demand

Production

Other Asia

China

Japan

*1 Company estimate* Company estimate


solve short-term issues•TurnRefining&Marketingaround

promote environmental management•Combatingglobalwarming

enact medium-to-long-term Growth strategies•FurtherpromotionofCRI•SteadyOilandNaturalGasE&Pbusinessexpansion•Leveragealliancestostrengthenoverseasbusiness•Promotenewtechnologybusinesses

Business environment

High crude oil prices

petroleum demand

Japan

▲

decline

Asia

▲

increase

Firm demand for petrochemicals

environmental concerns

Restructuring Existing Businesses and Establishing a Firm Base for New Business—Strategies of the Fourth Medium-Term Management Plan

Guided by the slogan “Challenge for Change,” we will respond to major

changes in the business environment with greater speed by focusing over

the short term on turning around one of Nippon Oil’s core businesses—

Refining and Marketing—through structural reforms. Over the medium to

long term, in addition to progressive expansion of the Oil and Natural Gas E&P

business, we will pursue a growth strategy driven by efforts to strengthen the

overseas operations business and new technology businesses. Furthermore,

we will set environmental objectives and promote environmental manage-

ment as an integral part of these business activities. Two pressing issues

are finding ways to leverage Nippon Oil’s base of technologies and human

resources to promote environmental management and achieve a turnaround

in the Refining and Marketing business. Ultimately, the aim is to develop a

business structure capable of weathering the major changes that currently

define the Company’s operating environment.

Performance &

Strategy

oVerVieW oF FourtH meDium-term mAnAGement plAn

technology/Human resources

Promote New-tech business

Bolster overseas business

Promote environmental management

Steadily expand upstream business

Turn Refining & Marketing around

High Crude Oil Prices Declining Domestic Oil Demand

Environmental Concerns Rising Oil Demand in Asia


FinAnCiAl tArGets AnD GoAlsIn fiscal 2010, the plan’s final year, our goals are consolidated ordinary

income of ¥200 billion (excluding inventory valuation factors), and ROE of

8%. To this end, we are building a corporate structure capable of deliver-

ing ROE of more than 10% over the medium to long term. And while

Nippon Oil has proactively enacted a variety of environmental measures

over the years, the new medium-term plan enshrines environmental

targets as a new management objective alongside financial targets. Such

measures will become increasingly important going forward, and this

highlights our commitment to addressing environmental problems more

proactively than ever before.

speCiAl FeAture

Regarding Nippon Oil’s policy of returns to shareholders, in addition

to increasing the amount of profits returned, our aim is to pay a stable

dividend that is unaffected by short-term fluctuations in business perfor-

mance. Consequently, our policy is to achieve a dividend on equity (DOE)

ratio of 2% or more on a consolidated basis for the duration of the new

medium-term plan.

Based on this policy, we will aim for a net D/E ratio of less than

100% as we strive to optimally balance investment, shareholder

returns, and debt, as we seek to expand both strategic investments

and the amount of returns to shareholders.

increase returns to shareholders

Raise the level of returns and achieve stable dividends unaffected by

short-term fluctuations in performance

2nd Medium-Term Plan 3rd Medium-Term Plan 4th Medium-Term Plan

10

5

0

15

20

1.0

0.5

0

1.5

2.0

(Yen per share) (%)

Dividend per share (Left scale) DOE (Right scale)

¥7

¥10

¥12

¥20

CApitAl AnD FinAnCiAl strAteGiesWe are earmarking ¥850 billion for total capital expenditures over the

plan’s three years, as we promote greater prioritization in investment

activities. As a cornerstone for realizing growth strategies, we have

positioned investments such as those planned for expanding the Oil

and Natural Gas E&P business expansion and enhancing the competitive-

ness of the Refining and Marketing business as strategic investments.

third medium-term management plan results and

Fourth medium-term management plan Forecasts

Expand strategic investment through greater prioritization

3rd Medium-Term Plan 4th Medium-Term Plan

662.9 850.0

424.7 670.0

238.2 180.0

Oil and Natural Gas E&P 430Strengthen Refining & Marketing 200New Technology Businesses, others 40

Strategic investment Regular investment

(Billions of yen)

FY2010

Crude oil price: Dubai crude oil price (U.S.$/barrel)Exchange rates (¥/U.S.$)

85 105

roe 8%

ordinary income (excl. inventory valuation factors) 200

refining & marketing- Petroleum products- Petrochemicals

oil and natural Gas e&pConstruction & other

261412

15915

Capital expenditures 850 interest-bearing debt net D/e ratio

1,650 less than 100%

(1) Financial targets and Goals

Aim for 10% over medium to long term

(2) environmental target

specific energy consumption in refining*

reduce 20% by FY2010 compared to FY1990

*Specific energy consumption Amount of energy used per volume of oil converted by crude distillation unit

(Billions of yen)


speCiFiC initiAtiVes

refining and marketingEnacting structural reforms to turn this business around is a pressing issue in the short term.

establish an optimal production and marketing framework

• Integrate with Kyushu Oil

• Cease refining at Nihonkai Oil

• Transform Osaka Refinery into joint refinery (export refinery) with CNPC Group

• Expand exports

• Build a highly transparent pricing structure

• Make greater use of TOCOM

Bolster oil refinery competitiveness

• Build a network of highly competitive refineries through aggressive capital investment

• Eliminate refinery trouble by: integrating processes such as inspections, construction and design;

bolstering technological capabilities; continuously improving maintenance; and adopting the latest

in IT systems for refinery operation and upkeep

strengthen petrochemicals business• Consider investment to augment basic chemicals capacity

• Expand production of global niche products

oil and natural Gas e&pBy expanding production volume, we are targeting volume of 170,000 BD by fiscal 2010 and 200,000 BD by fiscal 2015.

increase investment in development of existing projects and exploration

• Invest ¥430 billion to expand production volume: exploration investment of ¥70 billion, development

investment of ¥230 billion, and investment in asset purchases of ¥130 billion

Continue to make priority investments in four core areas

• Continue to prioritize investment in four regions where past operations have been successful (U.K.

North Sea, Southeast Asia, Oceania, U.S. Gulf of Mexico)

overseas BusinessNippon Oil will aggressively develop operations overseas by leveraging alliances.

reinforce and expand overseas lubricant business • Increase the sales volume

expand business in Asia-pacific rim region • Leverage alliances with CNPC Group and SK Energy

extend new technology business overseas • Recosul, refining process technology, catalysts, etc.

new technology BusinessesThe Company will make fuel cells the center of its home energy strategy.

re-engineer FC systems development and

production structure• Establish ENEOS CELLTECH

promote solar power generation

systems business

• Establish Fuel Cell & Solar Cell Business Department

• Invest in Space Energy

• Start joint research with University of Tokyo‘s Research Center for Advanced Science & Technology (RCAST)

environmental managementWe will work to enhance cost and product competitiveness in terms of both refining and end consumption.

reduce Co2 at refining phase • Promote energy efficiency and set higher targets than the industry

reduce Co2 at the consumption phase• Offer environmentally friendly products and services

• Conduct R&D of next-generation clean energy technologies

Performance &

Strategy


interVieW WitH tHe presiDent

Challenge for Change

in the third medium-term management plan, the three-year period from fiscal 2008 was characterized as a time for

“making major leaps forward.” Has that now changed with the positioning of the Fourth medium-term manage-

ment plan? please explain for us the positioning and key points of the new plan.As you’ve said, at the time that we announced the Third Medium-Term Management Plan in

March 2005, we positioned the three-year period to March 2008 as one for building the founda-

tions for future development and the three years of the Fourth Medium-Term Management Plan

as a period for making major leaps forward. But the operating environment for our business has

changed greatly with the recent surge in crude oil prices and greater-than-expected decline in

demand within the Japanese market, among other factors. As a result, in fiscal 2007, the final

year of the Third Medium-Term Management Plan, our Refining and Marketing business regret-

tably recorded losses in real terms. This caused us to miss our target for ordinary income.

My view is that our most urgent task is to build an earnings structure that is capable

of weathering these major changes in operating conditions, while enabling us to respond

successfully to the future state of the business environment. The Fourth Medium-Term

Management Plan therefore assumes tough business conditions ahead and positions us to

take up the “Challenge for Change.” Over this period, our objective is to construct a resilient

operating base as the foundation for future growth.

In terms of business strategy, the most important themes are to turn our Refining and

Marketing business around and, as the Group’s growth strategy, to focus on reinforcing petro-

chemical operations, expanding the Oil and Natural Gas E&P business, strengthening overseas

operations and making further progress in developing our new technology businesses. As

addressing environmental issues assumes increasing importance, a final key point is that this

plan is the first in which we have actually set an environmental performance target alongside

our financial objectives.

Q1

Anticipating a harsh operating environment in the three years from fiscal 2008 to 2010, the Nippon Oil Group has formulated the Fourth Medium-Term Management Plan to position this period as one for making structural reforms to existing businesses, while at the same time developing a firm base for new businesses. Under the slogan “Challenge for Change,” the plan aims to create a business that is structurally adapted to respond to ongoing changes in the operating environment.

In this section, President Nishio answers ten questions about the Fourth Medium-Term Management Plan on the following topics.

Q6: Realizing expanded production volume from Oil and Natural Gas E&P

Q7: Targeting higher earnings from new technology businesses

Q8: Rationale for setting environmental performance targets

Q9: Thinking on capital investment plansQ10: Thoughts on improving corporate value and

shareholder returns policy

Q1: Positioning and key points of new planQ2: The ROE target of 8%Q3: Specific measures to rebuild the Refining and

Marketing businessQ4: Projected impact of planned new refineries in China

and the Middle East on Asian petroleum and petrochemical markets

Q5: Competitiveness of Nippon Oil Group refineries within Asia


in the third medium-term management plan the roe target was 10%, but in the Fourth medium-term management

plan you have set a lower target of 8%. What is the rationale for this?First, I should point out that we are not saying that 8% is an acceptable level for ROE. As I

mentioned before, the Fourth Medium-Term Management Plan is concerned with turning our

core businesses around while at the same time pursuing a range of growth strategies. That is

not to say that all of these initiatives will bear fruit within the three years to the end of fiscal

2010. In the midst of major change within our business environment, our aim is to construct a

business model for sustainable growth over the medium and long terms. This requires us to

move forward by steadily implementing a range of necessary measures. Our long-term goal

remains to raise ROE to the 10% level. The target of 8% ROE for fiscal 2010 should be viewed

as a transitional goal.

What specific measures are you taking to turn the Group’s refining and marketing business around?

First, we are undertaking a fundamental review of the business structure that we have created

to date with the aim of optimizing our production and marketing systems. On the production

side, the merger with Kyushu Oil will gain us a new refinery in Oita, Japan, that is equipped

for exports, integrated with petrochemical operations and that also has excellent crude oil

cracking facilities. At the same time, we have decided to discontinue crude oil refining at the

Toyama Refinery of Group company Nihonkai Oil from fiscal 2009, since this does not possess

the necessary cracking facilities or export capabilities. Alongside these measures, we are

taking a number of other actions to develop one of the most competitive refining frameworks

in Asia. These include programs to eliminate incidents at refineries and technical upgrades

such as developing our HS-FCC* capabilities.

In terms of optimizing our marketing framework, we are focusing on expanding exports

while also trading energy futures on The Tokyo Commodity Exchange (TOCOM) so that we

can actively conduct arbitrage transactions between Japanese and overseas markets. At the

same time, we are revising wholesale pricing structures through the introduction of new

systems based on objective pricing indicators. These moves promise to help us realize price

increases within the domestic market.

* HS-FCC: High Severity Fluid Catalytic Cracking

Q2

Q3

Performance &

Strategy


Q4


Our next task is to expand exports. With demand for petroleum products in structural

decline in Japan, supplying the growing demand for oil in the Asia-Pacific region is a major

business opportunity that we must seize. To this end, we have taken the lead among Japanese

oil refiners in building up the export capabilities of our oil refineries. From April 2008, the

volume of commissioned refining for the China National Petroleum Corporation (CNPC) Group

increased from 50,000 BD to 70,000 BD. This is one form of export activity for us. We also

have a separate joint venture agreement with CNPC under which we are converting our Osaka

refinery (115,000 BD) to supply exports mainly to China and the rest of Asia. This will enable

us to expand our export operations further while providing a stable route to export sales. The

expansion of export capacity not only helps us compensate directly for revenue lost as domes-

tic demand continues to decline, but it also promises to help us indirectly by promoting better

linkage between pricing conditions in Japan and overseas.

Finally, we are also working to reinforce our petrochemicals business further. The Third

Medium-Term Management Plan featured some major investments to upgrade these opera-

tions and connect them more efficiently to our oil refining operations. We refer to this as our

Chemical Refinery Integration (CRI) strategy. With the acquisition of the Oita Refinery we will

also be looking at a fresh CRI project. We plan to increase paraxylene production capacity to

1.6 million tons per year. Also, in view of market pricing and the projected capital costs of

plant construction, going forward we aim to boost annual production capacity further to 2.0

million tons. In other areas, besides investing in cooperative alliances with various business

partners in Japan and overseas, we plan to complete pilot production based on our innovative

HS-FCC process so that we can significantly raise the proportion of derived propylene. We are

also targeting higher production of ENB,* a product for which we command a global market

share of about 80%. We are eyeing further progress in expanding production of functional

petrochemicals going forward.

* ENB: Ethylidene norbornene (used as a crosslinking agent for making ethylene propylene diene monomer (EPDM) synthetic rubber)

large-scale refining capacity is planned for China and the middle east even as nippon oil focuses on expanding

exports. How long do you think current tight supply conditions for petroleum products and petrochemicals will

persist in overseas markets?

We prepared the Fourth Medium-Term Management Plan using supply and demand projec-

tions for petroleum products and petrochemicals in the Asian region that take into account

all the current plant construction and capacity upgrade projects. We also assumed that all

the capacity coming onstream is refining infrastructure with a highly reliable supply output

employing the latest production technology.

In the case of petroleum products, our projections suggest that growth in production

output will virtually keep pace with demand over the plan period. This points to prices for

petroleum products remaining firm in overseas markets. In the Japanese market, we see

prices for petroleum products remaining low by comparison. This is an issue, given the

strong domestic market-oriented stance that Japan’s oil companies, Nippon Oil included,

have taken to date. In our view, the ongoing decline in domestic demand is leading to the

current market-defying trend in which prices in the Japanese market have decoupled from


those in overseas markets. Our strategy for addressing this situation is to expand our

exports while also making active use of futures trading on TOCOM so that, as I mentioned

earlier, we can try to enhance the correlation between prices in Japan and overseas.

In the case of petrochemicals, we are projecting that capacity growth will outstrip demand

within Asia and the Middle East around 2010–2011, which is likely to result in a temporary

softening of petrochemical market prices. However, we also expect demand to continue

expanding steadily, eliminating any excess supply and helping prices to gradually recover.

There is also a possibility that prices for petrochemicals in 2010 and beyond will not

decline as much as our projections suggest because construction costs will likely stay high for

longer than expected, causing some of the plans for new capacity due to come onstream at

that time to be delayed or shelved.

Are the nippon oil Group’s refinery operations highly competitive within Asia? How will they compare with the

state-of-the-art refineries being brought onstream in places such as China and india? There is no single comprehensive yardstick of competitiveness for refineries. This can be

measured in various ways, such as on a cost basis or in terms of the degree of integration

with petrochemical operations. In terms of the ratio of cracking units to topper capacity,

I would say that currently our operations are on a par with the Japanese average. I would

say that this capacity also exceeds that of the average export-oriented refiner based in

South Korea or Taiwan with export positions in Asia. Going forward, in addition to the

planned integration with Kyushu Oil and cessation of crude oil refining at the Toyama

R efinery, we plan to maintain and build on this dominance through investments in further

technical upgrades over the course of the Fourth and Fifth Medium-Term Management

Plans. Given the shift in petroleum demand toward lighter oils and the

increasingly wide gap between light and heavy crude oil prices, we believe

that the ratio of cracking units to topper capacity is evolving into a critical

factor in refinery competitiveness. In addition, as a result of the CRI invest-

ments made over the course of the Second and Third Medium-Term Man-

agement Plans, our refineries already boast a high level of integration with

Group petrochemical operations.

In recent years, our Group’s refineries have not been able to show their

full potential owing to a number of incidents that have interrupted opera-

tions. To address this issue, the Fourth Medium-Term Management Plan

includes programs to eliminate such incidents. We are also investing in

further technical upgrades so that over the medium to long term we have

one of the most competitive refining frameworks in Asia.

Q5

Performance &

Strategy

* Ratio of toppers to cracking units (fluid catalytic cracking (FCC), thermal crackers, hydrocracking, IPPs); Data for all countries, including Japan, calculated by the Company

Cracking unit—topper Comparison*

South Korea

Taiwan

Japan (excluding Nippon Oil Group)

Singapore

Nippon Oil Group

After 5th Medium

-Term Plan

After 4th Medium

-Term Plan

After Nihonkai Oil refining cessation

and Kyushu Oil integration0

0.1

0.2

0.3

0.4

Present Future

(%)


In terms of comparison with refineries that are equipped with the latest cracking

equipment, the recent surge in material costs means that refineries now have to operate with

relatively high fixed-cost bases. We continue to invest to make sure that our refineries remain

technically advanced. I do not believe that the competitiveness of refineries can be measured

simply by comparing the ages of the refineries in question.

You ended up falling short of the third medium-term management plan production target for oil and gas of

180,000 BD. How feasible do you think is the production target of 170,000 BD for fiscal 2010, the fourth plan’s final year? In trying to expand production volume it is important to strike a balance between exploration

activities and production asset acquisitions, depending on the prevailing business conditions.

Although exploration is essential for maintaining a sustainable position as an upstream enter-

prise, the risks are high, and lead times before production comes onstream are typically quite

long. In the Third Medium-Term Management Plan, asset purchases formed the major compo-

nent of our plan to expand production. The sharp rise in oil prices caused the price of produc-

tion assets to increase sharply as well. We decided to emphasize profitability over sticking to

our initial production targets.

The production target for the latest plan is 170,000 BD in 2010. In addition to current produc-

tion projects, in 2008 we expect to commence production at the Tangguh LNG Project in Indonesia

and the Phuong Dong oil field offshore Vietnam. I believe that the production target is feasible

provided production comes onstream as anticipated at these and other development projects.

We are refraining from investing in production assets so long as business conditions

continue to push up their price. Planned investments for the Fourth Medium-Term Management

Plan are targeting an expansion of exploration activities. At existing projects, we also plan to

prevent production decline and invest in additional development to pursue a further upside

from these assets. We have already acquired new exploration blocks in various offshore zones

in Libya, Vietnam, Malaysia and Thailand so that we can ramp up exploration activities over

the course of the Fourth Medium-Term Management Plan. We expect these projects to begin

contributing to production from fiscal 2011 onward. All of the areas in question look promising.

I believe that we will be able to realize fresh output from these fields by applying rigorous risk

management methods.

Q6


outlook for oil and Gas production Volume

200

150

170

145

100

50

0

05FY 06FY 07FY 08FY 09FY 10FY

Goal of over 200,000 BD by 2015 (Thousand BD)


What are your aims in new technology businesses? What is the Group strategy for commercializing

these operations?The philosophy of the Nippon Oil Group is “Creating the energy future and promoting prosper-

ity and harmony with nature.” At a time when the business environment is defined by elevated

oil prices and growing concerns over environmental issues such as global warming, supplying

environmentally friendly alternative energy systems based on fuel cells or solar power is

certainly a good way of realizing this philosophy. We have decided to push forward with devel-

oping new technology businesses as part of the Fourth Medium-Term Management Plan.

The most immediate issues facing us in the commercialization of fuel cells are reducing

costs and raising reliability. In part, this is a question of improving the technology. Mass

adoption of this technology will also be essential for bringing costs down. We were the first

company in the world to develop residential-use fuel cell systems powered by LPG and

kerosene. As of the end of March 2008, we had installed more than 800 units at residences

around Japan. In 2008, we will install around 150 systems for “Hydrogen Town,” the largest

trial of fuel cell technology in the world at a site in Fukuoka Prefecture. In April 2008, as

part of our efforts to speed up development and realize lower costs via technical improve-

ments, we established ENEOS CELLTECH as a joint venture with our development partner,

Sanyo Electric Co., Ltd. (our equity stake in this venture is 81%). Creating a new company

that specializes exclusively in the fuel cell business will enable us to focus personnel and

other resources more effectively in this field. A nationally sponsored large-scale demonstra-

tion project for residential-use fuel cell systems in which we are involved is due to finish in

March 2009, and we expect to commence full-scale sales in fiscal 2009. We are continuing

to pursue a number of initiatives aimed at reducing costs and promoting mass adoption of

the technology so that we are in the most advantageous position for the start of commercial

operations in fiscal 2009. We have set unit sales targets for this business of 9,000 units in

fiscal 2010, increasing to 40,000 units in fiscal 2015.

We also have been researching solar power generation systems for a number of years. In

April 2008, we established the Fuel Cell & Solar Cell Business Department to accelerate the

development of this business. We have also taken an equity stake in Space Energy Corporation,

a Japanese manufacturer of silicon wafers. Moreover, we have set up “ENEOS Lab” to conduct

joint research into super-high-efficiency solar cells and other alternative energy technologies

with the Research Center for Advanced Science & Technology at the University of Tokyo. Our

future aim is to create new business models for developing and selling residential energy

devices with low environmental impact, for example, by incorporating solar power into a fuel

cell-based solution, as part of a comprehensive strategy for supplying home energy needs.

Q7

Performance &

Strategy


Q8


the Fourth medium-term management plan is the first one for which nippon oil has set an environmental

performance target alongside financial goals. What is the rationale behind this?Until now we have set internal targets for the various environmental programs that we have

undertaken. The difference now is that, as I said earlier, environmental issues have assumed

much greater importance. Our view is that energy firms in particular have a major responsi-

bility and an important role to play in addressing these issues. From this standpoint, with

the latest plan we decided to take one of the most important internal targets—that of

cutting CO2 emissions at the refining division—and turn it into a management target on a

par with the financial performance goals of the plan. Emissions from our refineries repre-

sent about 80% of total CO2 emissions for the Group, which makes this the critical area to

target for reducing emissions.

Our concrete target for fiscal 2010 is to reduce the specific energy consumption at the

refining division per unit of output by 20% relative to the fiscal 1990 benchmark. This is a

significantly higher target than the 13% reduction advocated by the Japanese oil industry,

illustrating our determination to be a leading company when it comes to addressing environ-

mental issues. This is not just a matter of being a good corporate citizen. The various mea-

sures that we are implementing to improve energy efficiency and lower power consumption

will help to make our refineries more cost-competitive, which in turn will strengthen the com-

petitiveness of Nippon Oil in the marketplace. As with our other CSR-related activities, we

view these environmental measures as also helping to enhance corporate value.

Could you explain the thinking behind your capital investment plans?

The new plan contains planned capital expenditures totaling ¥850 billion, which is greater

than the amount we invested during the previous medium-term plan. The proportion of this

figure dedicated to strategic investments is higher, reflecting a smaller allocation to regular

investments. The key point here is that we are being more selective with projects so that we

can focus our resources for maximum effectiveness. Capital expenditures on the development

of oil and natural gas E&P assets account for nearly 70% of total strategic investment. Other

investments aimed at boosting the competitiveness of refining and marketing operations,

which is the major theme of the plan, include a solvent deasphalting (SDA) pitch boiler, the

HS-FCC pilot production project at the Mizushima Refinery, and investments aimed at increas-

ing export capacity.

Q9


Finally, what are your thoughts on shareholder returns and increasing corporate value?

Our intention was to raise the level of the dividend as part of the Third Medium-Term

Management Plan. With the latest plan, we have formulated a new policy on shareholder

returns. We plan to increase dividends to a level that takes into account the balance of

financial risks. Specifically, we aim to increase returns to shareholders while also trying

to maintain a stable level of dividends that is not unduly influenced by short-term business

performance. We have established a new target of setting our dividend on equity (DOE)

at a level of 2% or more. Over the course of the Fourth Medium-Term Management Plan, we

aim to pay annual cash dividends of ¥20.0 per share, which would represent an increase of

¥8.0 compared with the Third Medium-Term Management Plan period.

We have thus set an ROE-based target for earnings and a DOE-based target for returns to

shareholders. My view is that using these two indicators to visibly raise profits and capital

efficiency with respect to shareholder returns will ultimately translate into enhanced corporate

value. Our short-term focus is on rebuilding core operations. Over the longer term, our goal is

to pursue various growth strategies. Across our entire business, we also plan to promote

CSR-related initiatives, especially environmental management. Together, these activities will

help us to realize sustainable growth for the Nippon Oil Group.

We came up with “Challenge for Change” as the slogan for the Fourth Medium-Term

Management Plan because in a harsh and rapidly changing business environment, we

believe that we must embrace change in order to make dramatic future progress. The slogan

expresses our strong determination to effect the necessary change. I hope that our share-

holders and other stakeholders will continue to give us their support and understanding as

we focus on turning these plans into reality.

Q10

Performance &

Strategy


positioning of upstream operations

Oil and Natural Gas E&P activities are an important part of the growth strategy for the Nippon

Oil Group. In fiscal 2004, we recorded production volume of 111,000 Barrels of Oil Equivalent

per Day (BOED). Fiscal 2005 saw the launch of the Nippon Oil Group’s Third Medium-Term

Management Plan, under which we invested aggressively in new interests. From this invest-

ment, production volume in fiscal 2007, the plan’s final year, grew to 145,000 BOED. Earnings,

also spurred on by soaring crude oil prices, rose substantially, exceeding plan targets by a

significant margin. Although production volume fell short of the plan’s 180,000 BOED target, this

outcome reflected a more selective approach to identifying profitable asset purchases amid

skyrocketing prices for producing oil and gas field assets.

Oil and Natural Gas E&P will remain a major part of the Group’s growth strategy under our Fourth

Medium-Term Management Plan. Launched at the start of fiscal 2008, the new plan will see us

continue our efforts to grow production volume. In the Third Medium-Term Management Plan, the

Nippon Oil Group increased volume mainly through asset purchases. By contrast, we now plan to

boost volumes by investing more heavily in exploration and by conducting additional development of

existing exploration blocks.

During the Third Medium-Term Management Plan, we acquired promising new exploration blocks in

countries like Libya, Vietnam and Malaysia in preparation for placing greater emphasis on exploration.

Under the Fourth Medium-Term Management Plan, we intend to make total investments of ¥430 billion, an

even larger amount than was invested during the Third Medium-Term Management Plan. By the close of

this plan in fiscal 2010, our goal is to boast production of 170,000 BOED. Realization of this target will

move the Nippon Oil Group ever-closer to its long-term objective of producing more than 200,000 BOED in

fiscal 2015.

Core Area strategy

The Nippon Oil Group focuses its resources on four core areas: Southeast Asia, Oceania, the U.K.

North Sea and the U.S. Gulf of Mexico. Through this strategy, we have efficiently gained the tech-

nological insight and experience that are essential for taking optimal advantage of our finite

Q3

reVieW oF operAtions

Oil and Natural Gas Exploration & Production (E&P)

Acquisition of 16-2 Block Offshore Vietnam

Phuong Dong Oil FieldK2 Oil Field

major Achievements Acquisition of oil and gas interest in U.S. Gulf of Mexico from

Anadarko Petroleum Corporation (May 2007) Moved to development stage at Phuong Dong oil field offshore

Vietnam (May 2007) Acquisition of exploration block offshore Vietnam (November 2007)

Acquisition of onshore exploration block in Sarawak, Malaysia (December 2007)

Acquisition pending for exploration block offshore Thailand (December 2007)


financial resources. In addition to the Rang Dong oil field in Vietnam and the Helang and Layang

gas fields in Malaysia, the Group plays a pivotal role in production activities as operator of 18 of

the 38 oil and gas fields in the U.S. Gulf of Mexico in which it has interests. The Group functions

similarly in the U.K. North Sea.

Under the Fourth Medium-Term Management Plan, we will focus on activities in these four core

regions to achieve steady growth in production volume.

natural Gas projects

Nippon Oil is actively expanding its business with integrated operations that capture value across

the whole chain of the natural gas business from exploration to marketing. Examples of such

expansion include participation in the Malaysia LNG Tiga Project and the Indonesian Tangguh LNG

Project, both of which encompass everything from exploration and development to liquefaction and

marketing. Natural gas produced from the first of the two aforementioned projects (Nippon Oil

Group interests: SK-10 block, 75%, and SK-8 block, 37.5%) is transported via pipeline from off-

shore Sarawak, Malaysia, to a Malaysia LNG Tiga Sdn. Bhd. liquefaction plant, in which the

Nippon Oil Group has a 10% interest, to be processed into LNG. This LNG is then sold to Japan

and to other parts of Asia. Using a variety of short-, medium- and long-term contracts, the Tangguh

project sold some 6.24 million tons of LNG in fiscal 2007.

The highly promising Tangguh LNG Project in Indonesia, meanwhile, has roughly 14 trillion

cubic feet of proven reserves. After acquiring an initial stake of 12.2%, the Nippon Oil Group

purchased the shares of KG Berau Petroleum Ltd. from Kanematsu Corporation in October 2007.

The Group’s equity interest in the project now stands at 13.45%. A liquefaction plant from which

LNG will be sold, with an annual production capacity of 7.6 million tons, is being constructed for

this project. Plans are progressing smoothly toward an anticipated start of LNG production at

the end of 2008. The Tangguh project already has contracts for the annual sale of 7.45 million

tons of LNG to markets in Asia and North America.

Activities During Fiscal 2007 and in the near Future

In September 2007, crude oil production commenced at the Blane oil field in the U.K. North Sea.

In the U.S. Gulf of Mexico, in May 2007 Nippon Oil Group and MCX Gulf of Mexico, LLC, a sub-

sidiary of Mitsubishi Corporation, acquired a 23.2% stake through a joint bidding proposal

(11.6% each) in the deepwater K2 oil field from Anadarko Petroleum Corporation, a major U.S.

independent oil company, which held a 65% stake. In December of the same year, we began

producing natural gas and condensate at the SM44 block, which is located in the Gulf shallows.

In addition to these projects, production proceeded smoothly at the Rang Dong oil field in

Vietnam, the Mutineer-Exeter oil fields in Australia, and the Jintan gas field in Malaysia.

Production volume in fiscal 2007, however, declined by 7,000 BOED, or 3.9% year on year, to

145,000 BOED. This result largely reflected a downturn in performance last year at the Helang

gas field in Malaysia caused by faulty compressors.

On the development front, we decided to move several projects to the development phase,

including the Saderi gas field in Malaysia in February 2007, the Phuong Dong oil field in Vietnam in

May, the Cilipadi gas field in Malaysia in September, and the West Don oil field in the U.K. North Sea

in May 2008. Development work at each of these projects is now under way.


TangguhLNGProject


We also conducted the full range of investigative work necessary for the development of the

Layang gas field in Malaysia. And in April 2008, trial drilling by the Group as an operator in the

WC552 block in the U.S. Gulf of Mexico revealed a commercially viable layer of gas. Prepara-

tions are now progressing quickly to develop the WC552 discovery.

As new exploration blocks, the Nippon Oil Group acquired interests in the 16-2 block off-

shore Vietnam in November 2007, and in the onshore block SK333 (as operator) in Sarawak,

Malaysia, in December.

Elsewhere, we took steps to establish a presence in Thailand by concluding an agreement that

will transfer interests in the B6/27 block in the Gulf of Thailand to the Nippon Oil Group. Addition-

ally, in April 2008, the Group, in collaboration with alliance partner Japan Energy Corporation,

acquired interests in the offshore PM308A block in waters off Peninsular Malaysia.

By forging ahead with exploration work and by pursuing new development of existing blocks

to increase production volume, we hope to strengthen the role that Oil and Natural Gas E&P

activities play in advancing the growth of the Nippon Oil Group.


I have worked on large projects offshore for 25 years in Australia and

Asia. I joined JVPC (Japan Vietnam Petroleum Company, Limited)

before its first oil was drilled and have been with the Rang Dong

project through all its development phases.

As the person responsible for operations in the Rang Dong oil field

in Vietnam, my job is to ensure all personnel work towards achieving

the Company goals, with a special emphasis on targets for safety,

production and environmental issues.

I’ve been part of the team since production started here at the

Rang Dong oil field in 1998. Total oil production at the field has now

exceeded 148 million barrels and we’re still going strong.

The reason we can keep production levels up comes down to

our detailed geological surveys and analyses that enable us to

avoid any production declines, and maintaining a highly skilled and

motivated workforce.

Some of the more memorable moments, both good and bad, at

the oil field over the last 10 years include the successful completion

of major expansion projects every year, which have vastly increased

the size and complexity of our operations. Our workforce has multi-

plied along with this expansion, and the successful training and

development of the large number of new recruits required has been

remarkable. Mother Nature has tested us at times with occasional

typhoons and severe weather, but as with all our major challenges,

good engineering, strong onshore support, and appropriate offshore

procedures all help us maintain our high level of achievement.

We’ll continue working hard to ensure sustained production at

the Rang Dong oil field, a key oil field for the Nippon Oil Group.

This year we are installing our eighth platform and connecting it

to our Central Production Complex. This may be the last major expan-

sion for our field. However, I believe that the knowledge and produc-

tion technologies we have gained as a result of this project can be

readily applied to other development projects in the future.

Graham SlappOffshore Installation Manager

Japan Vietnam Petroleum Company, Limited

Acquisition of PM 308A Block in Malaysia


export expansion

In 2007, domestic demand for gasoline and middle distillates declined by 2.4% and 6.4%, respectively.

Total fuel oil demand was also down by 2.4% despite a temporary spike in demand for heavy fuel oil C

used in electric power generation due to operating trouble at a nuclear power plant in Japan. Excluding

this special case, actual demand for fuel oil was down roughly 5% for the second consecutive year. No

major changes in this downward trend in Japan appear likely for the foreseeable future, reflecting the

growing burden of fuel costs due to soaring crude oil prices in recent years, as well as the ongoing

shift to new fuels and greater energy efficiency. This outlook suggests that Japan’s petroleum indus-

try must now be restructured from the ground up.

In contrast to the domestic market, demand for petroleum products is expected to grow over

the medium to long term in the rest of Asia, most notably China and India, in line with economic

development in the region. In-house estimates suggest that between 2007 and 2010, demand in

Asia (excluding Japan) will grow by an average of 4.4% per year.

Amid changes of this kind in the business environment, the Nippon Oil Group has sought to

capture rising demand for petroleum products outside Japan by giving priority to augmenting its

export capacity for these products. As an initial step, in 2006 we made substantial investments in the

Group’s refineries that will raise export capacity to 230,000 BD by the end of fiscal 2008. This move

will enable Nippon Oil to flexibly export in line with the supply-demand picture in Japan and petro-

leum product market trends overseas.

Since July 2004, we have undertaken commissioned refining for CNPC. The contracted refining

volume has increased each year, with volume reaching 70,000 BD in April 2008. Supporting this

steady rise is booming demand for petroleum products accompanying economic growth in China.

While we have worked to deepen cooperative relationships with CNPC in each business field,

including signing a memorandum of understanding regarding a long-term business partnership in

April 2007, we have taken this a step further by signing a letter of intent with CNPC in May 2008

to establish a joint refinery. This will involve divesting the Osaka Refinery and forming a new joint

venture company, which is set for establishment in April 2009. Plans also call for the refinery to be


Refining & Petrochemicals

Announcement of Integration with Kyushu Oil

Signing Ceremony with CNPCNew Plant at Sendai Refinery

major topicsLong-termcooperativeagreementwithCNPC(April2007) Start of petrochemical cumene manufacturing equipment at Muroran

Refinery (July 2007)AdditionalinvestmentinMichangOilIndustrialCo.,Ltd.ofSouth

Korea (July 2007) Reinforcement of the benzene business (July 2007)

Ceremony celebrating completion of upgrade construction at Sendai Refinery (September 2007)

Memorandum of understanding signed for integration with Kyushu Oil (March 2008) Termination of oil refining/conversion to oil terminal for Nihonkai Oil’s

Toyama Refinery (April 2008)LetterofintenttoestablishjointrefinerysignedwithCNPC(May2008)


converted to an export-centric operation focused on markets mainly in Asia outside of Japan.

This planned venture will eliminate facility overcapacity in light of decreasing domestic demand,

while creating a stable framework and secure sales channels for supplying products to the rest

of Asia.

rebuilding and strengthening the refinery network

Nippon Oil and Kyushu Oil will undergo business integration in October 2008. Along with investments in

Kyushu Oil, Nippon Oil has forged a close partnership with the company in other business sectors over

the years, such as crude oil procurement, distribution and petrochemicals. The integration of the two

companies is expected to generate profit-side benefits by unifying and boosting the efficiency of distri-

bution and supply chain operations. Exploiting the prime location of the Oita Refinery, which is situated

relatively close to mainland Asia, should also lead to further growth in petroleum and petrochemical

exports for the Nippon Oil Group.

Elsewhere, we plan to cease crude oil refining operations at Nihonkai Oil’s Toyama Refinery and

convert the facility into an oil terminal. The change is scheduled to be completed by the end of March

2009. The decision to stop refining operations is an effort to make the Group’s refinery network more

competitive overall, since the Toyama Refinery, which is small and lacks heavy oil cracking facilities,

is less competitive than other refineries. This move alone is projected to raise utilization rates for the

Group’s toppers by around four percentage points.

Further strengthening refinery Competitiveness

Finding ways to effectively utilize surplus heavy oil is emerging as an issue amid escalating crude

oil prices, diminishing demand for heavy oil and other trends in recent years. In the drive to hone

refinery competitiveness further, Nippon Oil has devised measures that target the potential use of

residue, one of which involves a wholesale independent power producer (IPP) business using heavy

oil as a fuel. Putting refinery infrastructure to use, we developed an IPP business and by the end of

fiscal 2004 we had established a framework consisting of the Muroran, Negishi, Osaka and Marifu

refineries and the Yokohama Plant. This framework is capable of supplying 700,000 kW of electricity.

(See the Marketing section p. 32 for more information.)

At the Mizushima Refinery, we are building a new solvent deasphalting (SDA) unit, with a

target completion date of spring 2009. By extracting the raw materials for lighter oils from

asphalt and residue, this unit will make it possible to process heavier grades of crude oil and

reduce production of heavy fuel oil C. Oil residue generated in the process is supplied to a

neighboring petrochemical firm for use as fuel. This kind of effective utilization of resources is

strengthening the competitiveness of the Mizushima complex as a whole and promoting both

greater energy efficiency and cost reductions.

In addition to upgrading our refinery facilities, reducing refinery incidents is another major

issue at Nippon Oil. In 2006, we launched the Refinery Project Office, which works to eliminate

refinery trouble by extensively analyzing the causes of past equipment trouble and accidents.

Going forward, we will take steps to upgrade our equipment to maintain and extend our current

competitive advantage, while also looking at strengthening refinery competitiveness in Asia.


Refining Capacity (BD)

IPP Power Supply Capacity

(kW)

Muroran 180,000 50,000Sendai 145,000Negishi 340,000 391,000*

Toyama 60,000Osaka 115,000 130,000Mizushima 250,000Marifu 127,000 132,000

total 1,217,000 703,000

Toyama −60,000Oita 160,000 137,000total 1,317,000 840,000*The capacity includes Yokohama Plant.

nippon oil Group refineries

Muroran

Sendai

Negishi

TOKYO

SEOUL

SHANGHAI

Toyama

Osaka

Oita

Marifu

Mizushima

● To cease refining (decided)● To become a joint refinery (planned)● To integrate with Kyushu Oil (decided)


Cri promotion and refinery upgrades

The Group will continue to advance initiatives aimed at expanding refinery functions in fields other

than the production of petroleum products. The key measure in this drive is Chemical Refinery Inte-

gration, or CRI. The purpose of CRI is to optimize production of petroleum products and petrochemi-

cals in line with demand trends by leveraging Nippon Oil’s strengths as a company that can take

advantage of refinery functions and crude oil resources to create petrochemicals. Our CRI strategy,

moreover, is an effective means of meeting the challenges of our present business climate, in which

demand for petroleum-based fuels is declining in Japan.

During the Third Medium-Term Management Plan, we made significant capital investments

designed to bolster the competitiveness of our refineries. For the Sendai Refinery in particular, we

completed construction of a Continuous Catalyst Regenerator (CCR) platformer in September 2007.

We also boosted production of propylene, xylene (a raw material for paraxylene) and other petro-

chemicals. Complementing these changes, we began using xylene produced at the Sendai Refinery

as a raw material in a bid to augment the capacity of paraxylene equipment at Mizushima Paraxy-

lene Co., Ltd., a joint venture with Nippon Oil and Mitsubishi Gas Chemical Company. This decision

has successfully raised the Group’s total annual production capacity of paraxylene to 1.4 million

tons. In combination with the Company’s share of production of Oita Para-Xylene Co., Ltd., a joint

venture with Kyushu Oil, Nippon Oil’s paraxylene production capacity will rise to 1.6 million tons

per year.

We also began construction work at the Muroran Refinery in July 2007 on equipment that will

produce cumene, a raw material used mainly in the manufacture of automotive head lamp covers

and DVDs. Construction is scheduled for completion in the second half of fiscal 2008.

Right now, we’re promoting a set of reforms designed to establish an

operational structure and a culture of safety that will eliminate

accidents at the Group’s refineries and plants.

The last several years have seen an unfortunate string of

incidents—some minor, some much more serious—at our refineries.

These events have made us more conscious of potential problems,

both from the standpoint of ensuring safe, reliable refinery

operations, and of coexistence with surrounding communities. These

problems have also taken a toll on earnings.

In the Refinery Project Office, our goal by fiscal 2011 is to reduce

the number of refinery incidents by 90% relative to fiscal 2006. With

this benchmark in mind, we’re meticulously analyzing the causes

behind earlier plant problems and taking countermeasures designed

to wipe out refinery trouble Group-wide.

We take ongoing steps to improve maintenance through plant

inspections and turnaround cycles. We also plan to push doggedly on

with our quest to eliminate refinery trouble by establishing a Group-

wide culture of safety through stronger operational control and

improved technological capabilities.

Hiroshi OnoExecutive officer & General Manager Refinery Project Office



Q3

establishing an optimal marketing Framework

Sharply higher prices for crude oil, greater energy conservation, an ongoing shift away from

conventional fuels and other recent trends are changing the operating environment for petroleum

marketing, one of Nippon Oil’s core businesses. But while demand for petroleum products contin-

ues to decline in Japan, demand for petroleum products and petrochemicals in the rest of Asia is

growing steadily, led by economic growth in China and India, most notably.

Demand for petroleum products is declining in Japan, with market prices also sluggish, amid

what many view as an overcapacity of refining and marketing facilities in the country. In contrast,

market conditions in Asia continue to improve, supported by increasing demand. In this climate, we

have taken steps to bolster petroleum product exports in order to build a marketing system that is

more responsive to market change. In recent years, market prices for petroleum products outside

Japan have remained high compared to the domestic market, where prices are relatively low. In

previous years, Nippon Oil’s policy was to prioritize sales to the domestic market, with any surplus

supply then exported. Going forward, however, we intend to pursue a different policy—sell Nippon

Oil’s products to the most advantageous markets.

Under our Third Medium-Term Management Plan, we made substantial capital investments

at Group refineries to progressively build and expand export facilities, after which we aggres-

sively exported our petroleum products. We took these actions as part of the push to establish

an optimal marketing framework. In fiscal 2007, we undertook refining of 50,000 BD on a con-

tract basis, effectively an export of petroleum products, for the CNPC Group. Under a revised

contract signed in April 2008, the contracted refining volume was increased to 70,000 BD.

During its Fourth Medium-Term Management Plan, Nippon Oil will augment facilities even

further to put vital infrastructure for expanding exports in place. The goal during this plan’s

duration is to boost our export capabilities to 260,000 BD, excluding output at the Oita refinery

of Kyushu Oil, which is scheduled to merge with Nippon Oil in October 2008. Aggressive export

expansion should have the added benefit of raising operating capacity utilization rates across

the Nippon Oil Group refineries. It should also enable the Company to better cope with a less

favorable supply-demand picture in Japan as well as to benefit from arbitrage between domes-

tic and overseas prices.


Marketing

Wind-PowerHachinoheSatelliteLNGTerminal

ENEOS Service Station

major topics Ceremony held to mark completion of facilities for supplying energy

toYoshida-MinamifactoryofFUJIFILMCorporation(April2007) Establishment of a joint venture between Taiheiyo Sekiyu Hanbai Co.,

Ltd.andKatsukiOilCo.,Ltd.(July2007)AnnouncementregardingintegrationofENEOSFrontierCo.,Ltd.,

T akanawa Energy Corporation and Taiheiyo Sekiyu (July 2007)

Application for Tokyo Commodity Exchange membership (November 2007)

Ceremony held to mark completion of facilities at Kawasaki Natural GasGenerationCo.,Ltd.(April2008)

Contractual revisions regarding contracted refining for China’s CNPC Group (April 2008)


In November 2007, we applied for membership in The Tokyo Commodity Exchange (TOCOM).

Conducting transactions using TOCOM should enable Nippon Oil to proactively improve co-movement

between domestic and overseas market prices.

Another point of focus is the development of a highly transparent pricing structure. At present,

the most common price-setting formula in the Japanese petroleum products market is based on

movement in costs, which is leading to an increasingly substantial gap with market prices. Nippon Oil

is no different as it currently employs a formula whereby crude oil price fluctuations are reflected in

wholesale prices for petroleum products on a monthly basis. In the future, however, we intend to

make pricing much more transparent by adopting a pricing system based on objective indicators that

better reflect supply and demand trends.

realigning the service station network

Amid a harsh environment characterized by soaring crude oil prices and diminished domestic

demand for petroleum products, Japan now has about 43,000 service stations, of which more than

9,900 are ENEOS service stations—the country’s largest service station network (as of March 31,

2008). Since 2000, however, the number of service stations nationwide has declined steadily,

reflecting decreased demand for petroleum products and sluggishness in the gasoline market.

Projecting that the number of stations will continue to slip lower due to more intense price

competition and other factors, we have worked to enhance the efficiency of Nippon Oil’s marketing

network for petroleum products and the competitiveness of its service stations.

In April 2008, we realigned our service station network through the management integration of

petroleum product marketing subsidiary ENEOS Frontier, Taiheiyo Sekiyu Hanbai Company, Limited

and Takanawa Energy Corporation. By reducing overlapping costs, such as through back-office

divisions, and other initiatives, we aim to build an efficient marketing network to enhance the

Nippon Oil Group’s competitiveness.

To strengthen the competitiveness of the actual service stations themselves, we are pursuing the

creation of high-value-added Doctor Drive (D.D.) service stations offering complete automotive services

ranging from car inspections to oil changes. As of March 31, 2008, the Group had a network of approxi-

mately 2,300 D.D. service stations, equivalent to roughly one-quarter of our overall service station network.

The Group also continues to focus on supplying competitive products. One example is our

environmentally friendly premium gasoline called ENEOS NEW VIGO, which reduces friction inside

engines to enhance both fuel economy and acceleration. The improved engine-cleaning capabilities

of this gasoline help reduce the levels of harmful substances found in exhaust gases.

It remains the key focus of Nippon Oil to supply various customers in Japan with competitive

products and services via an efficient marketing network.


All Japan43,000 SS

(March 31, 2008)

Nippon Oil23%

25%

Kyusyu Oil2%

41%

Exxon Mobil Group 13%

Idemitsu Kosan 11%Showa Shell Sekiyu 10%

Others

Doctor Drive SS2,287

7,632Standard SS

Nippon Oil 9,919 SS

(March 31, 2008)

High Value-added service stations —Doctor Drive

Car washing Vehicle inspections


Gas and electric power

In addition to its core petroleum products and petrochemicals, Nippon Oil supplies a diverse array

of energy sources such as gas, electricity and coal.

natural Gas and lnGAnticipating growth in demand for natural gas, Nippon Oil is aiming to strengthen its integrated operating system from production and liquefaction to marketing, while expanding the business opportunities available in each stage of the supply chain.

In the upstream area, Nippon Oil is taking part in the Tiga project in Malaysia and also the Tangguh project in Indonesia, where production is scheduled to commence at the end of 2008. We are also seeking opportunities to participate in even more LNG projects (Please see the Oil and Natural Gas E & P section on p. 24 for more information).

In the downstream area, Nippon Oil owns an LNG importing terminal located within our M izushima Refinery, from which we supply natural gas and LNG to neighboring companies. In order to meet future demand increases, we are currently expanding the terminal and constructing a new LNG tank, scheduled to be completed in fiscal 2011. We also own and operate an LNG satellite terminal (tank capacity: 4,500 kL) in Hachinohe, which commenced commercial operations in March 2007, from which we supply natural gas via pipeline and LNG by tank cars to city gas companies and industrial users.

electric powerDeregulation of the Japanese electric power industry has encouraged a growing number of compa-nies to enter the electric power business from diverse industries. Wholesale power supply by independent power producers (IPPs) has been allowed since 1995, and the permitted scope for the retail electric power supply business of power producers and suppliers (PPSs) has been gradually broadened since 2000. The Company is well positioned to maintain strong competitiveness in electric power operations by making good use of its extensive refining infrastructure and by utiliz-ing surplus residue from its refining operations as fuel for its power generation plants. We plan to earn a stable profit by expanding our electric power operations to an extent that permits us to make the most of our competitive advantages.

We have established a framework consisting of the Muroran, Negishi, Osaka and Marifu refin-eries and the Yokohama Plant, which is capable of supplying 700,000 kW of electricity. We oper-ate wholesale independent power producer (IPP) businesses at each refinery, targeting electric power companies.

Taking advantage of the surplus internal generating capacity of the Negishi Refinery, since July 2003, Nippon Oil has been involved in the PPS retail electric power supply business in Japan. Meanwhile, since November 2007, we have utilized surplus internal generating capacity at the Sendai Refinery, produced from power generating equipment powered by associated gas, as a source of retail electric power.

At Kawasaki Natural Gas Generation Co., Ltd., a joint venture between Nippon Oil and Tokyo Gas Co., Ltd., operations commenced at Power Plant No. 1 in April 2008, with operations at Power Plant No. 2 set to begin in October 2008. The two power plants at Kawasaki Natural Gas Generation each have a power-generating capacity of roughly 410,000 kW. With a combined electric power output of approximately 820,000 kW, the company is the largest power plant of its kind in Japan for an electric power business in the deregulated retail power sector.

In terms of wind power initiatives, Nippon Oil is currently operating a wind turbine at its Akita Oil Depot. Surplus power generated is sold to Tohoku Electric Power. We plan to build a similar turbine at the Kawasaki Terminal, with completion scheduled for the end of fiscal 2009.


KawasakiNaturalGasGenerationCo.,Ltd.


In another move, we are developing a comprehensive proposal and marketing business that tailors supplies of fuel, electricity and heat we supply to customers’ needs. For example, Nippon Oil has been contracted to provide energy totaling 55,000 kW for three manufacturing facilities operated by the Fujifilm Group, which has been shifting its fuel to natural gas to reduce CO2 emis-sions. Commercial operations based on fuel provided by Nippon Oil began at FUJIFILM Corporation’s Yoshida-Minami Factory in April 2007. This is the largest B.O.O.* project in Japan through which Nippon Oil provides total services, from procuring LNG to the installation, running and manage-ment of highly efficient cogeneration systems.

* B.O.O. is an acronym for “build, own, operate,” which differs from conventional on-site energy system services in that equipment operation and management services are supplied as part of the overall package.

CoalIn 1990, Nippon Oil acquired stakes in Oakbridge Pty Limited, which owns a majority interest in Bulga coal mine, one of the largest coal mines in Australia with annual production of 11 million tons.

We are working together with Xstrata Coal, the Bulga coal mine operating company, to ensure stable production and a steady supply.

Bulga coal mine consists of Bulga open cut mine, Beltana underground mine and a coal prepara-tion plant.

Beltana underground mine has achieved the highest productivity of any underground mine in Australia, with annual production of raw coal in excess of 45,000 tons per person.

Bulga coal has been used by every Japanese power utility since we supplied our first customer in 1992. Bulga has become the leading thermal coal brand in the Japanese market with 7 million tons of sales per year.

Nippon Oil is actively expanding its coal business not only in Australia but also in other countries such as Indonesia, as diversity in supply sources is necessary to meet robust domestic demand.

Building an optimal production and sales framework responsive to

changes in the supply-and-demand picture is a vital issue that can

directly affect a company’s profitability. In recent years, while

demand for petroleum products in Japan has gradually declined, it

has been rising sharply in China and other parts of Asia. Clearly, the

key to rebuilding petroleum sales, one of our core businesses, is to

devise a production and sales framework that can flexibly respond to

export opportunities.

Besides the most direct outcome of an aggressive stance to

exporting petroleum products, i.e., covering the decline in domestic

demand, more exports should enable us to rectify the oversupply

problem in the domestic market. Together with expanding exports,

we’ve begun to make greater use of futures transactions on

TOCOM. These actions are integrating markets in and outside of

Japan, and promoting the formation of a more transparent and fair

domestic market. From this vantage point, we’re working hard to

maximize the profitability of the Nippon Oil Group.

Hiroshi HosoiGeneral Manager Supply Planning and Optimization


Bulga Coal Mine


lubricants Business

We are endeavoring to expand sales of lubricants overseas in line with international expansion of

Japanese automakers and other Japanese firms. Expansion of lubricant sales is a key pillar of our

overseas strategy.

Operations have expanded steadily at Tianjin Nisseki Lubricants & Grease Co., Ltd., a China-based

lubricant manufacturing and marketing company established in 1995, and in which we have a 40%

shareholding. Full-scale operations have also commenced at a production plant established in

Guangzhou, China, in September 2006, with a lubricant production capacity of 27,000 kL per year. The

Company now has a two-base, lubricant manufacturing network with a combined capacity of 82,000 kL

per year that is well positioned to supply both the southern and northern regions of China.

We also market refrigeration oil for household appliances based on an exclusive manufacturing

and marketing agreement with the CNPC Group. Refrigeration oil is a lubricant used in compressor

units that drive air conditioners, refrigerators and other cooling devices, and as such, requires high

technical specifications and strict quality management. We anticipate healthy growth in sales volume

for refrigeration oil, our mainstay lubricant, in China amid surging demand for household appliances in

the domestic market in line with recent economic growth. In addition to boosting sales and reducing

costs, we will focus on the sale of environmentally friendly products, viewing the launch of more

eco-conscious air conditioners compatible with tighter environmental regulations as an important

business opportunity.

Nippon Oil also has a lubricant manufacturing subsidiary in the U.S. state of Alabama called

Nippon Oil Lubricants (America) LLC. In October 2006, this subsidiary commenced full-scale operation

of a lubricant and grease production plant with a capacity of 39,000 kL per year. This is the Group’s

first manufacturing base for lubricants in the U.S., where, previously, Nippon Oil marketed products

manufactured on a commissioned basis.

We are also continuing to expand our ENEOS Oil brand overseas, conducting sales for the first

time in a range of countries and regions, including the west coast of North America, the United

Kingdom, Turkey and other countries in 2006.


overseas lubricant sales Volume

04FY

25

20

15

10

50

005FY 06FY 07FY

(Thousand KL)

Overseas Operations

Ceremony of New ENB PlantRepair Shop in MalaysiaNipponOilLubricants(America)

topics Capacity added to ENB production facility in the United States

(July 2007) Memorandum of understanding signed with UAE company to jointly

examine Recosul business viability (December 2007)


Similarly, we intend to invest business resources in Brazil, India, Russia and other newly

emerging markets to effectively meet growing lubricant demand as Japanese automakers advance

their operations in these countries.

Tracking anticipated growth in demand for high-performance lubricants in China and through

Asia, we plan to expand business operations centered on this region.

Nippon Oil sold roughly 230,000 kL in overseas sales of lubricants in fiscal 2007. Our goal in the

Fourth Medium-Term Management Plan is to raise lubricant sales volume overseas to 300,000 kL per

year. Accordingly, we are exploring options for securing new production and marketing bases to meet

this target.

technology-Based Businesses

Nippon Oil is developing not only petroleum products overseas, but also new technology-based

businesses centered on excellent refining technologies and related operations.

Recosul* is a product that we developed by leveraging technology to utilize the sulfur byproduct

of refining. In addition to its strength and superior water resistance, Recosul has high acid resistance.

These features have led to its use as a construction material for sewage facilities (e.g., manholes and

pipes), marine structures and on waterways. Sales in Japan commenced in the summer of 2006. In

2007, we signed a Memorandum of Understanding with a UAE company to study development of the

Recosul business in the UAE, in order to meet robust demand for effective sulfur utilization in the

region. Market surveys and feasibility studies regarding the new business are currently under way.

Plans are also in the works to promote businesses overseas based on refining process technolo-

gies, catalysts and other technologies developed by Nippon Oil.

* Recosul is a substance developed by mixing modified sulfur (created by mixing a special additive with sulfur at 130°C to 150 °C) with aggregate materials such as seashells, steel slag or sand, and fine powders such as coal ash. Once poured and allowed to slowly cool, Recosul hardens to a strength and consistency comparable to concrete.


The Nippon Oil Group holds the top share of the global market for

ethylidene norbornene (ENB), about two-thirds of which is handled by

NCTI. ENB is a crosslinking agent used to increase the durability of

synthetic rubber, which is primarily used in the production of car

windshield wipers, radiator hoses, rubber window seals and other

rubber products. With the increasing demand for synthetic rubber

accompanying an increase in automotive production, demand for ENB

is forecast to increase into the future. The unique technologies

gained as a result of developing ENB can be readily applied to a

variety of other fields, and it will be my responsibility to develop

those opportunities.

At NCTI, I direct the purchase of raw materials for ENB manu-

facturing, set ENB production schedules and place ENB products

into the American and European markets. It is my opinion that

there will continue to be a rise in the demand for ENB in the

foreseeable future.

There is a wide variety of responsibilities at NCTI that enables

me to develop professional relationships with the most important

customers and suppliers in this market. I value the opportunity to

interact with the ENB team within Nippon Oil, as their expertise is

invaluable. It is an honor to be a part of this organization, and I look

forward to lending expertise in the market.

Aubrey G. CannonGeneral Manager-Commercial Nisseki Chemical Texas Inc. (NCTI)

Recosul


High-performance Functional petrochemicals

In manufacturing and marketing of high-performance functional petrochemicals, created by leveraging

Nippon Oil’s own technological advantages, we aim to further expand the scale and profitability of

this business as part of our global niche strategy.

enBIn ethylidene norbornene (ENB), Nippon Oil has production facilities in the United States and Japan, and a two-base sales network for supplying ENB worldwide, through a joint venture with Sanyo Chemical Industries, Ltd.

Steps were taken in July 2007 to boost production capacity, particularly at our ENB production site in Texas (U.S.), where annual capacity was raised from 20,000 tons to 40,000 tons. Combined with production capacity of 20,000 tons in Japan, Nippon Oil now has a production framework for produc-ing a total of 60,000 tons of ENB per year.

ENB is used as a cross-linking agent for ethylene propylene diene monomer (EPDM) rubber, a synthetic rubber with superior heat and weather resistance used in automotive rubber applications and other areas. Tracking growing global demand for EPDM, demand for ENB is expected to grow by around 4% each year.

Nippon Oil commands a roughly 80% global share of the ENB market, a position made possible by proprietary manufacturing processes that deliver quality and outstanding cost competitiveness. With in-house production of the raw materials for ENB within reach, we intend to further expand both production and market share to make this business base even stronger.

Xydar BusinessXydar, a liquid crystal polymer, is marketed as a high-performance super-engineering plastic known for its strength, elasticity and other unique features, including world-class heat resistance. Today, demand for Xydar is rising sharply not only in the electrical and electronic sectors, but in office equipment and other fields as well. Nippon Oil has pushed ahead with developing grades of Xydar matched to specific applications. This business is now poised for greater expansion with the establishment of production facilities for plastic raw materials for Xydar in December 2007.

ClAFCLAF is a high-performance nonwoven material that is extremely strong and lightweight, with proper-ties that include breathability and water permeability. The fields of application for CLAF range from bags for agricultural produce to homebuilding materials, with the material also being used by Japa-nese automakers as a constituent material for automotive seats. Atlanta Nisseki CLAF, Inc. (ANCI), the company responsible for our nonwoven material operations in the U.S., is developing this busi-ness in the local market, as well as in the European and Latin American markets, as our overseas site for the manufacture and sale of polyolefin-based nonwoven materials made using the Nippon Oil Group’s proprietary technology. We intend to expand this business even further going forward.

Among other actions, plans for this business call for boosting capacity at our production sites. Our goal is to maintain Nippon Oil’s competitive advantage in the global market by responding to expansion in the worldwide market for nonwoven materials, where annual growth of at least 7% is expected.

ENB, Xydar, and CLAF are products with high profit margins that take advantage of technologies

and strengths unique to Nippon Oil. These products also boast dominant global market shares. As

part of our global niche strategy, we aim to boost profitability even higher by expanding and develop-

ing these products going forward.


CLAF


Fuel Cells and Hydrogen energy

Nippon Oil began R&D of fuel cells in 1986, leveraging unique technologies pertaining to hydrogen

production, catalyst development and other areas cultivated in its refining operations over many

years. The Company produced an LPG-fueled residential-use fuel cell system in March 2005, followed

by a kerosene-fueled system in March 2006. In both cases, Nippon Oil was first in the world to create

a commercially viable fuel cell.

In fiscal 2005, the Japanese government launched a large-scale, residential-use fuel cell

demonstration project to lower costs and enhance the durability of fuel cell systems. Nippon Oil

took advantage of its participation in the project to install 831 units over the ensuing three years

up through March 31, 2008. This figure accounts for roughly 38% of the systems installed over the

project thus far, and is the largest among the project participants. This project is set to continue

through March 31, 2009, and we will effectively utilize the success of operations thus far to vigor-

ously pursue the installation of additional systems.

To facilitate technological improvements that will reduce costs and to boost development

speed, Nippon Oil joined forces with development partner Sanyo Electric Co., Ltd. to form joint

venture ENEOS CELLTECH (81% ownership by Nippon Oil) in April 2008. The founding of a new

company dedicated to fuel cell operations has enabled the companies to deploy and concentrate

investment of human resources more effectively.

With the scheduled termination of the large-scale demonstration project in the March 2009

fiscal year, the fuel cell business will enter a new stage with the commencement of full-scale

marketing of fuel cell systems the following fiscal year. To start Nippon Oil off from the most

advantageous position possible, we will move aggressively forward with steps to reduce costs and

encourage the uptake of fuel cell systems. We are targeting sales volume of approximately 9,000

units for fiscal 2010, ending March 31, 2011, and approximately 40,000 units by fiscal 2015.


installation of Fuel Cells

05FY

500

400

300

200

100

006FY 07FY 08FY

(Plan) LPG Kerosene Other

(Units)

New Technology Businesses

Solar Power GenerationResidential-Use Fuel CellHydrogen Fueling Station and FCV

major Achievements & topics Entered a business alliance in fuel cells with Cosmo Oil (April 2007) Commenced trial operation of next-generation solid oxide fuel cell

systems (July 2007) Conducted large-scale installation of Nippon Oil fuel cell systems at

“Hydrogen Town” in Fukuoka, Japan (February 2008)

Established a new joint venture in the stationary fuel cell business with Sanyo Electric (April 2008)

Established“ENEOSLab”forjointresearchwithUniversityofTokyo’sResearch Center for Advanced Science & Technology (April 2008)


Elsewhere, Nippon Oil is taking part in another government-sponsored program, the JHFC

Project, which seeks to expedite the use of fuel cell vehicles (FCVs) and establish related

hydrogen-fuel supply infrastructure in Japan. Since 2003 Nippon Oil has operated the Yokohama

-Asahi Hydrogen Fueling Station, Japan’s first facility for supplying hydrogen using a

naphtha reforming process. The Company has also leased FCVs to utilize in hydrogen fueling

test trials at the station and similar sites as part of its multifaceted research in this area.

solar power Generation

Nippon Oil has long conducted research into solar power generation systems. However, having

determined that expectations surrounding the need to shift to a low-carbon society to reduce

greenhouse gas levels have grown, we opted to establish the Fuel Cell & Solar Cell Business

Department in April 2008. Preparations have also commenced ahead of the marketing of liquid-

crystal, silicon-based solar power generation systems. To mitigate concerns over the stable pro-

curement of silicon as a raw material, Nippon Oil took a 15.5% equity stake in Space Energy

Corporation, Japan’s second-largest manufacturer of silicon wafers in terms of production volume.

The Company also decided to conduct joint research into super-high-efficiency solar cells

with the University of Tokyo’s Research Center for Advanced Science & Technology (RCAST). This

research seeks to develop cells with a power-generation efficiency of 40% at a cost comparable

to that of thermal power generation. As part of development efforts, we established within RCAST

the “ENEOS Lab” to which several Nippon Oil researchers are assigned, as we strive to develop

a revolutionary technology that is radically different from any other witnessed to date.


Solar power generation system

Solar-heated water system

Home energy management system Storage battery

Fuell cell

I am involved in R&D of petroleum fuel powered polymer electrolyte

fuel cell (PEFC) cogeneration systems for residential use. This is the

most promising type of fuel cell system among those now under

development. I specialize in hydrogen fuel processing units.

Hydrogen is necessary to generate electricity with fuel cells, but it

rarely exists in nature. Hydrogen production, therefore, is the key to

expanding the use of fuel cells. At present, no other source of hydro-

gen can compete with petroleum-based fuels in terms of supply

stability and availability. However, we already have an advantage in

the technology of advanced hydrogen production, which we have

improved for many years, thanks to our history as an oil refining

company. That is one of the reasons why Nippon Oil was able to

successfully develop fuel cell systems.

Nippon Oil is a participant in a large-scale demonstration

project launched by the Japanese government in 2005. In the last

three years, we have installed 831 residential fuel cells all over

Japan. This number is the largest among all project participants.

Each fuel cell system has provided us with a lot of valuable data

and great ideas for developing new systems.

I would like to continue to be involved in both the research process

and product development, and also hope to make consumers happy

through my work.

Emi KatoSenior ChemistPolymer Electrolyte Fuel Cell R&D GroupFuel Cell Research LaboratoryResearch & Development Division

Future Home Energy Proposed by Nippon Oil


Confirming the Viability of sulfur-Free Gasoline

To help prevent air pollution and reduce carbon dioxide emissions, Nippon Oil has successfully

developed production technology and confirmed the viability of catalysts for producing sulfur-free

automotive fuels. In parallel, we are operating an ROK-Finer process plant that Nippon Oil has

developed to lower gasoline sulfur content.

At the same time, we are continuing to investigate ways to improve upon these process technologies.

Nippon Oil was recognized for its achievements over the years in the development of produc-

tion technology and practical applications for sulfur-free fuels when the Company was awarded

the 54th Okochi Memorial Special Production Prize by the Okochi Memorial Foundation in

February 2008.

technology for Converting Heavy oil Fractions into petrochemical products

“Bottom to Chemical” technology refers to a technique for converting heavy oil, for which

surpluses in the refining process are forecast, into petrochemical products. In this field, Nippon

Oil is taking part in efforts to develop technologies for high severity fluid catalytic cracking

applicable to heavy oil technology, one of the projects aiming for the development of revolutionary,

next-generation refining and other technologies being promoted by the Japan Petroleum Energy

Center. As part of the project, we plan to construct our own High Severity Fluid Catalytic

Cracking Process* (HS-FCC) demonstration facility, with a production capacity of 3,000 BD, at

the Mizushima Refinery.

* High Severity Fluid Catalytic Cracking Process refers to a groundbreaking technology for producing propylene and high-octane gasoline more efficiently than conventional FCC by bringing heavy oil and catalysts into brief, uniform contact at high temperatures to stimulate heavy oil breakdown. The new process is highly efficient compared to conventional FCC.


r&D expenditures

04FY

15,000

10,000

5,000

005FY 06FY 07FY

(Millions of yen)

Research and Development

ROK-FInerBiomass FuelCentral Technical Research Laboratory

major Achievements & topics Next-generation automobile and fuel demonstration given at the

residence of Japan’s prime minister (June 2007)BeganconstructionofaGTL(GasToLiquids)demonstrationtest

plant in Niigata, Japan (September 2007) Awarded the Okochi Memorial Special Production Prize for the

development and practical application of sulfur-free fuel production technology (February 2008)

Established the Recosul Industry Association (April 2008) Began investigating the feasibility of joint commercialization of

carbon materials for capacitors with GS Caltex Corporation (July 2008)



Gtl

GTL technology synthesizes liquid fuel from natural gas. This process is expected to result in clean

fuel and a promising high-performance base oil for lubricants. In 2006, we set up the Nippon GTL

Technology Research Association together with INPEX CORPORATION, Japan Petroleum Exploration

Co., Ltd., Cosmo Oil Co., Ltd., NIPPON STEEL ENGINEERING Co., Ltd., and CHIYODA CORPORATION.

The association is conducting joint research along a five-year plan with Japan Oil, Gas and Metals

National Corporation (JOGMEC). As part of this research, a demonstration plant with a 500 BD

production capacity is being built in the city of Niigata, where we plan to conduct demonstration

testing. Construction of the demonstration plant got under way in September 2007, with scheduled

completion by the end of fiscal 2008. The groundbreaking technology under research is the first in

the world to use unprocessed natural gas containing CO2 as an input. Through this research, our

goal is to develop competitive technologies rivaling those of major petroleum firms in Europe and

the United States to provide stable energy supplies for the future, while achieving greater harmony

with the global environment.

Biomass Fuel initiatives

Biomass fuel offers a new source of liquid fuel for transportation to replace gasoline and can help

to combat global warming because of the possibility of producing energy without a net increase of

carbon dioxide into the atmosphere. From this standpoint, the use of biomass fuels has emerged as

an important topic. Bioethanol, for example, is currently produced mainly from crops such as

sugarcane and corn. However, dependency on these resources not only has limits in terms of

supply capacity, but may lead to sharply higher prices for food staples. For this reason, Nippon Oil

is aiming to develop production technology that utilizes cellulose-based biomass as a raw material.

This option would offer a potentially enormous biomass supply resource, while avoiding competi-

tion with food staples.

In biomass fuel for diesel engines, we have teamed up with Toyota Motor Corporation to

develop bio hydrofined diesel (BHD) mainly made from vegetable oil and fat. As part of a joint

project to commercialize this fuel with the Tokyo Metropolitan Government, Toyota and Hino

Motors Ltd., we conducted test runs in Tokyo using a 10% BHD/petro-diesel mixture in buses

manufactured by Hino Motors from October 2007 to March 2008.

This hybrid bus runs on bio hydrofined diesel (BHD)

Development of BHD with Toyota Motor Corporation


Development of Carbon electrode materials for Capacitors and

li-ion rechargeable Batteries

We are taking advantage of petroleum coke from the Marifu Refinery to develop high-performance

carbon electrode materials for capacitors and Li-ion rechargeable batteries. In the field of

carbon materials for capacitors, we have a demonstration production facility in operation at the

Kawasaki terminal with an annual production capacity of 50 tons. R&D aimed at the early com-

mercialization of these materials is progressing steadily. In July 2008, we began investigating

the possibility of jointly commercializing carbon materials for capacitors with GS Caltex Corporation

of South Korea.

promoting industry-Academia Alliances

Since 2005, Nippon Oil has promoted activities under a comprehensive alliance with the

University of Tokyo’s Research Center for Advanced Science & Technology (RCAST). The theme

of this joint research is to find ways to realize greater harmony between energy use and the

natural environment. Specifically, we are conducting joint research in several fields, among

them next-generation organic solar cells, materials for high-output rechargeable batteries, and

functional polymers for solubilizing biomass. A variety of human resource and other exchanges

are also taking place, including the dispatch of a specially appointed associate professor from

Nippon Oil to the University of Tokyo.

In April 2008, we established within RCAST the “ENEOS Lab,” to which several Nippon Oil

researchers are assigned to conduct joint research, with investigation already under way into

super-high-efficiency solar cells, capacitors and other new energy technologies. Going forward,

we hope to accelerate research built on knowledge exchanges between academia and the

private sector to achieve sustainable business and social development.



CorporAte soCiAl responsiBilitY (Csr)

1. overview of nippon oil Group’s Csr Activities

Group philosophy

Your Choice of EnergyCreating the energy future and promoting prosperity and harmony with nature

six Values We respect

EthicsNew ideasEnvironmental harmonyRelationshipsGlobal approachesYou

ーGlobal warming prevention measuresー

ーQuality assuranceー

ーSocial contributionー

ーRespect for human rights and dignityー

Suppliers

Nippon Oil Group Philosophy

Local communities, NGOs/NPOs

SOCIAL

Customers,dealers

Shareholders,investors,

financial institutions

Public-sectororganizations

Employees

Fourth Medium-Term Management Plan

ENVIRONMENTAL

ECONOMIC

ーEnvironmental managementー

ーComplianceー

ーCorporate governanceー

ーInformation securityー

ーSafety of refineriesー

ーCrisis managementー

ーInvestor relationsー

ーActivities to reduce environmental impactー


Managem

ent System

2. the Group’s Basic Csr policy

Having articulated the Nippon Oil Group Philosophy, the Company has

drafted the Nippon Oil Corporation Group CSR Rules to clearly define

the Group’s basic CSR policy. This policy calls for every individual

employee to work sincerely to act in accordance with the “Group

Philosophy”, “Six Values We Respect” and “Standards of Conduct” to

ensure that the Group dependably carries out its responsibilities to

society and is able to earn the trust of its stakeholders.

The Nippon Oil Group has identified and is strategically promoting

the CSR activities detailed below.

(1) CSR vital to all business activities and the source of

our competitiveness

In the course of fulfilling their assigned tasks, instill the message that

each employee can contribute to wider society through the proper

execution of the duties they perform daily.

(2) Broad spectrum of measures to enhance corporate value

Engage in investment activities, and pursue a host of measures

(explainable to stakeholders) for yielding returns.

(3) Build win-win relationships with stakeholders

Build relationships of trust through communication with all people with

whom the Company has contact, including shareholders, employees,

clients, business partners, and local communities.

3. Csr promotion system

Guided by its basic CSR policy, Nippon Oil is strengthening its system

for the strategic and Groupwide promotion of CSR management. The

Group defined its six focus areas for CSR, namely “Compliance,”

“Human Rights,” “Information Security,” “Corporate Citizenship,” “Envi-

ronment & Safety,” and “Quality Assurance.” This was followed by

establishment of the Nippon Oil Group CSR Meeting, led by the presi-

dent of Nippon Oil Corporation and attended by senior executives of

Nippon Oil and the presidents of the Group’s principal companies, to

comprehensively supervise all CSR activities. Six specialized commit-

tees were also established below the CSR Meeting, each responsible

for strongly promoting CSR management in their respective fields.

4. environmental initiatives

realizing “environmental Harmony”

We have embraced “environmental harmony” as part of the Nippon Oil

Group Philosophy and we are promoting environmental management in

line with the Group Environmental Vision that we have instituted.

nippon oil Group environmental Vision• As an comprehensive energy company, we will work to create a sustainable

society.

• We will continue to offer energy and products that are environmentally friendly.

• We will continue to develop new energy technologies.

Head Office Branches Refineries/Plants Group Companies

Nippon Oil Group CSR Meeting

Quality Assurance Committee

Compliance Committee

Human Rights Committee

Information Security Committee

Corporate Citizenship Committee

Environment & Safety Committee

Head Office: Quality Assurance Dept.

Head Office: General Administration Dept.

Head Office: Human Resources Dept.



Head Office: Environment & Safety Dept.

Chair Representative Director: PresidentMembers include senior executives of Nippon Oil and the president of each principal Group company

Csr promotion system

Six CSR Committees FY2007 Themes

Compliance Committee 1. Confirming legal compliance of operations2. Conducting training on legal issues tailored to individual needs3. Reevaluating the internal reporting system (Compliance Hot Line)

Human Rights Committee

Promoting healthy work styles– Promote communication and work-life balance

Information Security Committee

Prevention of leaks of information on individuals and other confidential information

Corporate Citizenship Committee

Develop ENEOS science classes on a nationwide basis

Environment & Safety Committee

1. Making the Group even more environmentally progressive– Promote environmental management on a unified Group basis

2. Rebuilding safety culture and practices – Eliminate labor accidents and injuries

Quality Assurance Committee

1. Executing thorough measures to prevent complaints and problems related to quality assurance processes– Review ENEOS quality management system

2. Building quality assurance systems focused on items procured from outside– Enhance communications with suppliers

3. Increasing the quality of services provided from the customer’s perspective– Increase the quality of service (customer service) at service stations


CorporAte soCiAl responsiBilitY (Csr)

We formulated the Medium-Term Environmental Management Plan

to govern Group actions to combat global warming over the period

fiscal 2008–2010. We are working to reduce CO2 emissions across all of

our business activities.

Co2 emissions reductions at the refining operations

Refining operations generate approximately 80% of the total CO2 emis-

sions of the Nippon Oil Group. Our main priority is therefore to take

measures to improve energy efficiency at the refining operations.

We have established the specific target of reducing energy con-

sumption at the refining stage by 20% relative to the fiscal 1990 bench-

mark by fiscal 2010.

This target, which is significantly higher than the 13% reduction that

the Petroleum Association of Japan (PAJ) advocates, demonstrates the

commitment of the Nippon Oil Group to taking proactive measures to help

prevent global warming. The 20% reduction also represents the first

environmental target to be included in one of the Group’s medium-term

management plans.

Specific energy consumption was 16.6% lower in fiscal 2007 than the

fiscal 1990 benchmark (a reduction from 11.71 to 9.77). This improvement was

equivalent in effect to cutting CO2 emissions by 2.2 million tons.

Co2 emissions reductions at the rang Dong oil Field in Vietnam

The Nippon Oil Group produces crude oil from the Rang Dong oil field in

Vietnam. The associated gas produced along with the crude oil, which in the

past was flared at the field’s offshore platform, is collected and supplied for

use at power generation plants and other businesses in Vietnam, thereby

reducing CO2 emissions. This project is registered with the United Nations as

a Clean Development Mechanism (CDM) and has received approval for the

issuance of certified emissions reductions (CERs) of approximately 4.49

million tons for CO2 reductions in the period from December 2001 through

December 2005.

5. social initiatives

The Nippon Oil Group aims to foster a corporate culture respectful of

human rights that enables employees—the driving force behind our

corporate strength—to work energetically and demonstrate their indi-

viduality and capabilities. To that end, the Group emphasizes measures

to promote employee capabilities, encourage women’s success, support

the physically challenged and promote greater awareness of human

rights issues. Nippon Oil’s efforts in this area are organized around the

Human Rights Committee, which considers human rights in the context

of various themes, such as the personnel system, promoting better

understanding of human rights, and human resource development. The

results of its deliberations are passed on to Nippon Oil, Nippon

Petroleum Refining Company, and other Group companies to be

reflected in their personnel strategies.

The Nippon Oil Group is

actively promoting social contri-

bution activities with an

emphasis on environmental

initiatives. The Group’s employ-

ees and their families conduct

forest protection activities in a

program called ENEOS Forest,

which is centered mainly on areas in Japan where Nippon Oil has refiner-

ies. In fiscal 2007, a total of 781 people participated in this program,

which conducted 14 activities.

The Group’s efforts also extend outside Japan. As an operator for oil

and gas development with operations largely in Vietnam and Malaysia,

Nippon Oil has long been involved in various social contribution and

cultural activities to benefit local communities. In Vietnam, the Group has

focused attention on educational support, including the building of

schools, to provide the children, who are Vietnam’s future, with environ-

ments more conducive to learning.

Completion ceremony of Tang Chuyen Junior High School

ENEOS Forest

specific energy Consumption of refining operations

● Specific energy consumption

(kL/thousand kL)

90FY

15.0

10.0

11.71

9.56 9.55 9.77 9.37

5.0

001FY 04FY 07FY 10FY

(Target)

20% lower than FY1990


As part of this focus, in September 2007, the Nippon Oil Group

donated funds to a project for constructing new school buildings on the

grounds of Tang Chuyen Junior High School in Hanam, a northern prov-

ince in Vietnam. Along with donations from employees, Nippon Oil also

provides school equipment and stationery for Muong Phang Elementary

School, located in a mountainous region in northern Vietnam near the

border with Thailand. Plans going forward call for extending the same

support to Tan Chuen Junior High School.

Nippon Oil continues to take active part in a host of support and

charitable activities, including offering aid donations to survivors of the

powerful cyclone that struck Myanmar in May 2008.

Tang Chuyen Junior High School

Managem

ent System

other overseas social Contribution Activities

October 2007 Made donations for the victims of a bridge collapse in Can Tho City, Vietnam

November 2005 Provided funds for construction of a rehabilitation center in Gio Linh, Quang Tri Province, Vietnam

September 2005 Made donations for people affected by Hurricane Katrina in the USA

May 2005 Offered donations accompanying recognition of city status for Miri (Malaysia)

April 2005 Donated funds to partially cover operating expenses at an art exhibition held in Libya.

Annual Activity Participated in walking day charity event in VietnamMade donations to support training of physically impaired children in Vietnam

Business operations in myanmarBusiness OverviewOperations in Myanmar are conducted through Nippon Oil Exploration (Myanmar), Limited (registered Japanese corporation), a 50/50 joint venture between Nippon Oil Exploration and the Japanese government. This local subsidiary owns 19.3% of interests in several exploration blocks (M-12, 13, 14) in the Yetagun Gas Field off the coast of Myanmar, where it is involved as a non-operator in this business. The operator for this project is Petronas Carigali Sdn. Bhd., an oil development subsidiary of state-owned Malay-sian petroleum firm Petronas. Petronas Carigali owns a 40.9% participat-ing interest. Other participants (also non-operators) include Myanmar’s state oil and gas company, MOGE, which owns 20.5% of interests, and PTTEP, a subsidiary of Thailand’s state oil and gas company PTT. PTTEP holds a 19.3% interest in the project.

In addition to natural gas production and the sale of natural gas shipped via pipeline to PTT, the project includes the sale in and outside of Myanmar of condensate produced at the gas field. Operations in Myanmar account for approx. 0.1% of Nippon Oil Group net sales. With the exception of MOGE, Myanmar’s state oil and gas firm and project partner, the Nippon Oil

nippon oil Business transactions in sudanNippon Oil purchases more than 30 different varieties of crude oil from more than 20 countries on an ongoing basis. In making these purchases, the key commercial considerations include both cost and quality in response to client demand. Environmental considerations are particularly important for our clients. Sudanese crude oil offers some of the best quality in terms of environmental performance, making it one of the few options available for meeting the quality requirements of principal oil consumers.

Group has no direct involvement in the sale of products to or business with the Myanmar government or government-affiliated firms. The Nippon Oil Group has no business office in Myanmar; as a result, no Group employees are in the country.

For more details regarding Nippon Oil’s operations in Myanmar, visit Nippon Oil Exploration’s corporate website at:

http://www.noex.co.jp/english/activity/southeast-asia/myanmar/index.html

CSR Activities in MyanmarAt Nippon Oil, we recognize that conditions in Myanmar today give cause for concern. We will continue to keep a close watch on the situation, and hold any necessary discussions with operators and other stakeholders. We work with our partners to ensure the highest international standards in the management of our projects’ environmental and social impacts. Project partner Nippon Oil Exploration (Myanmar) supports socio-economic pro-grams in Myanmar, including programs pertaining to education, income improvement, and job training, as well as reproductive health programs closely aligned to local needs.

Nippon Oil’s purchases of Sudanese crude oil are made through international traders and other entities: the Company has never entered into direct contracts with the Sudanese government or Sudan’s State-owned oil company. Similarly, we have no exploration or production rights or facilities in Sudan, and have no intention of acquiring any such rights in the foreseeable future.

We are keenly examining other sources of crude oil with the same environmental qualities as the Sudanese product, but so far have found it difficult to identify a reliable alternative that meets our clients’ stringent environmental requirements.


CorporAte GoVernAnCe

Board of Directors

Fumiaki Watari

Makoto Satani

Masahito NakamuraExecutive Director of the Fuel Retail Sales Division

Yasushi KimuraExecutive Director of the Energy Solution Division

Naoaki TsuchiyaExecutive Director of the Overseas Business DivisionExecutive Director of the Supply Division

Shinji Nishio

Toshikazu Kobayashi

Shigeo HiraiExecutive Director of the Corporate Management Division I

Yasuo KaminoExecutive Director of the Lubricants & Specialties Business Division

Makoto KuramochiDeputy Director of the Overseas Business Division

Ikutoshi MatsumuraExecutive Director of the Energy System Business DivisionExecutive Director of the Research & Development Division

Kan UenoExecutive Director of the Chemicals Division

Junichi KohashiExecutive Director of the Environment, Safety & Quality Management Division Executive Director of the Manufacturing Technology & Engineering Division

Yukio YamagataExecutive Director of the Corporate Management Division II

Representative Director, Chairman of the Board

Representative Directors, Executive Vice Presidents

Directors, Senior Vice Presidents

Representative Director, President

DirectorsAkira KitamuraGeneral Manager of the Secretariat

Michio IkedaGeneral Manager of the Corporate Planning & Management Department

Hajime OkazakiGeneral Manager of the Central Technical Research Laboratory

Hiroshi OnoPresident and Representative Director of Nippon Petroleum Refining Company, Limited

Makoto KosekiPresident and Representative Director of Nippon Oil Exploration Limited

Executive OfficersJun Matsuzawa

Yoshiki Hirayama

Seijiro Yamazaki

Haruo Nakano

Shunsaku Miyake

Nobuyuki Tanahashi

Masahiro Yoshida

Michiyasu Kobayashi

Ichiro Kurata

Hirokazu Matsuo

Akira Omachi

Toru Tanaka

Yasuji Araki

Kazuyuki Tanaka

Shirou Kikkawa

Junichi Kawada

Nagayasu Matsuzawa

Yuichi Kanemaru

Tsutomu Sugimori

Hiroji Adachi


Auditors

Diagram of operational execution, Audit, and supervision

Managem

ent System

Hiroshi Maru Hideo Tabuchi

Masao Fujii Hidehiko Haru Masahiro Sakata

Standing Corporate Auditors

Corporate Auditors

Election and removal of auditors

Audits

Audits

General Meeting of Shareholders

Board of Directors (Chaired by board chairman)

Independent Auditors

Group Companies

Election and removal of directors

AppointmentElection and removal

Monitoring and supervision

Financial audits

Internal audit

Internal audit

Exchanges of opinion

Financial audits

ReportsExchanges of opinion

Interviews (Business execution divisions) and information exchange (Auditors)

Dispatch of officers/personnelApprovals

Exchanges of opinionDeliberation of proposed investments

ReportsRemovalAudits

Election and removal

Operational Execution

Executive CommitteeBody to assist decision-making by the president

Reporting directly to the president

Representative Director, President

Board of Corporate Auditors

Senior Vice Presidents

Executive Vice Presidents

Executive Officers Appointed by the President

Executive Officers

CSR Department (Internal Audit)

Organizational configuration: Company with Board of Corporate Auditors System

Head of Board of Directors: Chairman*

Number of directors: 19

Elected outside directors: None

Number of corporate auditors: 5

Number of outside auditors: 3

* Except when serving concurrently as president



Basic Approach to Corporate Governance

Amid the current increasingly severe competitive environment for

energy companies, the Group aims to upgrade its management

strategy development capabilities and establish rapid and dynamic

decision-making and operational execution that is responsive to

changes in the business environment. We also work to ensure the

soundness and transparency of management to respond to the trust

and confidence of all our stakeholders. These are the foundations of

our corporate governance.

In line with these beliefs, the Nippon Oil Group has established

corporate governance systems with the following features.

(1) The term of directors is one year, and directors must be approved by

the regular general meeting of shareholders each year.

(2) The presidents of principal Group companies are made members of

Nippon Oil Corporation’s Board of Directors, and management strat-

egy is debated and decided on a Groupwide basis.

(3) The Company has selected the Board of Corporate Auditors system.

The majority of the corporate auditors comprising the board are

outside auditors with specialized expertise. Equipped with stronger

and broader authority than before under Japan’s Companies Act,

they effectively monitor and supervise management and ensure that

it is sound and transparent.

(4) Nippon Oil is strengthening its Groupwide CSR promotion systems,

led by the Nippon Oil Group CSR Meeting.

1. Directors and executive officers

Nippon Oil Corporation’s executive officers are appointed by the

Board of Directors. By separating the important business decisions

made by the Board of Directors and supervision of the execution of

directors’ duties from the operational functions carried out by execu-

tive officers, this system aims to enhance the quality and speed of

decision-making and clarify responsibility for business execution.

Regarding items defined by laws, regulations, and the Company’s

Articles of Incorporation, after clarifying standards for agenda items by

delineating the Board of Directors’ regulations and criteria for determining

meeting agendas, the Board of Directors makes important management

decisions pertaining to operational execution. The representative director,

president is responsible for operational execution decisions not covered

by the Board of Directors.

Before the president executes operational decisions, related issues

are thoroughly discussed and examined by the Executive Committee,

which is comprised of the president, executive vice presidents, senior

vice presidents, and other selected executive officers. Members of the

committee at or below the level of executive vice president assist the

president in decision-making. The Executive Committee meets once per

week, in principle, and its members report on and discuss the current

status and future direction of business activities in various divisions as

needed. The president indicates the direction of operational policies as

necessary and makes decisions on their execution. In accordance with

board regulations, important operational decisions made solely by the

president are reported to the Board of Directors, while reports on the

Executive Committee’s consideration and consultation processes and

results are made to the Board of Corporate Auditors.

Under the leadership of the chairman of the board, the Board of

Directors debates and decides items that are to be determined by

the Board of Directors. In addition, the Board of Directors conducts

interviews regarding reporting items and supervises the operational

execution of representative directors and performance of duties by

each director.

When nominating candidates for director, each nominee is

assessed from a variety of angles, and their occupational experience,

personality, insight, and other attributes are also examined. A list of

those candidates expected to contribute to the Company’s manage-

ment, who are deemed capable of handling the responsibilities of

director and able to meet the expectations of shareholders, is submitted

to the Board of Directors for further consideration. The final nominees

who emerge are then put forth as candidates for election at the regular

general meeting of shareholders.

With respect to operational execution at Nippon Oil Group

companies, the presidents of Group companies Nippon Petroleum

Refining Co., Ltd. and Nippon Oil Exploration Limited are added as

members of the Board of Directors with the goal of strengthening

Group management. Debate and decisions regarding important

business plans and other matters such as important capital expendi-

tures and items necessary to the strategic development of Group

business at these companies are conducted by or directly reported

to the Board of Directors. Similarly, we hold regular meetings

attended by Nippon Oil Corporation’s chairman, president, executive

vice presidents, and senior vice presidents, as well as by the presidents


Managem

ent System

of the Group’s principal companies, with the aim of maximizing the

Group’s corporate value. At these meetings members communicate,

confirm, and thoroughly implement basic policies and share informa-

tion and exchange opinions with a view to generating synergies.

2. Auditors

The Company’s five corporate auditors, three of whom are outside

auditors, attend the Board of Directors’ meetings and pose ques-

tions and express opinions at these meetings ahead of the reporting

of resolutions deliberated and adopted as well as reporting items.

The corporate auditors also monitor whether violations of laws and

regulations or the Articles of Incorporation have been committed in

the execution of duties performed by the directors.

Pursuant to regulations established by the Board of Corporate

Auditors and corporate auditing standards, the corporate auditors and

the Board of Corporate Auditors have systems in place for conducting

comprehensive audits by the corporate auditors as prescribed by law.

In addition to the examination of records relating to financial accounts

and important meetings, the auditors receive reports from directors

and employees of the Company and representative directors and

officers of subsidiaries regarding the performance of their duties.

These and similar actions comprise audits of the directors’ perfor-

mance conducted by the corporate auditors on an ongoing, day-to-day

basis. The progress and results of audits which each corporate auditor

has conducted based on the audit plan are reported by the auditors at

regular meetings of the Board of Corporate Auditors, which in

principle are held once monthly. The sharing of results of overall audit

activities also takes place at these meetings.

In addition, the representative directors and the auditors

exchange opinions regarding the management policies of the repre-

sentative directors, important management issues that the Company

must confront, risks that the Company faces, the environment in

which corporate auditors conduct audits, efforts to improve audits,

and other various important audit-related issues. In order to deepen

mutual understanding and the relationship of trust, all five represen-

tative directors and all five corporate auditors, including the three

outside auditors, hold regular meetings. In fiscal 2007, these meet-

ings took place on four occasions, with the members discussing

issues including protective measures against hostile takeovers and

shareholder return policies for the Company’s Fourth Medium-Term

Management Plan.

In nominating candidates for corporate auditor, Nippon Oil consid-

ers the nominee’s ability to fulfill the duties expected of auditors, the

possession of specialized expertise, a wealth of experience and an

outstanding performance record. Beyond these basic credentials, how-

ever, candidates must also embody the highest ethical standards and

have a reputation for impartiality, fairness, and honesty. Following

consideration by the Board of Directors and approval of the Board of

Corporate Auditors, nominees who are deemed to exemplify these

qualities are put forth as candidates for election at the regular general

meeting of shareholders.

Name

Board of Directors’ meeting

attendance record

Board of Corporate Auditors’ meeting

attendance record Professional background Reason for election Concurrent posts

Masao Fujii 12/12 14/14 Former judge in Japan’s Supreme Court Following successive judicial appointments, worked as a Justice of Japan’s Supreme Court; Nippon Oil Corporation believes that his lengthy experience and expertise will enable him to monitor and supervise management from an objective and fair viewpoint

Outside director, Marubeni Corporation

Hidehiko Haru* Former executive vice president and representative director of Tokyo Electric Power Company (TEPCO)Former member, Bank of Japan Policy Committee

With extensive professional experience at TEPCO and as a member of the Bank of Japan Policy Committee, Nippon Oil Corporation believes that he will make use of his rich expertise in operational management and fiscal policy areas to conduct monitoring and supervision of management from an objective and fair perspective.

Auditor, Nippon Yusen Kabushiki Kaisha (NYK LINE)

Masahiro Sakata* Former Deputy Director-General of the Minister’s Secretariat, Ministry of FinanceFormer Director-General of the Cabinet Legislation Bureau

After years of work at the Ministry of Finance and appoint-ment to the Cabinet Legislation Bureau, Nippon Oil Corpora-tion has judged that his abundant expertise in the fields of policy and legislation will enable him to monitor and supervise management from an objective and fair viewpoint

Anderson Mori & TomotsuneAuditor, Tokio Marine & Nichido Fire Insurance Co., Ltd.Auditor, The Nishi-Nippon City Bank, Ltd.

* Hidehiko Haru and Masahiro Sakata were newly elected and appointed auditors at the 193rd General Meeting of Shareholders on June 24, 2008.



3. reason for selecting the Board of Corporate Auditors’ system

Nippon Oil Corporation’s Board of Directors is comprised of directors

thoroughly familiar with the Group’s operations, and they work to main-

tain and increase the efficiency and responsiveness of management.

On the other hand, Nippon Oil believes that augmenting its systems for

the performance of audits by corporate auditors, which have been given

greater authority by successive revisions of Japan’s Companies Act, is a

desirable means of maintaining and strengthening management sound-

ness, and it has therefore established its Board of Corporate Auditors.

4. outside Auditors

Three of the five members of the Company’s Board of Corporate Audi-

tors are full outside auditors unaffiliated with the Company.

Outside auditors use their wealth of experience and knowledge to

pose questions and express opinions at Board of Directors’ meetings

regarding agenda items. In fiscal 2007 these included conclusion of a

contract for a comprehensive tie-up with Sanyo Electric Co., Ltd. for

stationary fuel cell operations and the MOU on management integra-

tion with Kyushu Oil Co., Ltd.

5. Creation of specialized support staff for Auditors

To augment the auditing capabilities of all the corporate auditors,

including the outside auditors, Nippon Oil has established the Secre-

tariat of Corporate Auditors, which has a three-person staff that is

completely and clearly independent of the Group’s business execution

departments as well as of the Group’s command systems, including the

personnel evaluation system.

6. Compensation of Directors and Corporate Auditors

The compensation of each director and corporate auditor is determined,

based on consideration of the Company’s performance as well as of the

role and contribution of each director and corporate auditor, within the

scope of the total remuneration figure authorized by the General Meet-

ing of Shareholders, in accordance with internal regulations created by

a vote of the Board of Directors in the case of directors and in accor-

dance with internal regulations created by a vote of the Board of Corpo-

rate Auditors in the case of auditors.

In accordance with resolutions by the Board of Directors and the

Board of Corporate Auditors in May 2005, Nippon Oil has abolished

its system of retirement allowances for directors and corporate audi-

tors. This decision was made to link compensation for directors and

corporate auditors more closely to their term of service and to the

Company’s business performance.

7. independent Auditor

Nippon Oil has selected Ernst & Young ShinNihon as the independent

auditor to perform audits of its financial accounts. In fiscal 2008,

these audits were carried out by three certified public accountants

(CPAs) employed by Ernst & Young ShinNihon—Haruo Senba,

Kazuhiko Umemura, and Takao Kamiya. These personnel were

assisted in their audits by a 24-member staff that included 10 CPAs

and 14 CPA assistants.

Total compensation paid to the independent auditor of the

Company is as follows:

Compensation based on work covered by article 2-1 of the

certified public accountant law ¥79 million

Compensation based on work other than that mentioned above

¥63 million

Number of recipientsRemuneration amount

(¥ million)

Directors 20 845

Corporate auditors(Outside auditors)

5(3)

103(30)

1. The total remuneration includes total bonuses of ¥165 million paid to directors and of ¥20 million paid to corporate auditors.

2. Employee salaries and bonuses of ¥63 million paid to five employee-directors are excluded from the total remuneration.


Financial Section

Financial Section

52 induStry trendS and nippon oil’S poSition 58 ManageMent’S diScuSSion and analySiS oF operationS 66 conSolidated Balance SheetS 68 conSolidated StateMentS oF incoMe 69 conSolidated StateMentS oF changeS in net aSSetS 70 conSolidated StateMentS oF caSh FlowS 71 noteS to conSolidated Financial StateMentS 83 report oF independent auditorS

Annual Report 2008 nippon oil corporation 51

induStry trendS and nippon oil’S poSition

1 3

Market data For petroleuM and petrocheMical productS

98CY

150

100

50

01CY 04CY 07CY

(%) (%)Japan China World

STRUCTURE OF ENERGY CONSUMPTION (CY2007) CHANGE IN OIL CONSUMPTION (CY)

Asia Pacific World Oil Coal Natural gas Nuclear power Hydroelectric power

3 GLOBAL OIL CONSUMPTION TRENDS BY REGION AND CHANGE IN CONSUMPTION (CY)Thousand BD

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007North America 22,674 23,286 23,548 23,571 23,665 24,050 24,897 25,023 24,904 25,024Europe & Eurasia 19,826 19,742 19,564 19,743 19,736 19,922 20,111 20,274 20,477 20,100asia pacific 19,623 20,557 21,147 21,281 21,934 22,702 24,008 24,368 24,851 25,444Middle East 4,492 4,573 4,716 4,829 5,011 5,229 5,507 5,731 5,949 6,203Africa 2,388 2,448 2,458 2,473 2,510 2,567 2,644 2,773 2,824 2,955South & Central America 4,936 4,968 4,907 5,006 4,974 4,826 4,944 5,147 5,225 5,493World 73,939 75,573 76,340 76,904 77,829 79,296 82,111 83,317 84,230 85,220

%

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007Europe & Eurasia and North America 100.0 101.2 101.4 101.9 102.1 103.5 105.9 106.6 106.8 106.2asia pacific 100.0 104.8 107.8 108.4 111.8 115.7 122.3 124.2 126.6 129.7World 100.0 102.2 103.2 104.0 105.3 107.2 111.1 112.7 113.9 115.3Change in Consumption (1998=100) Source: BP, Statistical Review of World Energy Note: BD=Barrels per day

MAJOR COUNTRIES’ DEPENDENCE ON FOREIGN ENERGY SOURCES AND OIL (CY2005)2%

Dependence on foreign energy sources Dependence on foreign oilJapan 81.2 99.7Italy 85.1 92.3France 50.4 98.6U.K. 12.7 −4.5Germany 61.0 96.3U.S.A. 30.3 66.1Source: International Energy Agency (IEA), Energy Balances

%Million tons, crude oil

equivalent basis

Oil Coal Natural gas Nuclear powerHydroelectric

power Total Total volumeJapan 44.2 24.2 15.7 12.2 3.7 100.0 517.4U.S.A. 39.9 24.3 25.2 8.1 2.4 100.0 2,361.4U.K. 36.2 18.2 38.1 6.5 1.0 100.0 215.9Germany 36.2 27.7 24.0 10.2 2.0 100.0 311.0France 35.8 4.7 14.8 39.1 5.6 100.0 255.1China 19.7 70.4 3.3 0.8 5.9 100.0 1,863.5Russia 18.2 13.7 57.1 5.2 5.9 100.0 692.0World 35.6 28.6 23.8 5.6 6.4 100.0 11,099.2*Source: BP, Statistical Review of World Energy *This figure represents world total volume.

STRUCTURE OF ENERGY CONSUMPTION IN MAJOR INDUSTRIALIZED COUNTRIES (CY2007)1

nippon oil corporation Annual Report 200852

Financial Section

4 6

90FY

100

50

095FY 06FY05FY 10FY

Fore

cast

Addi

tiona

l mea

sure

s

02CY

20,000

15,000

10,000

5,000

003CY 05CY04CY 06CY02CY

30,000

20,000

10,000

003CY 05CY04CY 06CY

(%)

STRUCTURE OF ENERGY SUPPLY IN JAPAN (FY)

Oil Hydroelectric and geothermal power Coal Nuclear power Natural gas New energy and others

Demand Production volume

BALANCE OF SUPPLY AND DEMAND FOR PETROCHEMICAL PRODUCTS IN ASIA (PROPYLENE, PARAXYLENE) (CY)Propylene Paraxylene

STRUCTURE OF DEMAND IN JAPAN BY TYPE OF OIL (CY)CONSUMPTION BY TYPE OF PETROLEUM PRODUCT (CY)

5

Ten thousand BD %

Japan 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2006Gasoline 93 95 98 100 102 103 103 105 104 103 20 Kerosene & Jet Fuel 71 71 72 71 73 73 73 70 73 68 13 Diesel Oil 128 125 126 124 124 121 119 117 115 108 21 Heavy fuel oil 72 70 69 65 59 56 65 58 58 54 10 Others 206 189 196 190 181 177 182 179 181 183 35 Total 570 550 561 550 539 530 542 529 531 516 100

Ten thousand BD

U.S.A.* Europe* Asia*

Gasoline 926 45% 257 17% 399 17%Kerosene & Jet Fuel 169 8% 128 8% 225 9%Diesel Oil 418 20% 624 40% 677 28%Heavy fuel oil 69 3% 185 12% 355 15%Others 485 23% 362 23% 745 31%Total 2,067 100% 1,556 100% 2,401 100%Source: IEA, Oil Market Report * Figures for U.S.A. and Europe are from 2006; Figures for Asia are from 2005.

BALANCE OF SUPPLY AND DEMAND FOR PETROCHEMICAL PRODUCTS IN ASIA* (ETHYLENE, PROPYLENE, BENZENE, PARAXYLENE) (CY)

6

Thousands of tons

2002 2003 2004 2005 2006ethylene Demand Production Volume

28,955 28,516

30,80330,528

32,29931,800

33,62432,862

34,89134,704

propylene Demand Production Volume

20,819 20,617

22,67422,353

23,31423,700

25,49225,198

26,79726,817

Thousands of tons

2002 2003 2004 2005 2006Benzene Demand Production Volume

12,22012,135

13,18813,246

14,11414,508

14,86815,402

15,48116,146

paraxylene Demand Production Volume

12,156 11,803

13,588 13,213

14,46113,224

15,61114,559

16,80416,322

Source: Ministry of Economy, Trade and Industry, Current and Future Global Trends in Petrochemical Product Supply and Demand * Asia includes figures for Oceania.

STRUCTURE OF ENERGY SUPPLY IN JAPAN (FY)4%

1990 1995 2005 2006 2010

ForecastAdditional measures

oil 56.0 53.6 46.5 44.1 42.2 41.9Hydroelectric and geothermal power 4.6 3.8 3.2 3.7 3.4 3.5Coal 16.8 16.5 20.9 21.2 20.1 20.0Nuclear power 9.6 12.3 11.7 11.7 14.2 14.7Natural gas 10.7 11.5 14.9 16.5 16.1 15.7New energy and others 2.3 2.2 2.7 2.8 4.1 4.2Total 100.0 100.0 100.0 100.0 100.0 100.0

Million kL, crude oil equivalent basis

Total 508 568 588 586 583 566Source: Ministry of Economy, Trade and Industry (METI), Advisory Committee for Energy

(Thousands of tons) (Thousands of tons)


nippon oil operating data

1 3

Crude oil (CIF) Regular gasoline

Group refining capacity(Thousand BD)

CRUDE OIL PRICE AND END USER GASOLINE PRICE (FY)

98FY

200

100

150

0

50

01FY 04FY 07FY

COMPARISON WITH OTHER MAJOR DOMESTIC OIL COMPANIES—II

NIPPON OIL Exxon Mobil Group Idemitsu Kosan Cosmo Oil Showa Shell Sekiyu Nippon Mining Holdings Others

Paraxylene production capacity(Thousands of tons)

24.9%40.3%

COMPARISON WITH OTHER MAJOR DOMESTIC OIL COMPANIES—I2Millions of yen Yen

Net salesOperating

incomeNet

incomeNet income per share

nippon oil 7,523,990 263,962 148,306 101.49Idemitsu Kosan 3,864,263 55,891 4,837 120.98Cosmo Oil 3,523,086 83,796 35,152 46.72Showa Shell Sekiyu 3,082,641 88,813 43,729 116.12Nippon Mining Holdings 4,339,472 103,186 99,299 107.14

Millions of yen % Yen

Total assets Net assetsShareholders’ equity ratio

Net assets per share

nippon oil 4,594,197 1,429,266 28.5 896.06Idemitsu Kosan 2,420,057 527,689 20.5 12,404.45Cosmo Oil 1,627,903 469,726 27.2 522.84Showa Shell Sekiyu 1,339,114 358,269 25.3 899.90Nippon Mining Holdings 2,251,208 765,264 30.3 735.22

Note: Figures represent performance in the fiscal year ended March 31, 2008. In the case of Showa Shell Sekiyu, however, figures represent performance in the fiscal year ended December 31, 2007.

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Crude oil (CIF) priceUS$/barrel 12.76 20.92 28.37 23.84 27.40 29.43 38.77 55.81 63.50 78.69

(Yen/kl) 10,319 14,518 19,617 18,645 21,034 20,955 26,158 39,736 46,659 56,311Regular gasoline price (Market price) (Yen/l) 92 95 103 101 100 101 115 128 136 146Sources: Ministry of Finance, Trade Statistics and other publications Notes: 1. CIF=Cost, insurance, and freight.

2. Figures for regular gasoline prices are including consumption tax from April 2004.

CRUDE OIL PRICE AND END USER GASOLINE PRICE (FY)1

Group refining capacity Thousand BD

nippon oil 1,217Exxon Mobil Group 936Idemitsu Kosan 640Cosmo Oil 635Showa Shell Sekiyu 515Nippon Mining Holdings 475Others 477Total 4,895

Paraxylene production capacity Thousands of tons

nippon oil 1,430Nippon Mining Holdings 550Idemitsu Kosan 479Exxon Mobil Group 480Others 610Total 3,549

Source: The Petroleum Association of Japan’s website as well as the association’s publication, Specified Statistics No. 51Note: Figures for Group refining capacity and Group refining capacity share are as of March 31, 2008.

Note: Data as of December 31.

COMPARISON WITH OTHER MAJOR DOMESTIC OIL COMPANIES—II3

DOMESTIC REFINING CAPACITY AND CAPACITY UTILIZATION RATE (FY)4Thousand BD

Refining Capacity 2003 2004 2005 2006 2007Industry Total 4,890 4,770 4,770 4,830 4,895nippon oil 1,272 1,217 1,217 1,217 1,217

%

Capacity Utilization Rate 2003 2004 2005 2006 2007Industry Total 83 84 87 83 83nippon oil 83 87 88 84 84

Note: Figures for refining capacity represent levels as of March 31 of each year.

(¥/l)


Financial Section

7 8

(Thousands of tons) (Thousand BOED)

Ethylene Propylene Benzene Paraxylene

NIPPON OIL GROUP’S PRODUCTION CAPACITY BY TYPE OF PETROCHEMICAL PRODUCT (FY) NIPPON OIL GROUP’S PRODUCTION VOLUME OF CRUDE OIL AND NATURAL GAS (CY)

03FY

1,500

1,000

500

0

04FY 06FY05FY 07FY 03CY

180

120

60

0

04CY 06CY05CY 07CY U.S.A. Canada*1 U.K. Southeast Asia Oceania

Note: Data as of December 31.

SALES BY TYPE OF PETROLEUM PRODUCT (FY)5Million kL

Industry Total 2003 2004 2005 2006 2007Gasoline and naphtha 108.5 110.5 110.8 110.6 107.6 Middle distillates*1 101.3 100.2 98.3 90.5 85.6 Heavy fuel oil*2 30.2 26.5 27.0 22.7 25.3 Total 240.0 237.2 236.1 223.8 218.5

Million kL

nippon oil 2003 2004 2005 2006 2007Gasoline and naphtha 20.1 21.0 21.1 20.1 19.4 Middle distillates 25.2 26.5 25.7 23.1 22.1 Heavy fuel oil 8.9 8.0 8.8 7.2 8.0 Total 54.3 55.5 55.6 50.4 49.5

Notes: All sales volume figures represent domestic sales volumes of petroleum fuels. Figures for sales volumes of Nippon Oil represent the sales of the parent company only, including sales to consoli-dated subsidiaries of each.

*1 Total sales volume for kerosene, diesel fuel, jet fuel, and heavy fuel oil A.*2 Total sales volume for heavy fuel oil C.

NIPPON OIL GROUP’S PRODUCTION CAPACITY BY TYPE OF PETROCHEMICAL PRODUCT7Thousands of tons

2003 2004 2005 2006 2007Ethylene 404 404 404 404 404Propylene 610 610 710 850 800

Thousands of tons

2003 2004 2005 2006 2007Benzene 1,022 1,127 1,119 1,147 1,147Paraxylene 960 1,020 1,050 1,210 1,430

US$/ton

Contract price in Asia of paraxylene (FY) 2004 2005 2006 2007 2008

I II III IV I II III IV I II III IV I II III IV I723 768 933 890 863 855 947 947 1,007 1,260 1,097 1,047 1,170 1,108 1,075 1,123 1,330

NIPPON OIL GROUP’S PRODUCTION VOLUME OF CRUDE OIL AND NATURAL GAS (CY)8Project companies’ entitlement basis, BOED Thousand BOE

2003 2004 2005 2006 2007Reserves as of

December 31, 2007U.S.A. 9,000 7,000 9,400 10,200 13,200 48,000Canada*1 10,600 11,900 10,700 12,900 15,200 261,000U.K. 19,600 17,200 16,900 13,700 12,500 38,000Southeast Asia 24,400 73,200 104,100 102,900 94,500 352,000Oceania 2,000 2,000 15,600 12,400 9,800 9,000Total 65,600 111,300 156,700 152,100 145,200 708,000

Note: BOED=Barrels of oil equivalent per day; BOE=Barrel of oil equivalent*1 Synthetic oil

NUMBER OF NIPPON OIL SERVICE STATIONS (FY)6

Service Stations 2003 2004 2005 2006 2007Industry total* 49,000 48,000 47,000 45,000 43,000nippon oil 11,333 11,059 10,807 10,368 9,919company-owned 2,607 2,518 2,436 2,309 2,175parent share of company- owned service stations 23.0% 22.8% 22.5% 22.3% 21.9%

Self-Service Stations 2003 2004 2005 2006 2007Industry total 3,423 4,103 4,948 6,161 –nippon oil 520 651 794 1,055 1,231company-owned 304 378 455 588 670parent share of company- owned service stations 58.5% 58.1% 57.3% 55.7% 54.4%

Note: These figures are for the parent company only.*Because the Ministry of Economy, Trade and Industry eliminated the distinction between fixed and mobile service stations from 2002 and now presents the total number of registered service stations operators, the total number of service stations for the industry as a whole is estimated by Nippon Oil Corporation.


Financial data (years ended March 31)

1 5 YEAR DATA FROM STATEMENTS OF INCOMEMillions of yen Thousands of U.S. dollars

2004 2005 2006 2007 2008 2008Net sales 4,279,751 4,924,163 6,117,988 6,624,256 7,523,990 75,239,900Operating income 55,918 201,470 303,930 159,684 263,962 2,639,620Ordinary income 57,089 212,435 309,088 186,611 275,666 2,756,660Income (loss) before income taxes and minority interests (149,672) 220,958 298,332 172,205 279,812 2,798,120Income taxes (7,855) 82,580 120,416 89,329 118,458 1,184,580Minority interests in earnings of consolidated subsidiaries (8,291) 6,858 11,404 12,654 13,048 130,480Net income (loss) (133,526) 131,519 166,510 70,221 148,306 1,483,060

2 5 YEAR DATA FROM BALANCE SHEETSMillions of yen Thousands of U.S. dollars

2004 2005 2006 2007 2008 2008Total current assets 1,395,336 1,569,328 2,128,558 2,262,528 2,487,526 24,875,260 Cash and cash equivalents, TD and short-term investments 181,855 163,113 239,013 334,853 228,907 2,289,070 Notes and accounts receivable-trade 578,850 611,258 773,589 818,679 901,675 9,016,750 Inventories 498,857 636,704 951,046 889,827 1,157,959 11,579,590Total fixed assets 1,870,137 1,945,006 2,090,849 2,122,993 2,106,662 21,066,620Total current liabilities 1,433,424 1,536,810 1,933,592 2,072,145 2,258,130 22,581,300Total long-term liabilities 909,763 927,431 1,022,738 981,406 906,800 9,068,000Minority interests in consolidated subsidiaries 101,113 96,870 109,238 119,241 119,478 1,194,780Total shareholders’ equity 821,202 953,240 1,130,328 – – –Total net assets – – – 1,331,981 1,429,266 14,292,660 Common stock 139,436 139,437 139,437 139,437 139,437 1,394,370 Capital surplus 274,838 274,852 275,015 275,760 275,782 2,757,820 Retained earnings 371,471 489,729 599,517 651,294 782,037 7,820,370Total assets 3,265,503 3,514,352 4,215,611 4,385,533 4,594,197 45,941,970

3 PER EMPLOYEEMillions of yen Thousands of U.S. dollars

2004 2005 2006 2007 2008 2008Net sales per employee 303.2 354.6 452.3 493.6 580.8 5,808Net income (loss) per employee (9.5) 9.5 12.3 5.2 11.4 114Total number of employees 14,347 13,424 13,628 13,214 12,697Note: The figures for net sales per employee and net income (loss) per employee are calculated based on the average number of employees at the beginning and the end of each fiscal year and on net

sales and net income (loss).

4 PER SHAREMillions of shares

2004 2005 2006 2007 2008Number of shares issued 1,514.5 1,514.5 1,464.5 1,464.5 1,464.5Number of potential common shares 37.3 – – – –Number of shares assuming full dilution 1,551.8 1,514.5 1,464.5 1,464.5 1,464.5Percentage of shares owned by foreign investors 22.3% 24.6% 29.7% 29.3% 31.7%

Yen U.S. dollars2004 2005 2006 2007 2008 2008

Net income (loss) per share (88.76) 86.72 114.08 48.12 101.49 1.01Shareholders’ equity per share 544.04 631.77 775.62 829.64 896.06 8.96 Stock price at the end of fiscal year 596 761 923 956 622 6.22

5 DIVIDENDSYen U.S. dollars

2004 2005 2006 2007 2008 2008Cash dividends per share attributable to the period 7 10 12 12 12 0.12Consolidated payout ratio (7.9)% 11.5% 10.5% 24.9% 11.8%

1

(Billions of yen)

2004 2005 2006 2007 2008–200

–100

0

100

200

2004 2005 2006 2007 2008–100

–50

0

50

100

150

4

(Yen)

NET INCOME (LOSS) 5

(%)

CONSOLIDATED PAYOUT RATIONET INCOME (LOSS) PER SHARE

2004 2005 2006 2007 2008–10

0

10

20

30

40


Financial Section

2004 2005 20072006 20080

50

100

150

200

250

300

6 7

(%) (Billions of yen)

Refining and Marketing Petrochemical Operations Oil and Natural Gas E&P Construction Other

RETURN ON EQUITY CAPITAL EXPENDITURES

2004 2005 20072006 20080

50

100

150

200

250

7

(Billions of yen)

Refining and Marketing Petrochemical Operations Oil and Natural Gas E&P Construction Other

DEPRECIATION AND AMORTIZATION

6 RATIOS2004 2005 2006 2007 2008

Return on total assets (4.04)% 3.88% 4.30% 1.63% 3.30%Return on equity (15.25)% 14.82% 15.98% 5.94% 11.76%Return on sales (3.12)% 2.67% 2.72% 1.06% 1.97%Trade receivables turnover (times) 7.31 8.28 8.84 8.32 8.75Total assets turnover (times) 1.29 1.45 1.58 1.54 1.68Inventory turnover (times) 8.75 8.67 7.71 7.20 7.35Liquidity (times) 0.44 0.42 0.39 0.52 0.45PER (times) – 8.80 8.09 19.87 6.13PBR (times) 1.10 1.20 1.19 1.15 0.69

7 CAPITAL EXPENDITURES, DEPRECIATION AND AMORTIZATION AND R&D EXPENDITURESBillions of yen Thousands of U.S. dollars

Capital expenditures 2004 2005 2006 2007 2008 2008Total capital expenditures 136.9 153.0 189.8 204.8 268.3 2,683,000 Refining and Marketing 107.8 85.1 115.1 146.6 120.9 1,209,000 Petrochemical Operations 10.5 *2 *2 *2 *2

Oil and Natural Gas E&P *1 54.4 65.1 43.3 132.2 1,322,000 Construction 7.4 6.8 4.7 8.9 10.8 108,000 Other 11.2 6.7 4.9 6.0 4.4 44,000Note: Figures include investments and loans.

Billions of yen Thousands of U.S. dollarsDepreciation and amortization 2004 2005 2006 2007 2008 2008Total depreciation and amortization 107.0 110.0 135.1 131.9 152.4 1,524,000 Refining and Marketing 87.7 85.1 85.0 81.7 96.0 960,000 Petrochemical Operations 6.8 *2 *2 *2 *2

Oil and Natural Gas E&P *1 12.6 39.0 39.6 45.2 452,000 Construction 5.4 5.1 4.8 4.9 5.8 58,000 Other 7.1 7.2 6.3 5.7 5.4 54,000*1 For the fiscal year ended March 31, 2004, figures for the “ Oil and Natural Gas E&P” segment are included within figures for the “Petrochemical Operations” segment.*2 For the fiscal years ended March 31, 2005, 2006, 2007 and 2008 figures for the “Petrochemical Operations” segment are included within figures for the “Refining and Marketing” segment.

Billions of yen Thousands of U.S. dollarsR&D expenditures 2004 2005 2006 2007 2008 2008

9.7 11.4 10.1 12.6 12.7 127,000

8 DEBT RATIOSBillions of yen Thousands of U.S. dollars

2004 2005 2006 2007 2008 2008Interest-bearing debt 946 965 1,213 1,297 1,332 13,320,000Funds on hand 108 145 215 272 229 2,290,000Net interest-bearing debt 838 821 998 1,025 1,103 11,030,000Ratio of interest-bearing debt to equity 115% 101% 107% 107% 102%Ratio of net interest-bearing debt to equity 102% 86% 88% 84% 84%Current ratio 97.34% 102.12% 110.25% 109.19% 110.16%Fixed ratio 227.73% 204.04% 184.98% 175.06% 160.84%Fixed assets/capitalization 102.08% 98.35% 91.30% 91.77% 90.18Interest coverage (times) 2.94 11.05 13.61 7.29 10.61Notes: 1. Figures for actual interest-bearing debt represent the value of interest-bearing debt calculated from balance sheet items less the balance of CP and the balance of debt associated with deposits

made by overseas financial subsidiaries to secure loans. 2. Figures for funds on hand are calculated by excluding the temporary effects stemming from the fact that the final day of the fiscal year was a banking holiday and the payment of fuel taxes was

delayed until the subsequent fiscal year.

9 RATINGSShowa Shell Cosmo Oil Nippon Mining Tonen General nippon oil

R&I A – – – A+Moody’s – Baa3 – Baa1 A3Note: All figures are as of June 30, 2008.

2004 2005 2006 2007 2008–20

–10

0

10

20

30


ManageMent’s Discussion anD analysis of operations

perforMance During the year

consolidated financial results

On a consolidated basis, the net sales of the Nippon Oil Group (“the Group”)

in the fiscal year under review increased 13.6% year on year, to ¥7,524.0

billion. Cost of sales rose 13.1% to ¥6,983.0 billion, reflecting higher crude

oil prices. However, SG&A expenses declined 3.8% to ¥277.1 billion. Operat-

ing income increased by ¥104.3 billion, to ¥264.0 billion. This was largely

due, however, to the positive impact on earnings of inventory valuation

factors, which contributed to higher earnings compared to the previous fiscal

year. Inventory valuation factors refer to the effect on the cost of goods sold

from the valuation of inventory using the gross average method to reflect

changes in the price of crude oil.

Excluding inventory valuation factors, operating income was ¥96.1

billion, a decrease of ¥72.8 billion from the previous fiscal year. This was due

to worsening margins for petroleum products and petrochemicals and the

impact of a worsening in losses resulting from tax system changes in fiscal

2007, the year ended March 31, 2008. This result came despite progress on

cost reductions and enhancing efficiency, as well as increased earnings from

the Oil and Natural Gas E&P business segment.

The Group also recorded non-operating income of ¥11.7 billion, a

decrease of ¥15.2 billion, due principally to higher interest expense and a

loss on valuation of derivatives.

As a result, consolidated ordinary income rose ¥89.1 billion, to ¥275.7

billion. Excluding inventory valuation factors, consolidated ordinary income

was ¥107.8 billion, a decrease of ¥88.0 billion from the previous fiscal year.

Due primarily to gains on sales of securities, the Company recorded

other income of ¥4.1 billion, an improvement of ¥18.5 billion over the previ-

ous fiscal year.

As a result of the above factors, the Group generated consolidated net

income of ¥148.3 billion, a year-on-year increase of ¥78.1 billion. Net income per

share was ¥101.49, up ¥53.37 from the previous fiscal year. ROE was 11.8%.

economic progress and outcomes

1. General economic climate and environment surrounding the

Nippon Oil Group

The Japanese economy showed signs of weakness during the fiscal year under

review. Despite relatively firm exports, consumer spending lost strength, with

the economy hit further by a slowdown in the U.S. economy triggered by the

sub-prime loan scandal and a progressively stronger yen. These negatives,

moreover, came amidst lackluster capital investment in Japan. In Asia, the

economies of China and India continued to grow rapidly, with similar expan-

sion trends also seen in other economies throughout the region.

On the global crude oil scene, growing financial instability in the U.S.

prompted investment funds to be moved out of financial and capital markets

into crude oil and other commodities. This shift was largely responsible for

further entrenching high prices for crude oil, leading to a historic high of over

US$100 per barrel for Dubai crude from the outset of 2008.

2. Progress and Outcomes of Business Activities

In this climate, the Nippon Oil Group positioned this period as a time to

execute its Third Medium-Term Management Plan, a three-year plan

launched in fiscal 2005. Along with steady generation of cash flows from

Refining and Marketing and Oil and Natural Gas E&P, the Group’s core

businesses, the Company pursued growth strategies with the aim of devel-

oping an integrated operating framework and to become an integrated

energy company. In the fiscal year under review, the plan’s final year, each

business segment implemented a host of measures along these lines, as

described on the following pages.

2004

8,000

3,000

4,000

5,000

4,280

4,924

6,118

6,624

7,524

6,000

7,000

1,000

2,000

02005 2006 2007 2008

Cost of sales SG&A expenses Operating income Net sales

2004

200

–50

0

50

100

150

–100

–1502005 2006 2007 2008

net sales, cost of sales, sg&a expenses, and operating income (years ended March 31) net income (loss) (years ended March 31)(Billions of yen) (Billions of yen)


Financial Section

refining and Marketing segment (including petrochemicals)

Production-side measures for petroleum products and petrochemicals

In terms of production, the Company first sought to meet growing demand

for petroleum products and petrochemicals in Asia by bolstering export

capacity for petroleum products and by focusing on preparing a system to

boost petrochemical production. Specifically, this first entailed a round of

construction to expand tanks, pumps, pipe networks and other product

shipment facilities to increase exports of diesel, heavy and other petroleum

products at the Sendai and Marifu refineries. This was followed in September

2007 by the installation of a Continuous Catalyst Regenerator platformer and

other equipment at the Sendai refinery to boost production of propylene (a

raw material for plastics and synthetic fibers) and xylene (a raw material for

paraxylene, used in synthetic fibers and PET bottles), and for high-efficiency

electric power generation utilizing associated gas. In tandem, the Company

expanded equipment for shifting from production of xylene to paraxylene at

Mizushima Paraxylene Co., Ltd. As a result, the Nippon Oil Group established

a production framework for producing 800,000 tons of propylene and 1.4

million tons of paraxylene per year. In July 2007, the Company also launched

construction of a facility at the Muroran refinery that will house equipment

for the production of cumene, a raw material used in products such as

automotive lamp covers and CDs and DVDs. Construction is scheduled to

conclude in the second half of fiscal 2008. Furthermore, the Company,

through a joint venture with Sanyo Chemical Industries, Ltd., has two sites,

in Ibaraki, Japan and Texas, U.S.A., for the production of ethylidene

norbornene (ENB), a raw material used in high-performance rubber, as well

as the world’s top share of sales for this product. With demand particularly

for automotive applications expected to grow going forward, work to expand

ENB production facilities at the U.S. plant was completed in July 2007, in a

bid to further boost sales.

As part of measures to make production systems more efficient, the

Company merged Nippon Petroleum Refining Co., Ltd., responsible for

managing the Muroran, Sendai, Yokohama, Negishi, Osaka, Mizushima and

Marifu refineries, with Nippon Petrochemicals Company, Limited, which

oversees the Kawasaki Operations Center, on April 1, 2008. This move

enabled the Nippon Oil Group to complete the integration of its production

system for petroleum products and petrochemicals. Furthermore, the Com-

pany decided to begin an in-depth examination of ceasing crude oil refining

at Nihonkai Oil Co., Ltd. as of March 2009, to cope with declining domestic

demand for petroleum products and establish a more efficient supply struc-

ture. Nihonkai Oil owns a refinery in Toyama, Japan, where until recently it

produced petroleum products in Japan’s Hokuriku region on behalf of Nippon Oil.

Going forward, however, the company’s function will change from that of a

refining company to that of an oil terminal operator, although it will continue

to be responsible for the stable supply of petroleum products to the region.

Marketing-side measures for petroleum products and petrochemicals

Where marketing is concerned, the Company’s first priority in light of a harsh

business climate of soaring crude oil prices and falling domestic demand for

petroleum products, was to work to enhance the efficiency of its distribution

network for petroleum products and boost the competitive strength of its

service stations. To this end, the Company merged ENEOS Frontier Company,

Limited, a subsidiary involved in the sale of petroleum products, with

Taiheiyo Sekiyu Hanbai Company, Limited and Takanawa Energy Corporation,

integrating the respective head offices and overlapping branches of the

companies and reorganizing the resulting service station network. Steps

were taken to enhance the profitability of the service stations owned by

Nippon Oil, which included the closing of unprofitable stations and the

introduction of efficient self-service stations.

net sales operating income(Billions of yen) (Billions of yen)

6,862.1

234.9371.0 56.1


126.3126.7

6.1 5.0



Gas, Power, Coal and Renewables

With the aim of becoming an integrated energy company, the Nippon Oil

Group is complementing its core petroleum product and petrochemical

operations with the supply of gas, electric power, coal and other diverse

energy sources to meet customer needs. At the same time, the Company,

with sights on the future, is taking steps to develop and mainstream new

energy systems.

In gas operations, the Company, in partnership with The Chugoku

Electric Power Co., Inc., operates an LNG importing terminal at the Mizushima

refinery, supplying consumers in the area with natural gas and LNG since

April 2006. Nippon Oil has also built a satellite LNG terminal on a former

depot site in Hachinohe, Aomori Prefecture, selling natural gas and LNG

from the site since March 2007. Moreover, to meet future natural gas and

LNG demand, the Company is building new LNG tanks and other facilities on

the site of the Mizushima refinery’s LNG terminal, with construction set to

conclude in fiscal 2011.

In electric power operations, Nippon Oil, through the Muroran, Yokohama,

Negishi, Osaka and Marifu refineries, is presently involved in the wholesale

supply of electricity to power companies. Complementing this, the Company

conducts the retail marketing of power generated by the Sendai and Negishi

refineries and Frontier Energy Niigata Co., Ltd. Meanwhile, Kawasaki Natural

Gas Generation Co., Ltd., a joint venture between Nippon Oil and Tokyo Gas Co.,

Ltd., launched commercial operation of its first power generation plant

(400,000kW) in April 2008. Construction on the company’s second plant (also

400,000kW) is in the final stages, with the plant to become operational in

October 2008. Once construction is completed, the Nippon Oil Group’s

electric power business is expected to boast a total supply capacity of

1.77 million kW.

As a next step, the Company promoted initiatives for the introduction of

biomass fuels, paying close attention to supply stability and ensuring safety

with respect to quality. Biomass fuels have captured attention as an effec-

tive energy source in combating global warming. Since April last year,

Nippon Oil, together with other members of the Petroleum Association of

Japan, has begun trial sales of biogasoline containing ETBE (Ethyl Tertiary

Butyl Ether), a substance derived from bioethanol. Full-scale marketing is set

to begin in fiscal 2010. In collaboration with Toyota Motor Corporation, the

Company developed a new bio hydrofined diesel (BHD). In the second half of

fiscal 2007, a project was initiated to use this fuel for new buses, produced

by Hino Motors Ltd. and used by the Tokyo Metropolitan Government.

As examples of this kind show, Nippon Oil has made strides in exploring the

future commercial viability of BHD.

Thirdly, Nippon Oil strengthened marketing activities for petroleum

products and petrochemicals, with a particular emphasis on growing demand

overseas. On this point, the Company first leveraged expanded export capac-

ity at its refineries in an aggressive drive to export petroleum products. As a

result, the Group recorded a year-on-year increase in total export volume to

3.68 million kL, a figure that included commissioned refining for China

National Petroleum Company (CNPC) Group. In lubricants, in addition to

increased exports, product exports from newly built lubricant plants in

Guangdong, China and Alabama, U.S.A. grew steadily. The result was con-

tinued growth in overseas lubricant sales, particularly to China, Southeast

Asia, and the U.S. In petrochemical sales, meanwhile, the Company aggres-

sively pursued sales activities targeting Asia, supported by reinforced pro-

duction capacity at the Sendai refinery, Mizushima Paraxylene and others,

leading to increased propylene and paraxylene sales.


+5.6

+106.7

–23.6

–12.9

–22.7 –11.4+22.8 +9.9 +1.8–38.6

–0.9

Inventoryvaluationfactors

(ｰ9.2→167.9)

Salesvolume

Cost reduction

Impact of tax system revision

Non-operating income

Sales volume

Profit margin & others

Non-operating income –0.2

In-housefuel cost

Time lag

Profit margin & others

FY06Ordinaryincome

FY07OrdinaryincomePetroleum Products +144.4 (Ex. inventory valuation –32.7) Petrochemicals –37.7

47.2

+177.1

153.9

Cost up –0.7

analysis of changes in ordinary income—refining and Marketing (years ended March 31)(Billions of yen)


Financial Section

Where coal operations are concerned, the Company owns interests in

Australia’s Bulga coal mine through local subsidiary Nippon Oil (Australia)

Pty. Ltd. Coal produced mainly from this site is largely sold to power and

steel companies in Japan. Demand for coal in Japan for electric power and

industry in general has surged, reflecting the operation of new coal-fired

electric power plants and the ongoing shift in fuel needs away from petro-

leum. During the fiscal year under review, these trends resulted in record

sales of 8.66 million tons of coal for Nippon Oil.

Another area in which Nippon Oil is involved is in the development

and promotion of fuel cells, which have gained attention as a new and

environmentally friendly energy system. Continuing from last year, the

Company has made progress in installing ENEOS ECO LP-1, a residential-

use fuel cell system that uses liquefied petroleum gas (LPG) as fuel, and

ENEOS ECOBOY, a residential-use fuel cell system that uses kerosene. As

a result, Nippon Oil had installed 831 fuel cell systems as of March 31,

2008, the top share among Japan’s fuel cell business operators. In April

2008, the Company established ENEOS CELLTECH Co., Ltd. as a receiver

company to which the stationary fuel cell business of Sanyo Electric Co., Ltd.,

Nippon Oil’s partner in the field of fuel cell development and manufacturing,

was transferred. This move will consolidate the technology and expertise

fostered by Nippon Oil and Sanyo Electric, leading to faster development

speed, improved performance and lower manufacturing costs.

As a result of the foregoing, the Refining and Marketing segment posted

net sales of ¥6,862.1 billion, up 15.2% from the previous fiscal year. Operat-

ing income was up ¥97.0 billion to ¥126.3 billion. This increase, however,

was due to the positive impact of inventory valuation factors, which contrib-

uted to higher earnings compared to the previous fiscal year. Inventory

valuation factors refer to the effect on the cost of goods sold from the

valuation of inventory using the gross average method to reflect changes in

the price of crude oil. Excluding inventory valuation factors, operating income

was ¥80.1 billion, down year on year. This result reflected worsening mar-

gins for petroleum products and petrochemicals, and came despite progress

made on cost reductions and enhancing efficiency.

oil and natural gas e&p segment

In the Oil and Natural Gas E&P segment, one of the Group’s key earners, the

Company produced 145,000BD of crude oil and natural gas during the fiscal

year under review from operations in Vietnam, Malaysia, Australia, the U.S.,

Canada, the U.K. and other locations.

As part of key measures during the term, Nippon Oil focused first on

production operations, where it newly commenced with crude oil production

at the Blane oil field, located in both U.K. and Norwegian territory in the

North Sea, in September 2007. This was followed in December 2007 with

the production of natural gas and condensate in a new exploration block in

the U.S. Gulf of Mexico. Regarding the purchase of assets, the Company

purchased a portion of interests held by Anadarko Petroleum Corporation in

an oilfield in the Gulf of Mexico.

Turning to development operations, Nippon Oil conducted investigative

work ahead of the move to development at the Westdon oilfield in the U.K.

North Sea and Layang gas field in Malaysia. Regarding the Tangguh LNG

Project in Indonesia, where development work is moving ahead toward the

start of production in fiscal 2008, the Company purchased a portion of

interests held by Kanematsu Corporation, thereby increasing the proportion

of rights in the project held by the Group.

In new exploration operations, which Nippon Oil views as sources of

long-term earnings, the Company made preparations to conduct test drilling

in exploration blocks off the coast of Libya. In addition, Nippon Oil acquired a

new exploration block off the southern coast of Vietnam as well as interests

Salesvolume

Sales price and others

Non-operating income

and loss, net

Including unrealized gains and losses

on hedge transactions-27.1 (+8.8→-18.3)

FY06Ordinaryincome

FY07Ordinaryincome

123.9

–13.6 +26.5 –25.5

111.3

–12.6

analysis of changes in ordinary income—oil and natural gas exploration & production (years ended March 31)(Billions of yen)


Regarding petroleum firms overseas, the Company reached agreements

with SK Corporation (now SK Energy), South Korea’s largest petroleum

company, in January 2007, and CNPC, China’s largest oil firm, in April the

same year, to explore the potential for business alliances in oil and natural

gas E&P, crude oil transport, the teaming up on the supply system of crude

and petroleum products, and a wide range of other areas. At present, discus-

sions examining this potential from a variety of different angles are ongoing.

With respect to commissioned refining for the CNPC Group, the 50,000 BD

volume seen to date will grow to 70,000 BD from fiscal 2008 to cope with

rapidly rising demand in China for petroleum products.

Business integration With Kyushu oil co., ltd.

Nippon Oil would also like to report on the business integration with Kyushu

Oil Co., Ltd. (Nippon Oil investment: 10%) announced publicly in March 2008.

Nippon Oil and Kyushu Oil have a history of close-knit partnerships

stretching over many years, from the teaming up on the supply of petroleum

products to the management of Oita Para-Xylene Co., Ltd., a joint venture

company in the production of paraxylene. Today, Japan’s oil industry is

confronting major changes, characterized by the inescapable fact of declin-

ing domestic demand on the one hand, and expected growth in demand for

petroleum products and petrochemicals overseas, most notably in Asia.

Sharing a common awareness of this business environment, Nippon Oil and

Kyushu Oil have decided to pursue business integration in October of this

year in order to further develop their existing ties.

In addition to streamlining operations in crude oil procurement, refining

and distribution, Nippon Oil will use the integration with Kyushu Oil to

reorganize its service station network and to aggressively export petroleum

products and petrochemicals. In this way, the Company will aim to build a

stronger corporate base and establish its global competitiveness.

promotion of csr Management

Guided by the Group philosophy of “Creating the energy future and promot-

ing prosperity and harmony with nature,” the Nippon Oil Group conducts

activities that stress the importance of corporate social responsibility (CSR)

in every business field.

As part of CSR, the Group considers harmony with nature to be a vital

mission of every company involved in the supply of energy. Past efforts in

this vein have included a project for the recovery and utilization of associ-

ated gas at the Rang Dong oilfield in Vietnam, promoting energy efficiency at

refineries, and achieving zero emissions, defined as disposal to landfill of

waste (i.e., volume of waste that is non-recyclable or cannot be emitted to

sea) of less than 1%. The Group also conducts regular soil contamination

studies and develops remediation measures as part of its host of environ-

mental CSR initiatives. Similarly, during the period under review, the Nippon

Oil Group continued to implement soil contamination surveys and counter-

measures for land in its possession. In parallel, the Group continued to

pursue environmental measures that include setting “zero emissions plus,”

defined as disposal to landfill of waste of less than 0.5%, as a target to

further reduce waste volume.

in an onshore exploration block in Sarawak, Malaysia. The Company also

acquired interests in an offshore exploration block in Thailand, the Group’s

first in that country, from a subsidiary of PTT, Plc. Thailand’s state oil com-

pany. And in April 2008, Nippon Oil, in collaboration with partner Japan

Energy Corporation, acquired interests in an offshore exploration block in the

waters surrounding Peninsular Malaysia.

As a result of the above initiatives, the Oil and Natural Gas E&P busi-

ness segment posted net sales of ¥234.9 billion, up 15.4% year on year, and

operating income of ¥126.7 billion, or ¥12.9 billion more than the previous

year. This result largely owed to favorable retail prices. This growth also

came despite a decline in the Group’s production volume of crude oil and

natural gas triggered mainly by lower production at existing projects due to

production equipment malfunctions, which was not offset by the contribution

of new asset purchases to overall production.

construction segment

This segment faced an even more adverse business environment during the

year under review, acutely characterized by a continued decline in public-

sector construction and soaring prices for raw materials. In this setting, the

Nippon Oil Group leveraged its superior technological strengths in an effort

to secure construction orders for road-paving, civil engineering, and other

construction projects. The Company also promoted greater sales of products

such as asphalt mixture, and bolstered cost-reduction and efficiency mea-

sures in the drive to maintain profitability. These efforts notwithstanding, net

sales in this business segment fell 9.1% to ¥371.0 billion. Operating income

was ¥6.1 billion, down ¥4.0 billion year on year, due mainly to sharply higher

prices for raw materials triggered by soaring crude oil prices.

other segment

In the Other segment, Nippon Oil operates a variety of businesses largely

centered on ENEOS brand products, including retail sales of automotive

products, real estate leasing, and marketing operations.

Due to the removal of a former consolidated subsidiary from the scope

of consolidation, this business segment recorded net sales of ¥56.0 billion,

down 4.1%, for the term under review. Operating income, however, rose ¥0.9

billion to ¥5.0 billion, mainly from increased income from real estate sales.

promotion of strategic alliances

Alongside the above initiatives, Nippon Oil is promoting strategic busi-

ness alliances with petroleum firms at home and abroad. In Japan, the

Company is allied with Idemitsu Kosan Co., Ltd., Cosmo Oil Co., Ltd., and

Japan Energy Corporation. Nippon Oil is forging cooperative ties with

each of these partners to better rationalize refining, the teaming up on

the supply system of products and distribution, as well as cooperative

ties in fuel cell operations and other fields.



Financial Section

In social contribution activities, as in the previous fiscal year, the Group

provided funding support for original basic research in the area of hydrogen

energy through the ENEOS Hydrogen Trust Fund, established in the hopes of

bringing a hydrogen energy society closer to reality. Among other actions,

the Group has set up “ENEOS Forests” in six locations across Japan as part

of its forest preservation program, and provided funding for the construction

of schools in Vietnam.

targets achieved in the third Medium-term Management plan

The Nippon Oil Group formulated a Third Medium-Term Management Plan,

running from fiscal 2005 to fiscal 2007, with the entire Group dedicated to

achieving plan objectives.

(A) Achievement of Target Management Indicators

In fiscal 2007, ROE was 11.8%, exceeding a planned target of 10%. How-

ever, consolidated ordinary income (excluding inventory valuation factors) for

the year was ¥107.8 billion, falling short of a targeted ¥190.0 billion. The

Group was adversely impacted by the inability to adequately pass on cost

increases triggered by soaring crude oil prices as part of wholesale prices,

resulting in an exceptionally harsh outcome for particularly for the Refining

and Marketing segment with respect to income.

(B) Priority Measures Completed in Realizing Plan Targets

The Nippon Oil Group implemented the following priority measures as the

means to realize the goals of its 3rd Medium-Term Plan.

Cost-reduction and efficiency targets

Although the Group set a target of ¥33.0 billion to be gained through cost

reductions and efficiency improvements for the three-year period from fiscal

2005, actual savings stalled at ¥17.5 billion. This was due mainly to an

increased cost burden accompanying stronger safety measures at refineries

and better environmental performance, as well as the impact of escalating

prices for crude oil and resources, equipment and raw materials and other

external changes in the business environment.

Capital expenditures plan

Believing that the bulk of cash flows should be allocated to realizing growth

strategies, the Company intended to prioritize the investment of ¥500.0

billion for capital expenditures in growth fields during the duration of the

plan. However, capital expenditures ultimately totaled ¥662.9 billion, mainly

due to additional investments for bolstering growth strategies.

Interest-bearing debt

The planned goal for interest-bearing debt was to reduce the level to less

than ¥900.0 billion by March 31, 2008. However, due to the impact of an

increase in working capital sparked by soaring crude oil prices, interest-

bearing debt as of March 31, 2008 was ¥1,331.6 billion.

analysis of financial position

Balance sheet analysis

At the end of the year under review, consolidated total assets were ¥4,594.2

billion, an increase of ¥208.7 billion from the end of the previous fiscal year.

This increase was principally attributable to a sharp increase in inventories

due to rising crude oil prices, as well as the purchase of oil and gas field

interests in the U.S. Gulf of Mexico by the Oil and Natural Gas E&P business.

Total liabilities as of March 31, 2008 stood at ¥3,164.9 billion, up ¥111.4

billion from a year earlier, due to an increase in operating capital in response

to steeply higher crude oil prices. Interest-bearing debt as of the fiscal

year-end was ¥1,331.6 billion, an increase of ¥34.5 billion compared to the

previous year.

Consolidated net assets totaled ¥1,429.3 billion, an increase of ¥97.3

billion from a year earlier. This gain was the result of positive factors such as

consolidated net income exceeding negative factors such as year-end and

interim dividends.

As a result, the shareholders‘ equity ratio was 28.5%. Net assets per

share increased ¥66.42 over the previous fiscal year-end to ¥896.06. The

ratio of net interest-bearing debt to equity was 84%.

Ratio of Interest-Bearing Debt to Equity (Years ended March 31)

%2004 2005 2006 2007 2008

Ratio of interest-bearing debt to equity 115 101 107 107 102Ratio of net interest-bearing debt to equity 102 86 88 84 84

Capital Expenditures, and Depreciation and Amortization (Years ended March 31)

Billions of yen2004 2005 2006 2007 2008

Capital expenditures* ¥136.9 ¥153.0 ¥189.8 ¥204.8 ¥268.3Depreciation and amortization 107.0 110.0 135.1 131.9 152.4

*Figures include investments and loans.

cash flow analysis

As of the end of the year under review, cash and cash equivalents (hereinaf-

ter referred to as “cash”) totaled ¥226.8 billion, representing a year-on-year

decrease of ¥95.0 billion. The cash flow movements and factors influencing

them during the year under review were as follows:

Net cash provided by operating activities amounted to ¥103.2 billion as

positive factors, such as income before income taxes (¥279.8 billion) and

non-cash expenses, such as depreciation and amortization (¥152.4 billion),

exceeded negative factors, such as an increase in inventories accompanying

higher crude oil prices.

Net cash used in investment activities amounted to ¥199.7 billion. This

was mainly due to the purchase of oil and gas field interests by the Oil and

Natural Gas E&P business.

Net cash provided by financing activities amounted to ¥6.4 billion as the

effect of dividend payments was offset by an increase in interest-bearing debt.


Basic policies regarDing allocation of profits/

DiviDenDs in the fiscal year unDer revieW anD the

next fiscal year

We consider the return of profits to shareholders to be an important

management priority. To maintain stable dividend payments while increasing

enterprise value, the Company takes into account the need to bolster internal

reserves to provide for investments targeting the realization of our growth

strategies. With consideration for such factors as business performance and

balanced funding, the Company works to increase dividends over the

medium to long term. Moreover, in the implementation of its capital policy,

Nippon Oil takes a flexible approach to acquisitions of treasury stock.

In accordance with these policies, in April 2005 the Company purchased

and retired 50 million shares of common stock at a total price of ¥38.5

billion. At the same time, under the Third Medium-Term Management Plan

launched in fiscal 2005, we reevaluated the level of our dividends and

decided to target annual cash dividends of ¥12 per share.

With respect to dividends in the Fourth Medium-Term Management Plan

started in fiscal 2008, the Company hopes to pay a dividend of ¥ 20 per

share from fiscal 2008. This move is designed to further expand returns to

shareholders, while realizing the payment of stable dividends irrespective of

short-term fluctuations in business performance. The basic dividend target for

the Fourth Medium-Term Management Plan is a DOE (dividend on equity) of

more than 2% on a consolidated basis.

In light of these forecasts, the Company plans to pay a dividend appli-

cable to the year of ¥20 per share for fiscal 2008, up ¥8 per share compared

to the previous fiscal year.

Business risKs

The Group faces a variety of risks that may play an important role in impact-

ing it financial condition, managerial performance and cash flow. The main

risks are outlined below:

1. impact of fluctuating currency exchange rates (against the

u.s. dollar) and crude oil prices.

a. Impact on Inventory Assets

The Group mainly utilizes the cost method based on the gross average

method for valuating its inventory assets. With this valuation method, when

crude oil prices (in yen) rise above the unit price of inventory, inventory

assets begin pushing down the cost of goods sold (in this instance, cost of

goods sold increases slower than crude oil prices due to the low price of

inventory), thus making it a positive profitability factor.

On the other hand, when crude oil prices (in yen) fall below the unit

price of inventory, the valuation of inventory assets pushes up the cost of

The following table shows the trend in cash flow indices for the Nippon

Oil Group.

%

Years ended March 31 2005 2006 2007 2008

Shareholders’ Equity Ratio 27.1 26.7 27.7 28.5 Shareholders’ Equity Ratio on a Market Value Basis 32.6 31.8 31.9 19.8 Debt Service Years 8.3 35.6 6.3 12.9 Interest Coverage Ratio 6.3 1.6 9.4 4.1

Notes: 1. Definitions of indicators are as follows: -- Equity ratio: equity / total assets (Figures March 2005 and March 2006 are now shown in the row labeled “Equity Ratio,” whereas in previous years they were shown in a row labeled “Shareholders’ Equity Ratio.”)

--Equity ratio on a market value basis: Total value of stock at market price / Total assets--Debt service years: Interest-bearing debt / Operating cash flow--Interest coverage ratio: Cash flow from operations / Interest paid

2. All indicators have been calculated based on consolidated financial data.3. Total value of stock at market price has been calculated by multiplying the Company’s

stock price at the end of the fiscal year by the number of shares outstanding at the end of the fiscal year (after exclusion of treasury stock).

4. Cash flow is the net cash provided by operating activities shown on the Consolidated Statements of Cash Flows.

5. Interest-bearing debt is actual interest-bearing debt, defined as the interest-bearing liabilities shown on the Consolidated Balance Sheets less the funds managed (credit assets) of finance subsidiaries. In addition, interest paid has been calculated by subtracting the amount of interest paid by finance subsidiaries to fund their credit asset portfolios from the amount of interest paid shown in the Consolidated Statements of Cash Flows.

commitment line contracts

To raise working capital efficiently, Nippon Oil has a commitment line con-

tract for ¥150 billion with a syndicate of 5 banks. There were no borrowings

under the commitment line at the end of the interim period under review.

Also, Nippon Oil and 3 U.S. subsidiaries have a commitment line con-

tract for US$200 million with a syndicate of 3 banks. There were no borrow-

ings under the commitment line at the end of March 2008.

capital expenditures (including investments and loans) and

Depreciation and amortization

Capital expenditures (including loans and investments), increased ¥63.5

billion year on year to ¥268.3 billion due to strategic investment in the Oil

and Natural Gas E&P business. Depreciation and amortization expenses

were ¥152.4 billion, up ¥20.5 billion year on year.

research & Development activities

R&D expenditures for fiscal 2007 were around the same level as the previ-

ous fiscal year, at ¥12.7 billion.



Financial Section

goods sold, thus making it a negative profitability factor.

b. Impact on Oil and Natural Gas E&P

In the area of E&P, a rise in crude oil prices (in yen) is a positive factor

for profitability because it leads to an increase in revenues. On the other

hand, a drop in crude oil prices (in yen) is a negative factor for profitability

because it leads to a decrease in revenues.

2. impact of fluctuations in demand and market conditions for

petroleum fuel and petrochemical products

The demand for petroleum products fluctuates depending on climate condi-

tions (such as an unseasonably cool summers or warm winters) and the

economic conditions of the time. Demand for petrochemical products fluctuates

depending on economic growth and trends in Asian markets as export

dependence on Asia, in particular China, increases. Sales of the Nippon Oil

Group’s products are impacted by these fluctuations and as such, demand

trends are determined to be a profitability factor.

In addition, the domestic market for petroleum fuel products fluctuates

as a result of the supply and demand environment for domestic petroleum

fuel products, local re-selling conditions and movements in the overseas

market for petroleum fuel products. Similarly, the market for petrochemical

products fluctuates depending on raw naphtha prices and market conditions

in East Asia. Although the NOC Group revises sale prices to reflect these

fluctuations, such changes may be considered a profitability factor depend-

ing on the market environment.

3. impact of fluctuating interest rates

An increase in interest rates is considered a negative profitability factor

because it would increase interest expense on loans and other interest-

bearing liabilities and consequently worsen the balance of financial

expenses. On the other hand, a fall in interest rates is considered a positive

profitability factor because it would decrease interest expense on loans and

other interest-bearing liabilities and consequently improve the balance of

financial expenses.

4. risks arising from overseas businesses

The Group’s procurement, production, exporting and sales activities are

carried out not only in Japan, but on a global scale in areas such as North

America, Europe and Asia/Oceania. The Group believes that certain risks as

outlined below exist in its overseas activities.

a. Country risks – Political and economic turmoil in foreign countries and a

freezing of currency exchanges, defaults on loans and other risks triggered

by them.

b. Social turmoil arising from strikes, terrorist activities, war, epidemics, etc.

c. Disasters arising out of an act of god.

d. Restrictions arising from new regulations, such as import restrictions and

export trade management rules.

The generation of such risks will hinder the Nippon Oil Group’s

overseas business activities and consequently, may lead to worsened

financial performance.

5. impact of trends in public investments and private

capital investments

The Group’s construction segment relies heavily on contracted paving, civil

engineering, and construction projects. The profitability of this segment

therefore fluctuates greatly on trends in the public investment and private

capital investment (including private residential investments) fields.

6. impact of stricter environmental regulations

From the standpoint of global environmental protection, new regulations on

quality or the need to blend in biomass fuels may result in cost increases to

the Group’s operations. Costs may be in the form of capital investments into

refineries or an increase in variable costs.

7. risks arising from information systems

Earthquakes, floods and other natural disasters may damage information

systems and stop normal business operations. In a situation such as this,

production and sales activities of the Group will not only be compromised

but it may have a major negative impact on the business of vendors.

8. operational risks associated with production facilities

The Group operates production facilities not only in Japan but also on a

global scale. Natural disasters or unforeseen events at any of these facilities

that leads to a ceasing of production may have a negative impact on the

overall financial performance of the Group.

Please note that although these risks contain items that may be forward-

looking in nature, they are based on information available to the Group at the

end of the fiscal year under review. In addition, the risks above should be not

considered a full list of risks that the Group may face in its operations.


consoliDateD Balance sheetsNippon Oil Corporation and Consolidated Subsidiaries

Millions of yen

Thousands of U.S. dollars

(Note 2)

March 31, 2008 and 2007 2008 2007 2008

assets

current assets: Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 226,792 ¥ 321,786 $ 2,267,920 Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,115 10,327 21,150 Short-term investments in securities (Note 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – 2,739 – Notes and accounts receivable (Note 6): Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 901,675 818,679 9,016,750 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99,426 106,130 994,260 Less allowance for doubtful receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,748) (2,900) (37,480) Inventories (Note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,157,959 889,827 11,579,590 Deferred income taxes (Note 9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51,394 50,662 513,940 Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51,910 65,275 519,100 Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,487,526 2,262,528 24,875,260

investments and long-term receivables: Investments in unconsolidated subsidiaries and affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63,420 57,200 634,200 Investments in other securities (Notes 3 and 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 326,724 366,569 3,267,240 Long-term receivables (Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,439 11,514 124,390 Total investments and long-term receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 402,585 435,283 4,025,850

property, plant and equipment (Notes 5 and 6): Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 648,325 675,036 6,483,250 Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 754,810 800,331 7,548,100 Oil tanks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 263,127 261,661 2,631,270 Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,691,071 1,596,089 16,910,710 Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,078 62,702 170,780

3,374,413 3,395,820 33,744,130 Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,068,553) (2,030,575) (20,685,530) Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,305,860 1,365,244 13,058,600Deferred income taxes (Note 9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,835 16,200 178,350Exploration & development investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260,870 180,023 2,608,700Other assets (Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119,520 126,252 1,195,200 total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 4,594,197 ¥ 4,385,533 $ 45,941,970See accompanying notes to consolidated financial statements.


Financial Section

Millions of yen


(Note 2)

March 31, 2008 and 2007 2008 2007 2008

liaBilities anD net assets

current liabilities: Short-term loans (Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 708,783 ¥ 602,131 $ 7,087,830 Current portion of long-term debt (Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81,740 92,047 817,400 Notes and accounts payable: Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 672,950 515,930 6,729,500 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 267,438 281,597 2,674,380 Excise taxes payable (Note 10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217,391 308,005 2,173,910 Accrued income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64,166 45,507 641,660 Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,693 46,395 416,930 Deferred income taxes (Note 9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,430 765 14,300 Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202,536 179,764 2,025,360 Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,258,130 2,072,145 22,581,300long-term liabilities: Long-term debt (Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 546,082 613,481 5,460,820 Accrued retirement benefits (Note 7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64,076 84,112 640,760 Reserve for inspection of oil tanks, machinery and equipment, and vessels . . . . . . . . . . . . . . . . . 31,246 35,174 312,460 Deferred income taxes (Note 9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174,351 177,192 1,743,510 Accrued estimated cost of abandonment of wells . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,572 33,276 375,720 Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53,470 38,167 534,700 Total long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 906,800 981,406 9,068,000net assets:Shareholders’ equity: Common stock: Authorized – 5,000,000,000 shares in 2008 and 2007 Issued – 1,464,508,343 shares in 2008 and 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139,437 139,437 1,394,370 Capital surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 275,782 275,760 2,757,820 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 782,037 651,294 7,820,370 Less treasury stock, at cost: 2,788,574 shares in 2008 and 2,742,825 shares in 2007 . . . . . . . . . (2,595) (2,475) (25,950) Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,194,662 1,064,016 11,946,620Valuation and translation adjustments: Unrealized holding gain on securities, net of deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . 85,725 121,830 857,250 Unrealized holding gain on hedging derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,355 19,901 183,550 Translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,045 6,991 110,450 Total valuation and translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115,125 148,723 1,151,250Minority interests in consolidated subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119,478 119,241 1,194,780 Total net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,429,266 1,331,981 14,292,660 total liabilities and net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥4,594,197 ¥4,385,533 $45,941,970


consoliDateD stateMents of incoMeNippon Oil Corporation and Consolidated Subsidiaries

Millions of yen


(Note 2)

Years ended March 31, 2008 and 2007 2008 2007 2008

net sales (Notes 10 and 16) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥7,523,990 ¥6,624,256 $75,239,900cost of sales (Note 10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,982,966 6,176,656 69,829,660 Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 541,023 447,600 5,410,230selling, general and administrative expenses (Notes 11 and 12) . . . . . . . . . . . . . . . . . . . . . . . 277,061 287,915 2,770,610 Operating income (Note 16) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 263,962 159,684 2,639,620non-operating income (expenses): Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (27,261) (24,789) (272,610) Interest and dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,281 21,130 252,810 Foreign exchange gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,238 5,214 112,380 Asset rental income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,946 10,937 99,460 Equity in earnings of unconsolidated subsidiaries and affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,366 3,048 43,660 (Loss) gain on valuation of derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (17,850) 8,896 (178,500) Gain from cancellation of derivative transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,316 – 23,160 Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,665 2,487 36,650

11,703 26,926 117,030ordinary income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 275,666 186,611 2,756,660other income (expenses): Gain on sales of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,850 12,524 248,500 Loss on disposal of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12,146) (11,482) (121,460) Write-downs of investments in securities and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (567) (1,085) (5,670) Gain on sales of securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,036 716 80,360 Loss on impairment of fixed assets (Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (13,141) (6,872) (131,410) Loss on redemption of bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – (1,363) – Restructuring cost for cogeneration business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – (3,456) – Loss on cost of elimination of asbestos . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – (364) – Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,885) (3,022) (28,850)

4,146 (14,405) (41,460)income before income taxes and minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 279,812 172,205 2,798,120income taxes (Note 9): Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97,176 94,954 971,760 Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,282 (5,624) 212,820income before minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161,354 82,875 1,613,540Minority interests in earnings of consolidated subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . (13,048) (12,654) (130,480)net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 148,306 ¥ 70,221 $ 1,483,060

YenU.S. dollars

(Note 2)

Years ended March 31, 2008 and 2007 2008 2007 2008

net income per share – basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥101.49 ¥48.12 $1.01cash dividends per share attributable to the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.00 12.00 0.12See accompanying notes to consolidated financial statements.


Financial Section

consoliDateD stateMents of changes in net assetsNippon Oil Corporation and Consolidated Subsidiaries

Millions of yen

Stockholders'equity Valuation and translation adjustments

Year ended March 31, 2008Common

stockCapital surplus

Retained earnings

Treasury stock

Total stockholders’

equity

Net unrealized

holding gains on securities

Deferred gains on hedges

Foreign currency

translation adjustments

Total valuation

and translation

adjustmentsMinority interests

Total net assets

Beginning of year . . . . . . . . . . . . ¥139,437 ¥275,760 ¥651,294 ¥ (2,475) ¥1,064,016 ¥121,830 ¥19,901 ¥ 6,991 ¥148,723 ¥119,241 ¥1,331,981 Cash dividends . . . . . . . . . . . . . . . – – (17,562) – (17,562) – – – – – (17,562)Net income . . . . . . . . . . . . . . . . . . – – 148,306 – 148,306 – – – – – 148,306 Acquisition of treasury stock . . . – – – (1,151) (1,151) – – – – – (1,151)Disposal of treasury stock . . . . . – (24) – 304 280 – – – – – 280 Net decrease resulting from exclusion of affiliates in equity method . . . . . . . . . . . . – – – 17 17 – – – – – 17 Share exchange . . . . . . . . . . . . . . – 46 – 709 755 – – – – – 755 Net changes other than stockholders’ equity . . . . . . . . . – – – – – (36,105) (1,546) 4,053 (33,597) 237 (33,360)End of year . . . . . . . . . . . . . . . . . . ¥139,437 ¥275,782 ¥782,037 ¥(2,595) ¥1,194,662 ¥ 85,725 ¥18,355 ¥11,045 ¥115,125 ¥119,478 ¥1,429,266

Millions of yen




Retained earnings

Treasury stock


equity

Net unrealized



Foreign currency


Total valuation

and translation


Total net assets

Beginning of year . . . . . . . . . . . . ¥139,437 ¥275,015 ¥599,517 ¥(5,929) ¥1,008,039 ¥122,456 ¥19,713 ¥ (167) ¥142,001 ¥109,238 ¥1,259,280 Cash dividends . . . . . . . . . . . . . . . – – (17,542) – (17,542) – – – – – (17,542)Bonuses to directors . . . . . . . . . . – – (26) – (26) – – – – – (26)Net income . . . . . . . . . . . . . . . . . . – – 70,221 – 70,221 – – – – – 70,221 Acquisition of treasury stock . . . – – – (703) (703) – – – – – (703)Disposal of treasury stock . . . . . – 745 – 4,158 4,903 – – – – – 4,903 Net decrease resulting from inclusion of subsidiaries in consolidation . . . . . . . . . . . . . – – (753) – (753) – – – – – (753)Net decrease resulting from inclusion of affiliates in equity method . . . . . . . . . . . .

– – (122) – (122) – – – – – (122)

Net changes other than stockholders’ equity . . . . . . . . . – – – – – (625) 188 7,158 6,721 10,002 16,724 End of year . . . . . . . . . . . . . . . . . . ¥139,437 ¥275,760 ¥651,294 ¥(2,475) ¥1,064,016 ¥121,830 ¥19,901 ¥6,991 ¥148,723 ¥119,241 ¥1,331,981

Thousands of U.S.dollars




Retained earnings

Treasury stock


equity

Net unrealized



Foreign currency


Total valuation

and translation


Total net assets

Beginning of year . . . . . . . . . . . . $1,394,370 $2,757,600 $6,512,940 $ (24,750) $10,640,160 $1,218,300 $199,010 $ 69,910 $1,487,230 $1,192,410 $13,319,810 Cash dividends . . . . . . . . . . . . . . . – – (175,620) – (175,620) – – – – – (175,620)Net income . . . . . . . . . . . . . . . . . . – – 1,483,060 – 1,483,060 – – – – – 1,483,060 Acquisition of treasury stock . . . – – – (11,510) (11,510) – – – – – (11,510)Disposal of treasury stock . . . . . – (240) – 3,040 2,800 – – – – – 2,800 Net decrease resulting from exclusion of affiliates in equity method . . . . . . . . . . . . – – – 170 170 – – – – – 170 Share exchange . . . . . . . . . . . . . . – 460 – 7,090 7,550 – – – – – 7,550 Net changes other than stockholders’ equity . . . . . . . . . – – – – – (361,050) (15,460) 40,530 (335,970) 2,370 (333,600)End of year . . . . . . . . . . . . . . . . . . $1,394,370 $2,757,820 $7,820,370 $(25,950) $11,946,620 $ 857,250 $183,550 $110,450 $1,151,250 $1,194,780 $14,292,660


consoliDateD stateMents of cash floWsNippon Oil Corporation and Consolidated Subsidiaries

Millions of yen


(Note 2)

Years ended March 31, 2008 and 2007 2008 2007 2008operating activitiesIncome before income taxes and minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 279,812 ¥ 172,205 $ 2,798,120Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152,350 131,872 1,523,500Amortization of excess of cost over net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (169) (254) (1,690)Reversal of allowance for doubtful receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,564) (4,777) (15,640)Reversal of allowance for accrued retirement benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (20,035) (14,527) (200,350)(Reversal of) provision for reserve for inspection of oil tanks, machinery and equipment, and vessels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,092) 864 (10,920)Provision for allowance for accrued cost of abandonment of wells . . . . . . . . . . . . . . . . . . . . . . . . . . 4,544 12,560 45,440Interest and dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (25,281) (21,130) (252,810)Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,261 24,789 272,610Loss (gain) on derivative instruments, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,850 (8,896) 178,500Gain on sales of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (24,850) (12,524) (248,500)Loss on disposal of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,145 7,254 91,450Loss on impairment of fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,141 6,872 131,410Gain on sales of investments in securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,048) (722) (80,480)Increase in notes and accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (79,512) (32,641) (795,120)(Increase) decrease in inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (268,024) 59,135 (2,680,240)Increase in notes and accounts payable and excise taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 65,234 8,975 652,340Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,467 5,774 304,670 Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171,229 334,828 1,712,290Interest and dividends received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,182 26,090 271,820Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (27,487) (23,863) (274,870)Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (79,675) (116,150) (796,750)Early retirement incentive payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – (1,143) –Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,967 (13,893) 119,670 Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103,216 205,867 1,032,160investing activitiesDecrease (increase) in time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,027 (10,015) 80,270Increase in short-term investments in securities and investments in other securities . . . . . . . . . . . (18,607) (10,346) (186,070)Additions to property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (117,203) (113,486) (1,172,030)Proceeds from sales of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63,562 23,105 635,620Proceeds from sales of shares of consolidated subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – 1,187 –Increase in cost of exploration and production of oil and related assets . . . . . . . . . . . . . . . . . . . . . . (119,203) (33,150) (1,192,030)(Increase) decrease in long-term receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (938) 6,832 (9,380)Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (15,347) (7,613) (153,470) Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (199,709) (143,487) (1,997,090)financing activitiesIncrease in short-term loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99,986 94,411 999,860Proceeds from long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,064 107,330 240,640Repayment of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (92,375) (139,840) (923,750)Expenditure for purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,139) (691) (11,390)Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (25,153) (21,645) (251,530)Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 992 4,843 9,920 Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,374 44,408 63,740effect of exchange rate changes on cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . (4,875) 308 (48,750)(Decrease) increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (94,994) 107,096 (949,940)cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 321,786 214,476 3,217,860increase in cash and cash equivalents resulting from inclusion of consolidated subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – 212 –cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 226,792 ¥ 321,786 $ 2,267,920See accompanying notes to consolidated financial statements.


Financial Section

notes to consoliDateD financial stateMentsNippon Oil Corporation and Consolidated SubsidiariesMarch 31, 2008

1 significant accounting policies

(a) Basis of preparation

The Company and its domestic consolidated subsidiaries maintain their accounting records and prepare their financial statements in accordance

with accounting principles generally accepted in Japan, and its overseas consolidated subsidiaries maintain their books of account in conformity

with those of their countries of domicile. The accompanying consolidated financial statements have been compiled from the accounts prepared by

the Company in accordance with the provisions set forth in the Financial Instruments and Exchange Law of Japan and in conformity with accounting

principles generally accepted in Japan, which are different in certain respects as to the application and disclosure requirements of International

Financial Reporting Standards.

In addition, the notes to the consolidated financial statements include information which is not required under accounting principles generally

accepted in Japan but is presented herein as additional information.

As permitted under the Financial Instruments and Exchange Law of Japan, amounts of less than one million yen have been omitted. As a result, the

totals shown in the accompanying consolidated financial statements (both in yen and in U.S. dollars) do not necessarily agree with the sums of the

individual amounts.

Certain amounts in the prior year’s financial statements have been reclassified to conform to the current year’s presentation.

(b) principles of consolidation and accounting for investments in unconsolidated subsidiaries and affiliates

The accompanying consolidated financial statements include the accounts of the Company and all its significant subsidiaries. Investments in certain

unconsolidated subsidiaries and significant affiliates are accounted for by the equity method. All significant inter-company balances and transactions

have been eliminated in consolidation.

The excess of cost over the underlying equity in net assets at the dates of acquisition of the major consolidated subsidiaries is amortized by the

straight-line method over 5 years.

Investments in unconsolidated subsidiaries and affiliates not accounted for by the equity method are stated at cost or less. Where there has been a

permanent decline in the value of the investments, the Company has written them down to reflect the impairment.

(c) foreign currency translation

Monetary assets and liabilities denominated in foreign currencies included in the current and non-current foreign currency accounts of the Company, of

its domestic consolidated subsidiaries and of its affiliates accounted for by the equity method have been translated into yen at the rates of exchange in

effect at the year end. Translation differences are charged or credited to income.

The accounts of the overseas consolidated subsidiaries are translated into yen as follows: all assets, liabilities and retained earnings at the end of

the year and items in the consolidated statements of income including net income, at the rate of exchange in effect at the year end; capital stock, at

historical rates; and cash dividends paid, at the rate of exchange in effect when paid. Translation differences arising from the balance sheet items are

included in shareholders’ equity, and those arising from minority interests in consolidated subsidiaries are reflected as translation adjustments.

(d) cash equivalents

The Company and its consolidated subsidiaries substantially consider all highly liquid investments with a maturity of three months or less when pur-

chased to be cash equivalents.

(e) securities

The accounting standard applicable to securities requires that all securities be classified into three categories: trading, held-to-maturity securities or

other. Held-to-maturity securities have been stated at their amortized cost. Marketable securities classified as other securities have been stated at fair

value with any changes in unrealized holding gain or loss, net of the applicable income taxes, included directly in shareholders’ equity. Non-marketable

securities classified as other securities have been stated at cost. Cost of securities sold has been determined by the moving average method.

(f) property, plant and equipment and depreciation

Property, plant and equipment is stated at cost.

Depreciation of property, plant and equipment is computed principally by the straight-line method for buildings, and by the declining-balance

method for other property, plant and equipment, over the estimated useful lives of the respective assets.

Significant renewals and improvements are capitalized at cost. Maintenance and repairs are charged to income as incurred.


Effective from the fiscal year beginning April 1, 2007, the Company and its domestic consolidated subsidiaries changed the depreciation method for

property, plant and equipment acquired on or after April 1, 2007 in accordance with an amendment to the Corporate Tax Law of Japan. As a result,

depreciation expenses increased by ¥2,730 million ($27,300 thousand), operating income decreased by ¥2,577 million ($25,770 thousand) and ordinary

income and income before income taxes and minority interests decreased by ¥2,592 million ($25,920 thousand) respectively. The financial impact of this

change on each segment is described in 16. Segment Information.

As for property, plant and equipment acquired before April 1, 2007, the Company applied the former depreciation method during the fiscal year

beginning April 1, 2007. Among these, property, plant and equipment for which the allowable limit on the depreciable amount has been reached are

to be depreciated evenly over five years beginning from the following fiscal year. As a result, depreciation expenses increased by ¥11,471 million

($114,710 thousand), operating income decreased by ¥11,231 million ($112,310 thousand), ordinary income and income before income taxes and

minority interests decreased by ¥11,254 million ($112,540 thousand) respectively. The financial impact of this change on each segment is described

in 16. Segment Information.

(g) inventories

Inventories are stated mainly at cost determined principally by the average method.

(h) accounting procedure for exploration and development investments

Expenditures relating to exploration and development under certain agreements are capitalized as assets and recovered in accordance with the terms of

the respective agreements.

(i) leases

Non-cancelable leases are accounted for primarily as operating leases (whether such leases are classified as operating or finance leases) except that

leases which stipulate the transfer of ownership of the leased assets to the lessee are accounted for as finance leases.

(j) retirement benefits

Accrued retirement benefits are stated principally at the amount calculated based on the present value of the retirement benefit obligation and the fair

value of the pension plan assets, as adjusted for unrecognized actuarial gain or loss, and unrecognized prior service cost. Prior service cost is amortized

as incurred by the straight-line method, principally over 5 years. Actuarial gain or loss is amortized commencing in the subsequent period by the straight-

line method, principally over 5 years.

(k) income taxes

Deferred income taxes are determined based on the differences between the amounts determined for financial reporting purposes and the tax bases of

the assets and liabilities and are measured using the enacted tax rates and laws which will be in effect when the differences are expected to reverse.

(l) reserve for inspection of oil tanks, machinery and equipment, and vessels

The Company and its domestic consolidated subsidiaries are required periodically to inspect their oil tanks, the machinery and equipment of their oil

refineries, and their vessels. A reserve for the inspection of oil tanks, machinery and equipment, and vessels is provided for the current portion of the

estimated total cost for such work.

(m) accrued estimated cost for abandonment of wells

The accrued estimated cost of abandonment of wells is provided to cover the costs to be incurred upon the abandonment of wells at an estimated

amount allocated over a scheduled period based on consolidated subsidiaries’ plans for the abandonment of such wells.

(n) research and development costs

Research and development costs are charged to income when incurred.

(o) Derivatives

Derivatives are stated at fair value with any changes in unrealized gain or loss charged or credited to income, except for those which meet the criteria

for deferral hedge accounting under which unrealized gain or loss is carried as net assets in the balance sheets. Receivables and payables hedged by

qualified forward foreign exchange contracts and currency swaps are translated at the corresponding contract rates.

(p) amounts per share

Basic net income per share for the years ended March 31, 2008 and 2007 has been computed based on the net income attributable to shareholders of

common stock and the weighted-average number of shares of common stock outstanding during the year.


Financial Section

2 u.s. Dollar amounts

The translation of yen amounts into U.S. dollar amounts is included solely for convenience and has been made, as a matter of arithmetic computation

only, at ¥100=U.S.$1.00, the approximate rate of exchange in effect on March 31, 2008. The translation should not be construed as a representation that

yen have been, could have been, or could in the future be, converted into U.S. dollars at that or any other rate.

3 securities

a) Marketable securities classified as held-to-maturity securities at March 31, 2008 and 2007 were as follows:


March 31, 2008 2007 2008

Carrying value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥64 ¥64 $640Aggregate market value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 64 640Net unrealized holding gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ (0) ¥ (0) $ (0)

b) Marketable securities classified as other securities at March 31, 2008 and 2007 were as follows:

Millions of yen Thousands of U.S. dollars

March 31, 2008Acquisition

costCarrying amount

Net unrealized

holdinggain

Acquisition cost

Carrying amount

Net unrealized

holding gain

Stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥141,052 ¥291,400 ¥150,348 $1,410,520 $2,914,000 $1,503,480Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500 496 (3) 5,000 4,960 (30)

¥141,552 ¥291,897 ¥150,344 $1,415,520 $2,918,970 $1,503,440

Millions of yen

March 31, 2007Acquisition

costCarrying amount

Net unrealized

holdinggain

Stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥124,539 ¥339,352 ¥214,812Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – – –

¥124,539 ¥339,352 ¥214,812

c) Sales of securities classified as other securities amounted to ¥9,489 million ($94,890 thousand) and ¥497 million, with a net aggregate gain of ¥7,739

million ($77,390 thousand) and ¥338 million for the years ended March 31, 2008 and 2007, respectively.

d) The redemption schedule at March 31, 2008 for securities with maturity dates is summarized as follows:

March 31, 2008Millions of

yenThousands of U.S.

dollars

Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ – $ –Due after one year through five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 10Due after five years through ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000 60,00Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – –


4 inventories

Inventories at March 31, 2008 and 2007 consisted of the following:


March 31, 2008 2007 2008

Merchandise and finished products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 245,981 ¥184,901 $ 2,459,810Crude oil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240,972 236,490 2,409,720Crude oil and others in transit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 328,862 184,529 3,288,620Work in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260,360 212,706 2,603,600Containers and supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,262 48,497 582,620Real estate for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,520 22,701 235,200

¥1,157,959 ¥889,827 $11,579,590

5 loss on impairment of fixed assets

Recognition of impairment losses on fixed assets for the years ended March 31, 2008 and 2007 resulted primarily from a significant decrease in the

market value of the Company’s land as well as from the overall deterioration of its business environment.

Loss on impairment of fixed assets for the years ended March 31, 2008 and 2007 consisted of the following:


March 31, 2008 2007 2008

Service stations Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 4,515 ¥ 159 $ 45,150 Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 – 930 Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 – 30

4,612 159 46,120Plants Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,032 – 10,320 Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 303 20

1,034 303 10,340Offices Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 510 175 5,100 Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – 8 –

510 183 5,100Real estate for rent Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,501 177 25,010

Idle properties and others Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,911 3,808 39,110 Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 351 1,332 3,510 Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 220 908 2,200

4,484 6,049 44,840Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥13,141 ¥6,872 $131,410

An impairment loss on service stations, offices and real estate for rent for the year ended March 31, 2007 was recorded at the total of the amount

by which the acquisition cost of each asset group exceeded its future cash flows, discounted at 4.5%.

An impairment loss on plants, certain idle properties and others for the year ended March 31, 2007 was recorded at the total of the amount by

which the acquisition cost of each asset exceeded its estimated fair value. The estimated fair value of land, if material, was determined in accordance

with real estate appraisal standards.

An impairment loss on service stations, plants and real estate for rent for the year ended March 31, 2008 was recorded at the total of the amount

by which the acquisition cost of each asset group exceeded its future cash flows, discounted at 4.5%.


Financial Section

An impairment loss on offices, certain idle properties and others for the year ended March 31, 2008 was recorded at the total of the amount by

which the acquisition cost of each asset exceeded its estimated fair value. The estimated fair value of land, if material, was determined in accordance

with real estate appraisal standards.

6 short-term loans and long-term Debt

Short-term loans are principally unsecured and generally represent bank overdrafts, commercial paper and notes maturing within one year. The

weighted-average interest rates for the years ended March 31, 2008 and 2007 were approximately 1.3% and 0.6%, respectively.

Long-term debt at March 31, 2008 and 2007 is summarized as follows:


March 31, 2008 2007 2008

Unsecured Eurobonds in U.S. dollars, due through February 2007, at interest rate 5.92% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ – ¥ 2,739 $ –Unsecured bonds in yen, due through June 2016, at interest rates ranging from 0.61% to 2.27% . . . . . 130,000 140,000 1,300,000Unsecured Eurobonds in yen, due through April 2013, at interest rates ranging from 0.82% to 1.62% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,047 7,796 50,470Loans from banks, life insurance companies and government agencies, due through March 2022, at interest rates ranging from 0.27% to 6.00%: Secured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78,786 90,572 787,860 Unsecured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 413,989 464,420 4,139,890

627,823 705,529 6,278,230Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (81,740) (92,047) (817,400)

¥546,082 ¥613,481 $5,460,820

Assets pledged at March 31, 2008 and 2007 as collateral for long-term debt or other debt were as follows:


March 31, 2008 2007 2008

Notes and accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 129 ¥ 129 $ 1,290Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213,887 217,317 2,138,870Other property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 238,560 210,381 2,385,600Investments in other securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,282 1 1,002,820Long-term receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,588 2,106 15,880

The aggregate annual maturities of long-term debt subsequent to March 31, 2008 are summarized as follows:

Year ending March 31,Millions of

yenThousands of U.S. dollars

2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 81,740 $ 817,4002010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,519 355,1902011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78,045 780,4502012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,195 701,9502013 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 362,322 3,623,220

¥627,823 $6,278,230


7 retirement Benefits

The Company and its major consolidated subsidiaries have defined benefit pension plans for their employees who are covered by non-contributory plans

which fall under the Welfare Pension Fund Plan of Japan.

Accrued retirement benefits at March 31, 2008 and 2007 consisted of the following:


March 31, 2008 2007 2008

Retirement benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥(259,792) ¥(263,729) $(2,597,920)Plan assets at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195,310 212,469 1,953,100Unfunded retirement benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (64,481) (51,260) (644,810)Unrecognized actuarial (loss) gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,705 (25,330) 57,050Unrecognized prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,257) (7,397) (52,570)Prepaid pension cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (43) (123) (430)Accrued retirement benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ (64,076) ¥ (84,112) $ (640,760)

Retirement benefit expenses for the years ended March 31, 2008 and 2007 are outlined as follows:


March 31, 2008 2007 2008

Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 7,014 ¥ 6,916 $ 70,140Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,153 5,123 51,530Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,776) (3,850) (37,760)Amortization of actuarial gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,438) (1,930) (64,380)Amortization of prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,140) (2,069) (21,400)

¥ (187) ¥ 4,189 $ (1,870)

The assumptions used in accounting for the above plans were as follows:

As of March 31, 2008 2007

Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mainly 2.0% Mainly 2.0%Expected rate of return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mainly 2.0% Mainly 2.0%

8 shareholders’ equity

The Corporation Law of Japan provides that an amount equal to 10% of the amount to be disbursed as distributions of capital surplus (other than the

capital reserve) and retained earnings (other than the legal reserve) be transferred to the capital reserve and the legal reserve, respectively, until the

sum of the capital reserve and the legal reserve equals 25% of the capital stock account. Such distributions can be made at any time by resolution of

the shareholders, or by the Board of Directors if certain conditions are met.


Financial Section

9 income taxes

Income taxes applicable to the Company and its domestic consolidated subsidiaries comprise corporation, enterprise and inhabitants’ taxes which, in

the aggregate, resulted in a statutory tax rate of approximately 41% for the year ended March 31, 2007 and 2008.

An analysis of the difference between the statutory tax rate and the effective tax rate for the year ended March 31, 2007 was as follows:

Year ended March 31, 2007

Statutory tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40.7%Adjustments: Non-deductible expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.0 Non-taxable dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1.2) Different tax rates applied to income of consolidated subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3 Equity in earnings of unconsolidated subsidiaries and affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.7) Inhabitants’ per capita taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.3 Adjustment to valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.8 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.7Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51.9%

A corresponding analysis for the year ended March 31, 2008 has been omitted due to the immaterial difference between the statutory and effective

tax rates for the year then ended.

The significant components of deferred tax assets and liabilities at March 31, 2008 and 2007 were as follows:


March 31, 2008 2007 2008

Deferred tax assets: Property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 16,098 ¥ 15,971 $ 160,980 Accrued retirement benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,372 34,563 263,720 Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,795 13,440 107,950 Net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,199 19,937 241,990 Loss on revaluation of securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,757 20,480 207,570 Loss on impairment of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51,872 54,372 518,720 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98,477 95,892 984,770 Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (98,856) (100,512) (988,560) Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149,716 154,145 1,497,160Deferred tax liabilities: Fair value of subsidiaries on consolidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,186 70,610 701,860 Reserves under Special Taxation Measures Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,190 39,504 411,900 Net unrealized holding gain on securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59,292 85,545 592,920 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85,599 69,579 855,990 Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 256,268 265,240 2,562,680Net deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥(106,551) ¥(111,094) $(1,065,510)

10 excise taxes

Excise taxes are levied on gasoline and diesel fuel when delivered to the customers and are included under net sales and cost of sales in the consoli-

dated statements of income. Excise taxes amounted to ¥1,008,892 million ($10,088,920 thousand) and ¥1,008,477 million for the years ended March 31,

2008 and 2007, respectively, and represented approximately 13% and 15% of net sales for the respective years.


11 selling, general and administrative expenses

Selling, general and administrative expenses at March 31, 2008 and 2007 consisted of the following:


March 31, 2008 2007 2008

Freight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥104,605 ¥107,329 $1,046,050Personnel expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66,041 69,291 660,410Retirement benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,177) 1,376 (11,770)Repair and inspection costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,224 11,774 82,240Rental expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,787 14,914 147,870Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,723 21,771 217,230Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62,856 61,456 628,560

¥277,061 ¥287,915 $2,770,610

12 research and Development expenses

Research and development expenses of ¥12,693 million ($126,930 thousand) and ¥12,632 million were charged to income as incurred for the years

ended March 31, 2008 and 2007, respectively.

13 contingent liabilities

(a) The Company and its consolidated subsidiaries had the following contingent liabilities at March 31, 2008 and 2007:


March 31, 2008 2007 2008

As guarantors of indebtedness of: Unconsolidated subsidiaries and affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥36,304 ¥24,575 $363,040 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,190 28,806 371,900

¥73,494 ¥53,381 $734,940

(b) Based on debt assumption agreements with financial institutions, the Company has transferred the debt repayment obligation for certain

bonds to such financial institutions. As of March 31, 2008, the Company had contingent obligations of ¥40,000 million ($400,000 thousand) in

respect of these bonds.

14 leases

lessee

(a) finance leases

The following pro forma amounts represent the acquisition costs, accumulated depreciation, accumulated loss on impairment and net book value of the

leased buildings and machinery and equipment at March 31, 2008 and 2007, which would have been reflected in the consolidated balance sheets if

finance lease accounting had been applied to the finance leases currently accounted for as operating leases:


March 31, 2008 2007 2008

Acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥12,570 ¥9,621 $125,700Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,505 4,221 45,050Accumulated loss on impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 916 1,165 9,160Net book value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 7,148 ¥4,234 $ 71,480


Financial Section

The following amounts represent the lease payments relating to finance leases accounted for as operating leases, reversal of allowance for loss on

impairment of leased property, the pro forma depreciation expense of the leased assets (calculated by the straight-line method over the lease terms),

the pro forma interest portion of the lease payments (calculated by the interest method) and loss on impairment at March 31, 2008 and 2007:


March 31, 2008 2007 2008

Lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥2,060 ¥1,848 $20,600Reversal of allowance for loss on impairment of leased property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 481 – 4,810Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,855 1,683 18,550Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 269 142 2,690Loss on impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – 1,165 –

Future minimum lease payments (exclusive of the interest portion thereon) subsequent to March 31, 2008 for finance leases accounted for as oper-

ating leases are summarized as follows:

Year ending March 31,Millions of yen


2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥1,717 $17,1702010 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,627 66,270 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥8,344 $83,440

(b) operating leases

Future minimum lease payments subsequent to March 31, 2008 for noncancelable operating leases are summarized as follows:



2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥161 $1,6102010 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 386 3,860 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥547 $5,470

lessor

(a) finance leases

The following amounts represent the acquisition costs, accumulated depreciation and net book value of machinery and equipment leased out at March

31, 2008 and 2007:


March 31, 2008 2007 2008

Acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥16,900 ¥17,924 $169,000Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,888 10,093 98,880Net book value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 7,011 ¥ 7,831 $ 70,110

The following amounts represent lease revenues relating to finance leases accounted for as operating leases, the pro forma depreciation expense

of the leased assets and the pro forma interest income on lease revenues (calculated by the interest method) at March 31, 2008 and 2007:


March 31, 2008 2007 2008

Lease revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥3,891 ¥4,002 $38,910Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,523 3,611 35,230Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 294 361 2,940


Future minimum lease revenues (exclusive of the interest portion thereon) subsequent to March 31, 2008 for finance leases accounted for as operat-

ing leases are summarized as follows:



2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥2,891 $28,9102010 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,404 44,040 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥7,295 $72,950

(b) operating leases

Future minimum lease revenues subsequent to March 31, 2008 for noncancelable operating leases are immaterial.

15 Derivatives

The Company and its consolidated subsidiaries utilize forward foreign exchange contracts, currency options, currency swaps, interest-rate swaps,

interest-rate caps, commodity swaps and commodity collars in order to manage the risk arising from adverse fluctuation in foreign currency exchange

rates, interest rates and commodity prices.

The notional amounts, fair value and unrealized gain or loss on open derivatives positions at March 31, 2008 and 2007 are summarized as follows:

Millions of yen Thousands of U.S. dollars

2008Notional amount

Fair value

Unrealized gain (loss)

Notional amount

Fair value


Currency: Forward foreign exchange contracts . . . . . . . . . . . . . . . . . ¥ 7,667 ¥ 7,283 ¥ (360) $ 76,670 $ 72,830 $ (3,600)Commodity swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥64,184 ¥(12,288) ¥(12,288) $641,840 $(122,880) $(122,880)Commodity options: Collars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 5,849 ¥ (1,006) ¥ (1,006) $ 58,490 $ (10,060) $ (10,060)

Millions of yen

2007Notional amount

Fair value


Currency: Forward foreign exchange contracts . . . . . . . . . . . . . . . . . ¥17,375 ¥17,329 ¥ (41)Interest-rate contracts: Swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 2,800 ¥ 7 ¥ 7Commodity swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥11,067 ¥11,712 ¥11,712Commodity options: Collars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥11,303 ¥ 709 ¥ 709Note: The above information is presented exclusive of derivatives utilized in hedging transactions.

16 segment information

The business of the Company and its consolidated subsidiaries is divided into the following four categories: Refining and Marketing, Oil and Natural Gas

E&P*, Construction, and Other. The Refining and Marketing segment comprises gasoline, naphtha, kerosene, diesel fuel, heavy fuels, petrochemical

products (paraxylene, benzene), plastics and others; the Oil and Natural Gas E&P segment comprises exploration for, and production of, oil and natural

gas; the Construction segment comprises paving, civil engineering and construction; and the Other segment comprises leasing, finance, insurance, data

processing and other businesses.

*Exploration and Production


Financial Section

The business and geographical segment information of the Company and its consolidated subsidiaries for the years ended March 31, 2008 and 2007

is summarized as follows:

Business segments

Millions of yen


Refining and

Marketing

Oil and Natural Gas E&P Construction Other Total Eliminations Consolidated

Sales to third parties . . . . . . . . . . . . . . . . . . . . . . . ¥6,862,067 ¥234,889 ¥370,974 ¥56,058 ¥7,523,990 ¥ – ¥7,523,990Intergroup sales and transfers . . . . . . . . . . . . . . . 10,111 – 4,350 15,843 30,304 (30,304) –Total sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,872,179 234,889 375,324 71,901 7,554,294 (30,304) 7,523,990Operating expenses . . . . . . . . . . . . . . . . . . . . . . . 6,745,829 108,190 369,261 66,893 7,290,174 (30,147) 7,260,027Operating income . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 126,349 ¥126,699 ¥ 6,062 ¥ 5,007 ¥ 264,119 ¥ (157) ¥ 263,962Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥3,711,223 ¥583,122 ¥395,324 ¥46,483 ¥4,736,152 ¥(141,955) ¥4,594,197Depreciation and amortization . . . . . . . . . . . . . . . ¥ 95,988 ¥ 45,229 ¥ 5,805 ¥ 5,579 ¥ 152,602 ¥ (252) ¥ 152,350Loss on impairment of fixed assets . . . . . . . . . . . ¥ 11,599 ¥ – ¥ 1,542 ¥ – ¥ 13,141 ¥ – ¥ 13,141Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . ¥ 86,555 ¥125,822 ¥ 10,650 ¥ 4,364 ¥ 227,391 ¥ – ¥ 227,391

Millions of yen


Refining and

Marketing


Sales to third parties . . . . . . . . . . . . . . . . . . . . . . . ¥5,954,390 ¥203,516 ¥407,893 ¥ 58,456 ¥6,624,256 ¥ – ¥6,624,256Intergroup sales and transfers . . . . . . . . . . . . . . . 9,259 – 1,371 17,369 28,000 (28,000) –Total sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,963,649 203,516 409,265 75,826 6,652,257 (28,000) 6,624,256Operating expenses . . . . . . . . . . . . . . . . . . . . . . . 5,934,308 89,704 399,181 71,762 6,494,956 (30,384) 6,464,571Operating income . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 29,341 ¥113,811 ¥ 10,083 ¥ 4,064 ¥ 157,300 ¥ 2,384 ¥ 159,684Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 3,542,084 ¥441,442 ¥428,095 ¥116,197 ¥ 4,527,820 ¥(142,287) ¥4,385,533Depreciation and amortization . . . . . . . . . . . . . . . ¥ 81,694 ¥ 39,625 ¥ 4,861 ¥ 5,758 ¥ 131,939 ¥ (67) ¥ 131,872Loss on impairment of fixed assets . . . . . . . . . . . ¥ 5,943 ¥ 430 ¥ 496 ¥ 2 ¥ 6,872 ¥ – ¥ 6,872Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . ¥ 107,438 ¥ 43,246 ¥ 8,496 ¥ 6,036 ¥ 165,219 ¥ – ¥ 165,219



Refining and

Marketing


Sales to third parties . . . . . . . . . . . . . . . . . . . . . . . $68,620,670 $2,348,890 $3,709,740 $560,580 $75,239,900 $ – $75,239,900Intergroup sales and transfers . . . . . . . . . . . . . . . 101,110 – 43,500 158,430 303,040 (303,040) –Total sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68,721,790 2,348,890 3,753,240 719,010 75,542,940 (303,040) 75,239,900Operating expenses . . . . . . . . . . . . . . . . . . . . . . . 67,458,290 1,081,900 3,692,610 668,930 72,901,740 (301,470) 72,600,270Operating income . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,263,490 $1,266,990 $ 60,620 $ 50,070 $ 2,641,190 $ (1,570) $ 2,639,620Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $37,112,230 $5,831,220 $3,953,240 $464,830 $47,361,520 $(1,419,550) $45,941,970Depreciation and amortization . . . . . . . . . . . . . . . $ 959,880 $ 452,290 $ 58,050 $ 55,790 $ 1,526,020 $ (2,520) $ 1,523,500Loss on impairment of fixed assets . . . . . . . . . . . $ 115,990 $ – $ 15,420 $ – $ 131,410 $ – $ 131,410Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . $ 865,550 $1,258,220 $ 106,500 $ 43,640 $ 2,273,910 $ – $ 2,273,910

Change in depreciation method for property, plant and equipment:

As described in “Significant Accounting Policies”, effective from the fiscal year beginning April 1, 2007, the Company and its domestic consolidated

subsidiaries changed the depreciation method for property, plant and equipment acquired on or after April 1, 2007 in accordance with an amendment to

the Corporate Tax Law of Japan. As a result, depreciation expenses increased by ¥2,482 million ($24,820 thousand) in the Refining and Marketing seg-

ment, by ¥3 million ($30 thousand) in the Oil and Natural Gas E&P segment, by ¥223 million ($2,230 thousand) in the Construction segment, and by ¥20

million ($200 thousand) in the Other segment. Operating expenses increased and Operating income decreased by ¥2,329 million ($23,290 thousand) in

the Refining and Marketing segment, by ¥3 million ($30 thousand) in the Oil and Natural Gas E&P segment, by ¥223 million ($2,230 thousand) in the

Construction segment, and by ¥20 million ($200 thousand) in the Other segment.

As for property, plant and equipment acquired before April 1, 2007, the Company and its domestic consolidated subsidiaries applied the former

depreciation method during the fiscal year beginning April 1, 2007. Among these, property, plant and equipment for which the allowable limit on the

depreciable amount has been reached are to be depreciated evenly over five years beginning from the following fiscal year. As a result, depreciation

expenses increased by ¥11,011 million ($110,110 thousand) in the Refining and Marketing segment, by ¥446 million ($4,460 thousand) in the Construc-

tion segment, and by ¥13 million ($130 thousand) in the Other segment. Operating expenses increased and operating income decreased by ¥10,772

million ($107,720 thousand) in the Refining and Marketing segment, by ¥445 million ($4,450 thousand) in the Construction segment, and by ¥13 million

($130 thousand) in the Other segment.


geographical segments

Millions of yen

Year ended March 31, 2008 JapanAsia and Oceania North America Europe Total Eliminations Consolidated

Sales to third parties . . . . . . . . . . . . . . . . . . . . . . . ¥ 7,217,346 ¥ 175,491 ¥ 95,339 ¥ 35,813 ¥ 7,523,990 ¥ – ¥ 7,523,990Intergroup sales and transfers . . . . . . . . . . . . . . . 35,480 506,426 – 5,998 547,905 (547,905) –Total sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,252,826 681,918 95,339 41,811 8,071,895 (547,905) 7,523,990Operating expenses . . . . . . . . . . . . . . . . . . . . . . . 7,116,519 593,790 74,824 23,189 7,808,324 (548,296) 7,260,027Operating income . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 136,307 ¥ 88,127 ¥ 20,514 ¥ 18,621 ¥ 263,571 ¥ 391 ¥ 263,962Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 4,086,504 ¥ 340,882 ¥ 253,763 ¥ 150,995 ¥ 4,832,147 ¥ (237,950) ¥ 4,594,197

Millions of yen

Year ended March 31, 2007 JapanAsia and Oceania North America Europe Total Eliminations Consolidated

Sales to third parties . . . . . . . . . . . . . . . . . . . . . . . ¥ 6,338,227 ¥ 196,709 ¥ 53,497 ¥ 35,821 ¥ 6,624,256 ¥ – ¥ 6,624,256Intergroup sales and transfers . . . . . . . . . . . . . . . 53,830 900,513 286,483 1,138,583 2,379,411 (2,379,411) –Total sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,392,057 1,097,223 339,981 1,174,405 9,003,668 (2,379,411) 6,624,256Operating expenses . . . . . . . . . . . . . . . . . . . . . . . 6,348,195 1,003,789 339,490 1,152,748 8,844,223 (2,379,651) 6,464,571Operating income . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 43,862 ¥ 93,433 ¥ 491 ¥ 21,657 ¥ 159,444 ¥ 240 ¥ 159,684Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 4,018,433 ¥ 283,994 ¥ 160,557 ¥ 135,920 ¥ 4,598,906 ¥ (213,373) ¥ 4,385,533


Year ended March 31, 2008 JapanAsia and Oceania

North America Europe Total Eliminations Consolidated

Sales to third parties . . . . . . . . . . . . . . . . . . . . . . . $72,173,460 $1,754,910 $ 953,390 $ 358,130 $75,239,900 $ – $75,239,900Intergroup sales and transfers . . . . . . . . . . . . . . . 354,800 5,064,260 – 59,980 5,479,050 (5,479,050) –Total sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,528,260 6,819,180 953,390 418,110 80,718,950 (5,479,050) 75,239,900Operating expenses . . . . . . . . . . . . . . . . . . . . . . . 71,165,190 5,937,900 748,240 231,890 78,083,240 (5,482,960) 72,600,270Operating income . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,363,070 $ 881,270 $ 205,140 $ 186,210 $ 2,635,710 $ 3,910 $ 2,639,620Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $40,865,040 $3,408,820 $2,537,630 $1,509,950 $48,321,470 $(2,379,500) $45,941,970

Change in depreciation method for property, plant and equipment:

As described in “Significant Accounting Policies”, effective from the fiscal year beginning April 1, 2007, the Company and its domestic consolidated subsid-

iaries changed the depreciation method for property, plant and equipment acquired on or after April 1, 2007 in accordance with an amendment to the Corpo-

rate Tax Law of Japan. As a result, operating expenses increased and operating income decreased by ¥2,577 million ($25,770 thousand) in Japan segment.

As for property, plant and equipment acquired before April 1, 2007, the Company and its domestic consolidated subsidiaries applied the former

depreciation method during the fiscal year beginning April 1, 2007. Among these, property, plant and equipment for which the allowable limit on the

depreciable amount has been reached are to be depreciated evenly over five years beginning from the following fiscal year. As a result, operating

expenses increased and operating income decreased by ¥11,231 million ($112,310 thousand) in Japan segment.

overseas sales

Overseas sales for the year ended March 31, 2008 were as follows:


Overseas sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 760,113 $ 7,601,130Total consolidated sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥7,523,990 $75,239,900Ratio of overseas sales to total consolidated sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.1%

As overseas sales constituted less than 10% of total consolidated sales for the year ended March 31, 2007, the disclosure of overseas sales has been omitted.

17 subsequent events

The following appropriations of retained earnings, which have not been reflected in the accompanying consolidated financial statements for the year

ended March 31, 2008, were approved at a meeting of the shareholders of the Company held on June 24, 2008:

Millions of yen


Year-end cash dividends (¥6=$0.06 per share) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥8,783 $87,830


Financial Section

report of inDepenDent auDitors

The Board of Directors

Nippon Oil Corporation

We have audited the accompanying consolidated balance sheets of Nippon Oil Corporation and consolidated subsidiaries as of March 31, 2008 and

2007, and the related consolidated statements of income, changes in net assets, and cash flows for the years then ended, all expressed in yen. These

financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements

based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in Japan. Those standards require that we plan and perform the

audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test

basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and

significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a

reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Nippon Oil Corporation

and consolidated subsidiaries at March 31, 2008 and 2007, and the consolidated results of their operations and their cash flows for the years then

ended in conformity with accounting principles generally accepted in Japan.

The U.S. dollar amounts in the accompanying consolidated financial statements with respect to the year ended March 31, 2008 are presented solely for

convenience. Our audit also included the translation of yen amounts into U.S. dollar amounts and, in our opinion, such translation has been made on the

basis described in Note 2.

June 20, 2008


PrinciPal niPPon oil GrouP comPanies(As of July 1, 2008)

OIL REFINING AND MARKETINGnippon Petroleum refining company, limitedCapital: ¥5,000 million (100%)Business: Refining and processing

of petroleum products and petrochemical products

Wakayama Petroleum refining co., ltd.Capital: ¥4,420 million (99.0%)Business: Manufacture of lubricants

nihonkai oil co., ltd.Capital: ¥4,000 million (66%)Business: Refining and processing

of petroleum products

eneos Frontier company, limitedCapital: ¥495 million (100%)Business: Sale of petroleum products

nisseki Plasto company, limitedCapital: ¥200 million (100%)Business: Manufacture and sale of processed synthetic

resin products including nonwoven materials

nippon oil europe limitedCapital: $6 million (100%)Business: Purchase, sale, import and export

of crude oil and petroleum products

nippon oil (u.s.a.) limitedCapital: $3 million (100%)Business: Purchase, sale, import and export

of petroleum products

nippon oil lubricants (america) llcCapital: $23 million (100%)*1

Business: Manufacture of lubricants and grease

nisseki chemical Texas inc.Capital: $30 million (100%)Business: Manufacture and sale of ENB and solvent

atlanta nisseki claF, inc.Capital: $8.9 million (100%)Business: Manufacture and sale of nonwoven materials

nippon oil (Guangzhou) lubricants corp.Capital: $17 million (90%)Business: Manufacture and sale of lubricants

nippon oil lc Film (suzhou) corp.Capital: $25 million (100%)Business: Manufacture and sale of Liquid Crystal Films

nippon oil (asia) Pte. ltd.Capital: S$300,000 (100%)Business: Purchase, sale, import and export

of crude oil and petroleum products

OIL STORAGE AND TRANSPORTnippon oil staging Terminal company, limitedCapital: ¥6,000 million (100%)*2

Business: Operation of petroleum storage and terminal facilities

nippon oil Tanker corporationCapital: ¥4,000 million (100%)*3

Business: Ocean transport of crude oil and petroleum products

okinawa cTs corporationCapital: ¥495 million (65%)Business: Operation of petroleum storage and

terminal facilities

EXPLORATION AND PRODUCTIONnippon oil exploration limitedCapital: ¥9,815 million (100%)Business: Exploration and production

of oil and natural gas

Japan Vietnam Petroleum co., limitedCapital: ¥22,530 million (97.1%)*4

Business: Exploration and production of oil and natural gas

nippon oil exploration (sarawak), limitedCapital: ¥14,880 million (76.5%)*4

Business: Exploration and production of natural gas

CONSTRUCTION AND ENGINEERINGniPPo corPoraTionCapital: ¥15,325 million (57.2%)Business: Road paving, civil engineering

and construction

OTHERnippon oil real estate company, limitedCapital: ¥500 million (100%)Business: Sale, purchase, leasing and

management of real estate

nippon oil Trading corporationCapital: ¥330 million (100%)Business: Planning of marketing and promotional

campaigns for service stations, develop-ment and marketing of products for such campaigns, travel agency business and operation of sports facilities

eneos cellTecH co., ltd.Capital: ¥100 million (81%)Business: Development, manufacture and sale of fuel

cell systems

nippon oil information Technology corporationCapital: ¥300 million (51%)Business: Commissioned development and operation

of computer and communications system

nippon oil (australia) Pty. limitedCapital: A$76.7 million (100%)Business: Purchase, sale, import and export

of coal and LNG

nippon oil Business services co., ltd.Capital: ¥50 million (100%)Business: Provision of accounting, payroll and

welfare services for Nippon Oil Group

nippon oil research institute co., ltd.Capital: ¥30 million (100%)Business: Research and consulting concerning

petroleum and petrochemical products

*1 Shares owned by Nippon Oil (U.S.A) Limited*2 Includes the shares owned by Nippon Petroleum

Refining Company, Limited (50.0%)*3 Includes the shares owned by Nippon Petroleum

Refining Company, Limited (96.0%)*4 Shares owned by Nippon Oil Exploration LimitedNote: Figures in parentheses indicate percentage of

equity ownership.

niPPon oil corPoraTion Annual Report 200884


oVerseas Bases(As of July 1, 2008)

abu Dhabi officeAl Masaood Tower, Suite No. 503 (5th Floor),Sheikh Hamdan Street, P.O. Box 43212, Abu Dhabi, United Arab EmiratesPhone: +971-2631-4991Fax: +971-2631-0151

Jakarta officeMidPlaza 2, 22nd Floor, Jl Jend. Sudirman Kav. 10-11, Jakarta 10220, IndonesiaPhone: +62-21-573-1234Fax: +62-21-574-2275

Beijing officeRoom 1918, China World Tower 1, China World Trade Center No. 1, Jian Guo Men Wai Avenue, Beijing 100004, P.R. ChinaPhone: +86-10-5866-9700Fax: +86-10-5866-9704

nippon oil exploration limitedTripoli OfficeYousaf Ben Tashifian Street Hai Al Andalus, P.O BOX 93593 Tripoli, Great Socialist People’s Libyan Arab JamahiriyaPhone: +218-21-477-2179/2215Fax: +218-21-477-2301

nippon oil exploration ltd,Ho Chi Minh City Representative OfficePetroVietnam Towers 10F, 1-5 Le Duan Street, District 1, Ho Chi Minh City, S.R. VietnamPhone: +84-8-910-6900Fax: +84-8-910-5282

nippon oil exploration u.s.a. limited5847 San Felipe, Suite 2800, Houston, Texas 77057, U.S.A.Phone: +1-713-260-7400Fax: +1-713-978-7800

Japan Vietnam Petroleum company, limitedVietnam Office (Vung Tau)Petro Vietnam Towers 7th Floor, No. 8, Hoang Dieu St., Vung Tau, S.R. VietnamPhone: +84-64-856937Fax: +84-64-856943

nippon oil exploration (malaysia), limitedMiri OfficeLot 1168, 3rd Floor, Wisma Interhill Building,Miri Waterfront Commercial Centre,98000 Miri, Sarawak, MalaysiaPhone: +60-85-444111Fax: +60-85-422963

Kuala Lumpur OfficeLevel 10, Tower 2,ET IQA Twins, 11, Jalan Pinang,50450 Kuala Lumpur, MalaysiaPhone:+60-3-2168-3838Fax: +60-3-2078-7680

nippon oil exploration and Production u.K. limited4th Floor, 1 Finsbury Square, London EC2A 1AE, U.K.Phone: +44-20-7309-7650Fax: +44-20-7309-7676

nippon oil (u.s.a.) limitedChicago Headquarters300 Park Blvd., #105, Itasca, Illinois 60143, U.S.A.Phone: +1-630-875-9701Fax: +1-630-875-9702Website: http://www.eneos.us

Houston Branch Office5847 San Felipe, Suite 2800, Houston, Texas 77057, U.S.A.Phone: +1-713-781-1300Fax: +1-713-781-1329

Los Angeles Branch Office3625 Del Amo Boulevard, Suite 385,Torrance, CA 90503, U.S.A.Phone: +1-310-214-2050Fax: +1-310-214-2090

nippon oil lubricants (america) llc100 Nippon Drive, Childersburg, AL 35044 U.S.A.Phone: +1-256-378-0131Fax: +1-256-378-0169

nippon oil europe limited2nd Floor, New Liverpool House,15 Eldon Street, London EC2M 7LD, U.K.Phone: +44-20-7309-6960Fax: +44-20-7309-6969Website: http://www.eneos.eu

nippon oil (asia) Pte. ltd.9 Temasek Boulevard #24-03Suntec Tower Two Singapore 038989Phone: +65-6336-7330Fax: +65-6336-7331

nippon oil (australia) Pty. limitedLevel 32, Chifley Tower, 2 Chifley Square,Sydney, N.S.W. 2000, AustraliaPhone: +61-2-9221-3366Fax: +61-2-9221-9462

Taiwan nisseki co., ltd.Room A1, 24F, No. 6 Su Wei 3rd Road,Kaohsiung, Taiwan, R.O.CPhone: +886-7-535-7458Fax: +886-7-535-7819

nippon oil (shanghai) corporationShanghai Office27F, HSBC Tower, 1000 Lu Jia Zui Ring Road, Pudong New Area, Shanghai 200120, P.R. ChinaPhone: +86-21-6841-2008Fax: +86-21-6841-2010

Guangzhou OfficeRoom 2312, Dongshan Plaza, 69 Xian Lie Road Central, Guangzhou, Guangdong 510095, P.R. ChinaPhone: +86-20-8732-4035/4036Fax: +86-20-8732-4050

Tianjin nisseki lubricants & Grease company, limited5 Hua Gong Street, Hangu, Tianjin 300480, P.R. ChinaPhone: +86-22-6716-1115/1116Fax: +86-22-6716-1119

nippon oil (Guangzhou) lubricants corp.No.38 YueHai Road, XiaoHu Village, Nansha District, Guangzhou 511455, P.R. ChinaPhone: +86-20-3497-3928Fax: +86-20-3497-3925

nippon oil lc Film (suzhou) corporation555 Jin Feng Road, Suzhou,Jiangsu 215129, P.R. ChinaPhone: +86-512-6701-5588Fax: +86-512-6701-5589

nippon oil (Thailand) ltd.Q. House Ploenjit (14A),598 Ploenchit Rd., Lumpini,Pathumwan, Bangkok 10300, ThailandPhone: +66-2627-3971~6Fax: +66-2627-3980

nippon oil malaysia sdn. Bhd.G17, Jusco Metro Prima, 1 Jalan Metro Prima,52100 Kepong, Kuala Lumpur, MalaysiaPhone: +60-3-6250-8853Fax: +60-3-6250-8851

nisseki chemical Texas inc.10500 Bay Area Blvd.,Pasadena, Texas 77507, U.S.A.Phone: +1-713-754-1000Fax: +1-713-754-1001

Atlanta Nisseki CLAF, Inc., Head Office600 Town Park Lane Suite 075, Kennesaw,GA 30144, U.S.A.Phone: +1-770-859-9885Fax: +1-770-859-0515

European Office4 Avenue Jean Giono, F-13090 Aix-en-Provence,FrancePhone: +33-442-277-624Fax: +33-442-275-472

Annual Report 2008 niPPon oil corPoraTion 85

orGanizaTion cHarT(As of April 1, 2008)

Departments marked* deal with both Nippon Oil Corporation’s business and Nippon Petroleum Refining Co., Limited’s.

Executive Committee

Secretariat

Corporate Social Responsibility Dept.

Corporate Planning & Management Dept.

Comptrollers Dept.

Investor Relations Dept.

Human Resources Dept.

Public Relations Dept.

Information Systems Dept.

General Administration Dept.

Purchasing Dept.

Environment & Safety Dept.*

Quality Assurance Dept.*

Technical Service Dept.*

Engineering Dept.*

Petroleum Trading & Shipping Dept.

Overseas Business Dept.

Supply & Manufacturing Dept.

Distribution Dept.

Marketing Planning Dept.

Retail Marketing Dept.

Home Energy Dept.

Lubricants & Specialties Business Coordination Dept.

Lubricants & Specialties Sales Dept.

Energy Solution Dept. I

Energy Solution Dept.

Energy Solution Dept. III

Gas Business Dept.

Chemicals Planning & Coordination Dept.

Olefins Dept.

Aromatics Dept.

Specialty & Performance Chemicals Dept. I

Specialty & Performance Chemicals Dept. II

Fuel Cell & Solar Cell Business Dept.

Energy System Development Dept.

Research & Development Planning Dept.

Central Technical Research Laboratory

Corporate ManagementDivision I

Corporate ManagementDivision II

Environment, Safety & QualityManagement Division

Lubricants & SpecialtiesBusiness Division

Energy SystemBusiness Division

Research & DevelopmentDivision

Manufacturing Technology& Engineering Division

Overseas Business Division

Supply Division

Fuel Retail Sales Division

Energy Solution Division

Chemicals Division

Chairman ofthe Board

GeneralMeeting of

Shareholders

Board ofCorporateAuditors

Secretariat ofCorporateAuditors

DirectorsAppointed by the President

President

Executive VicePresidents

Senior VicePresidents

Board ofDirectors

niPPon oil corPoraTion Annual Report 200886


(As of July 1, 2008)

investor inForMation

Date of establishmentMay 10, 1888

paid-in Capital¥139,437 million

Head office3-12, Nishi Shimbashi 1-chome,Minato-ku, Tokyo 105-8412, JapanPhone: +81-3-3502-1184 (IR Department)Fax: +81-3-3502-9862Website: http://www.eneos.co.jp

securities tradedCommon stock listed on the Tokyo, Osaka,Nagoya, Fukuoka, and Sapporo exchanges

transfer agentThe Chuo Mitsui Trust and Banking Co., Ltd.

other publicationThis Nippon Oil Corporation publication can be obtained from our website.

Csr report 2008http://www.eneos.co.jp/english/index.htmlNippon Oil Group activities for CSR

03FY 07FY06FY05FY04FY

200,000

150,000

100,000

50,000

0

Trading volume (thousands of shares/months)

1,200

900

600

300

Stock price range (yen)

stock price range and trading volume

Major shareholders (as of March 31, 2008)Number of shares held (thousands of shares) (%)

The Master Trust Bank of Japan, Ltd. (Trust Unit) 65,389 4.5

Japan Trustee Services Bank, Ltd. (Trust Unit) 64,645 4.4

Mizuho Corporate Bank, Ltd 47,298 3.2

Mitsubishi Corporation 45,435 3.1

Sumitomo Mitsui Banking Corporation 40,398 2.8

The Bank of Tokyo-Mitsubishi UFJ, Ltd. 30,617 2.1

Tokio Marine & Nichido Fire Insurance Co., Ltd. 29,323 2.0

State Street Bank and Trust Company 505103 26,319 1.8

State Street Bank and Trust Company 18,967 1.3

Morgan Stanley and Company Inc. 18,803 1.3

Note: Trading volume figures represent the average trading volumes for each quarter.

Annual Report 2008 nippon oil Corporation 87

NIPPON

OIL CORPORATION Annual Report 2008

Printed in Japan

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