Corporate Report Year ended December 31, 2012] Powering ......Powering A New Stage of Growth...

Powering A New Stage of Growth

Corporate Report 2013 [Year ended December 31, 2012]Show

a Shell Sekiyu K.K. Corporate Report 2013

Showa Shell Sekiyu K.K.

The search for an appropriate means of supplying energy into the future is progressing on a global scale, and in Japan energy sources are becoming an ever more common subject of discussion. Calling upon the strength forged over a history spanning 113 years in Japan, the Showa Shell Group has devoted itself to playing a central role in providing a stable supply of energy over the long term. Going forward, we will contribute to shaping the future of energy in accordance with the needs of today’s society.

Energy is directly linked to our daily lives and to industrial activity. We are working to create new value by supplying this energy in an optimal and reliable manner while also providing advanced new energy sources that will power the next generation. The Showa Shell Group believes that this is our way toward becoming a global energy solution provider.

Powering a New Stage of Growth

Medium-Term

Business

Action Plan

Management Philosophy / Code of Conduct

Philosophy

Mindset

HSSE / Compliance

Foundation

Oil Business:

Become the most profitable refiner in Japan

Solar Business:

Become a global leader

Electric Power Business:

Expand business scale and the

source of power generation

Fostering seeds for future growth: Develop new products o

r business

models for future growth

To Become the Global Energy Solution Provider that

Society and Customers Require

1

Editorial Policy

The Showa Shell Group’s objective, based on its Management Philosophy, is to collaborate with its various stakeholders to “become the energy solution provider that society and our customers require.” We believe that our corporate social responsibility (CSR) activities are core to ac-complishing this goal. For this reason and to provide a more comprehensive view of the Group’s management and business activities, this report includes non-financial information regarding CSR and other matters along with management policies, strategies, and business conditions.

Reporting PeriodInformation contained in this report is based on corporate performance during fiscal 2012 (January 1, 2012, through December 31, 2012). In some cases, the report also describes activities conducted in fiscal 2013.

Scope of ReportingIn principle, this report covers the 31 consolidated subsidiaries and 13 equity-method affiliates that constituted the Showa Shell Group as of December 31, 2012. In the event that reporting is outside this scope, this fact is indicated.

Reference Guidelines for Presentation of Non-Financial InformationISO 26000, International Organization for Standardization: International guidance on social responsibilityGlobal Reporting Initiative (GRI) Sustainability Reporting Guidelines Version 3.0 (G3): International guidelines on corporate sustainability reportingEnvironmental Reporting Guidelines (2012 version), Ministry of the Environment of Japan

Caution Regarding Business Forecasts and Forward-Looking StatementsBusiness forecasts and other forward-looking statements regarding Showa Shell found in this report reflect the management’s assessment based on data available to it at the time the report was published. Readers are cautioned that actual business results may differ materially from these statements due to changes in economic conditions, market trends, exchange rates, and other factors.

Management PhilosophyShowa Shell Sekiyu K.K. can only achieve a further leap and perpetual growth by constantly making its contribution to society, while secur-ing reasonable profits and constructing a strong management base and sound corporate constitution.

With this in mind, we set our corporate creed as follows:1. We will always endeavor for a breakthrough or technological innovation with a spirit of customer first, and for continual growth

of the Company, discharging our social responsibilities, including environmental preservation, a stable supply of energy, and operational safety.

2. We will implement Japanese-style management adaptable to changes at our own discretion and on our own responsibility, while maintaining close relationships with Shell Group companies and cultivating our international business sense.

3. We will aim to achieve our corporate goals and form a group of positive people full of vitality associated with each other through a noble ideal and trust.

4. We will endeavor to improve productivity through an effort calling for everybody participation for thinking and sweating together and construct an affluent future on the base of the Company’s unshakable footing.

Code of ConductWe share a set of core values—honesty, integrity, and respect for people. We also firmly believe in the fundamental importance of trust, openness, teamwork, and professionalism, and pride in what we do.

Please see our website for the text of our Code of Conduct.

http://www.showa-shell.co.jp/english/profile/mp/action.html

Over the past several years, the Showa Shell Group has continued to evolve as it strives to transform into an organization that can lead the industry over the next 50 years. These efforts have started producing results. Looking toward the future, we will take a realistic perspective, without fear of the changing times, as we boldly pursue the creation of new value. We believe that the Showa Shell Group is growing toward the next stage at an accelerated pace.

Shigeya KatoChairman, Representative Director, and Chief Executive Officer (CEO)

2

4 Our Value Chain and Strengths6 Our History8 Our Medium-Term Business Action Plan10 Financial and Non-Financial Highlights

PROFILE

P4

47 Formulation of the Talent Vision48 Creation of a Worker-Friendly

Environment

HUMAN RESOURCES

P46

24 Business Highlights26 Oil Business34 Energy Solution Business36 Energy Solution Business (Solar Business)43 Energy Solution Business (Electric

Power Business)45 Research and Development

REVIEW OF OPERATIONS

P24

64 Corporate Governance Structure65 Outside Directors and Auditors66 Executive Remuneration66 Internal Control System69 Interview with Outside Director70 Board of Directors and Corporate Auditors

CORPORATE GOVERNANCE

P63

61 Eighth Environmental Photo Contest “Things to Preserve and Correct around Our Town”

62 Major Initiatives in 2012

COMMUNITY AND SOCIAL CONTRIBUTION ACTIVITIES

P60

51 HSSE Promotion and Management System52 Goal Zero Movement54 Health54 Safety55 Security56 The Environment

HSSE

P50

72 Twelve-Year Summary of Selected Financial Data

74 Business Risks76 Consolidated Financial Statements81 Notes to the Consolidated Financial

Statements95 Independent Auditor’s Report96 Network98 Major Subsidiaries and Affiliates99 Investor Information

FINANCIAL SECTION AND CORPORATE DATA

P71

12 Message from the CEO16 Interview with the COO22 Message from the CFO

MANAGEMENT MESSAGE

P12

CSR Book 2013


2013 / 07 / 01 [15:37]

CONTENTS

Details pertaining to other CSR initia-tives are described in CSR Book 2013, which is available on our website.

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

WebsiteCSR BOOK 2013

3

ProfileM

anagement M

essageReview

of Operations

Hum

an ResourcesH

SSEC

omm

unity and Social C

ontribution Activities

Corporate G

overnanceFinancial Section and

Corporate D

ata

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


Our Value Chain and Strengths

SOLAR BUSINESS

Transport

Synergies

Synergies

STRENGTH

Flexible crude oil procurement leveraging the networks of the Shell Group and Saudi Aramco

STRENGTH

High utilization rate at refiner-ies that are “top class” in Japan in terms of competitiveness

HSSE (Health, Safety, Security, Environment)

We are creating new value by pursuing synergies that exceed the boundaries of individual businesses.

We produce gasoline, diesel oil, kerosene, heavy fuel oil, lubri-cants, asphalt, raw materials for petrochemical products, liquid petroleum gas (LPG), and other oil products, and sell these prod-ucts to customers throughout Japan via contract dealers.

In our solar business, under the brand name Solar Frontier, we develop and manufacture CIS thin-film solar modules. In the electric power business, we operate power plants and sell power to customers.

Showa Shell is developing next-generation products and services to drive future growth.

Oil Business

Energy Solution Business

Research and Development

PROFILE

ProcurementWe procure crude oil from oil producing countries.

Raw Material ProcurementWe procure raw materials for the production of CIS thin-film solar modules.

Power Plant OperationWe operate power plants that use byproducts from the petroleum refining process as fuel, natural gas-fired power stations built on former facility sites, and solar power plants utilizing CIS thin-film solar modules.

Development and Cultivation of Next-Generation ServicesWe continuously develop and provide new services.

RefiningOur refineries refine crude oil into such products as gasoline, kerosene, diesel oil, heavy fuel oil, raw materials for petrochemical products, and LPG.

ELECTRIC POWER BUSINESS

4

Japan and overseas

Customers

General Households

Industrial and Other Customers

Distribution

STRENGTH

Technologies for creat-ing next-generation CIS thin-film solar modules that feature superior cost competitiveness and performance

HSSE (Health, Safety, Security, Environment) STRENGTH HSSE based on the Shell Group’s international standards

STRENGTHBusiness model providing high-value services for all areas of the supply chain on a “one-stop” basis

ManufacturingOur plants manufacture CIS thin-film solar modules.

Solar Module SalesWe sell CIS thin-film solar modules in Japan through sales agents and home builders.

Overseas subsidiaries sell these modules around the world.

Power Plant Development and ConstructionWe develop, design, operate, and provide maintenance for solar power plants.

Oil DepotsOur petroleum products are stored in refinery tanks and oil depots.

DistributionWe distribute our petroleum products throughout Japan on ships, tank trucks, and other modes of transportation.

PlantsOur plants produce lubricants and asphalt.

SalesService stations operated by our contract dealers and retailers sell our gaso-line, kerosene, diesel oil, and other products to customers. We also sell industrial fuels, jet and marine fuels, lubricants, asphalt, and LPG through contract dealers.

5

ProfileM

anagement M

essageReview

of Operations

Hum

an ResourcesC

omm

unity and Social C


Corporate G


Corporate D

ataH

SSE

Showa Shell’s history in Japan spans 113 years. Throughout this history, we have continued to provide energy that meets the needs of society, changing our focus as the times demanded. When industry was burgeoning, our focus was on heavy fuel oil. During the rise of motorization, we emphasized gasoline. Furthermore, we began research and development of solar modules after the oil shock in the 1970s, driven forward by our passion to address the issue “what should we do for resource-scarce Japan to secure a stable supply of energy if the supply of oil from the Middle East is depleted”.

Today, our Oil Business is generating stable profits, and we are pursuing further growth by developing our solar business and electric power business. In addition, we are looking ahead and advancing R&D ventures, bearing in mind what would be the energy required by the next generation.

PROFILE

Our HistoryOur underlying motivation is the gene that drives us to provide energy that meets the needs of society.

Shell Sekiyu K.K established in 1900 Showa Oil Co., Ltd., established in 1942

Number of directors significantly reduced Executive officer system adopted

1997

HSSE-MS introduced

2001

Environmental photo contest started

2005

Shell Art Award established

1956

Research and development of CIS thin-film solar modules commenced

1993

Electricity sales business began

2003

Shell Pura high-octane automobile gasoline launched

2002

Gas to liquids (GTL) kerosene launched

2005

Research and develop-ment of solar modules commenced

1978

New high-performance gasoline FORMULA Shell Super X launched

1987

Shell Helix series of luxury automobile oils launched

1996

Showa Shell Sekiyu K.K. established

1985

Saudi Aramco became a major shareholder

2004

Commercialization decided

2005

6

Share of Net Sales (Fiscal 2012)

96.6%

Sales growth rate in Energy Solution Business

271.1%(over 2-year period)

201220112010

Core Business

Oil BusinessBecome the most profitable refiner in Japan

Growth Driver


Solar Business Become a global leader

Electric Power BusinessExpand business scale and the source of power generation

Latent Potential for Future Growth

Research and DevelopmentDevelop new products or business models for future growth

Capabilities Supporting Corporate Value

Management FoundationEarning greater trust from society and maximizing corporate value

Half of directors made outside directors

2013

Management structure reforms implemented

2013

Electric vehicle (EV) quick charger installation services began

2009

Operations at the Ohgishima Power Station commenced

2010

Expansion of Ohgishima Power Station decided

2012

Commercial production began at the Kunitomi Plant

2011

Project investment company established

2013

Ohgimachi Factory of the Keihin Refinery closed

2011

Consideration regarding participation in a paraxylene project began

2012

7

ProfileM

anagement M

essageReview

of Operations

Hum

an ResourcesC

omm

unity and Social C


Corporate G


Corporate D

ataH

SSE

Become the most profitable refiner in JapanWhile demand for oil products is experiencing a structural decline in Japan stemming from the falling birthrate, aging population, and increased concern for energy savings among consumers, a certain degree of demand is expected to continue into the future. Overseas, meanwhile, demand for oil products and petrochemicals is expected to rise in conjunction with economic growth, particularly in Asia.

Solar Business:

Become a global leaderThe solar module market is forecast to expand on a global scale going forward. Solar Frontier K.K. will work to achieve ongoing growth by succeeding in the rapidly growing Japanese market and expanding operations into overseas markets.

Declining oil product demand in Japan

Commence full-fledged expansion onto the

global market

Capture growing global demand

Leverage foundation established in Japan

to grow further

Succeeding in the Japanese market

Thoroughly cut costs by utilizing technological

capabilities for CIS thin-film solar modules

Develop high-value-added business model

Maintain scale of domestic sales

Improve margin in pursuit of high added-value

Cut costs throughout the supply chain

Step Changes—Growing through Structural Business TransformationsOrganic Growth in Existing Businesses

Management Foundation


Oil Business

Earning greater trust from society and maximizing corporate valueThe Company has instituted a new management system that will enable it to respond more flexibly to changes in the business environment. With this system in place, it is advancing its business while devel-oping competitive human resources, managing risks related to HSSE, and practicing strict compliance.

PROFILE

Our Medium-Term Business Action Plan

8

In addition to growing existing businesses, the Showa Shell Group is implementing “Step Changes”—growth through structural business transformations—as it works to evolve its business into one that will continue to grow into the future.


Electric Power Business:

Expand business scale and the source of power generationIn Japan, the tight supply and demand balance for electricity is expected to continue into the future. To address this issue, the Showa Shell Group is working to develop its electric power business into the third pillar of its business through the Step Change of expanding the scale of this business and the range of power sources it utilizes. In this manner, we will contribute to a stable supply of electricity.

Growing demand for aromatic petrochemicals in Asia

Expand petrochemicals business

Pursue strategic alliances with other companies

Oil

LNG

Solar

Bio-mass, etc.

Expand generation capacity to 1 GW-class

Step Changes—Growing through Structural Business Transformations

Aiming to “become the energy solution provider that society and our customers require,” we will pursue organic growth by improving the efficiency and profitability of existing businesses and implement “Step Changes” by allocating business resources toward achieving future growth.

Develop new products or business models for future growthShowa Shell is constantly considering the best possible form of energy for society and custom-ers, and, together with the Shell Group and our strategic partners, we are advancing the development of products and services related to next-generation energy accordingly.

Powering a New Stage of Growth Profile

Managem

ent Message

Review of O

perationsH

uman Resources

Com

munity and Social

Contribution A

ctivitiesC

orporate Governance

Financial Section and C

orporate Data

HSSE

9

* 1 CCS ordinary income (ordinary income on Current Cost of Supply basis): Ordinary income based on costs excluding inventory valuation effects* 2 Total shareholders’ equity = Total net assets – Minority interests* 3 Net interest-bearing debt = Interest-bearing debt – Cash and deposits* 4 Capital employed = Total shareholders’ equity + Total debts* 5 Free cash flow = Cash flows from operating activities + Cash flows from investing activities* 6 Shareholders’ equity ratio = Total shareholders’ equity / Total assets * 7 Current ratio = Total current assets / Total current liabilities* 8 Gearing ratio = (Total debts – Cash and deposits) / (Capital employed – Cash and deposits)* 9 Unit energy consumption: Energy consumption (kiloliters of crude oil equivalent) / Equivalent feedstock volume (megaliter)* 10 Per 1 million labor hours: Figures include Showa Shell Group companies and business partners, and recordable cases of all occupational accidents,

including those that do not result in lost work time.

Showa Shell Sekiyu K.K. and Consolidated SubsidiariesYears ended 31 December

2012 2011 2010 2009 2008

For the year: Yen Million

Net sales ¥2,629,261 ¥2,771,418 ¥2,346,081 ¥2,022,520 ¥3,272,801Operating income (loss) 14,697 60,288 36,701 (57,142) (12,283)Ordinary income (loss) 12,674 61,807 42,148 (56,455) (10,065)CCS ordinary income (loss)*1 11,224 30,020 34,286 (11,691) 45,697 Net income (loss) after taxes 1,013 23,110 15,956 (57,619) (16,221)

At year-end: Yen Million

Total shareholders’ equity*2 ¥ 249,826 ¥ 255,865 ¥ 240,204 ¥ 235,517 ¥ 306,813 Total assets 1,233,193 1,208,442 1,193,149 1,172,739 1,209,956 Net interest-bearing debt*3 247,552 262,800 280,108 275,837 206,363 Depreciation and amortization 43,620 43,329 33,949 35,277 31,239 Capital expenditures 20,987 39,559 81,733 49,933 37,606 Capital employed*4 515,554 534,228 541,256 533,590 586,290 Research and development expenses 5,840 5,041 4,700 2,637 2,233

Cash flows: Yen Million

Cash flows from operating activities ¥ 41,922 ¥ 50,551 ¥ 89,836 ¥ (7,395) ¥ 26,631 Cash flows from investing activities (17,747) (24,560) (82,510) (47,761) (42,932)Free cash flow*5 24,174 25,991 7,325 (55,156) (16,301)Cash flows from financing activities (21,391) (31,159) (8,671) 4,371 72,337

Per share data: Yen

Net income (loss) after taxes per share ¥ 2.69 ¥ 61.36 ¥ 42.37 ¥ (152.99) ¥ (43.07)Total shareholders’ equity per share 663.33 679.37 637.78 625.33 814.63Dividends per share 18.00 18.00 18.00 36.00 36.00

Key indicators: %

Return on equity (%) 0.4% 9.3% 6.7% — —Shareholders’ equity ratio*6 20.3 21.2 20.1 20.1% 25.4%Current ratio*7 104.3 103.2 90.2 83.0 95.4 Gearing ratio*8 49.8 50.7 53.8 53.9 40.2 Number of employees 5,848 5,947 5,761 5,439 5,229

Group oil refineries

Amount and rate of industrial waste output (tonnes/year)

107 92 135 186 144

CO2 emissions (kilotonnes/year) 4,754 5,872 5,673 5,641 6,031 Unit energy consumption*9 7.16 7.67 7.96 7.90 8.05

Showa Shell Group companies and business partners

Total recordable case frequency*10 (%) 1.4 1.7 1.8 2.1 1.5

FINANCIAL AND NON-FINANCIAL HIGHLIGHTS

10

Performance In 2009, performance decreased significantly due to a rapid decline in the prices of crude oil and oil products. However, since 2010,

operating income in the Oil Business has been stable and our Energy Solution Business has been progressively growing into a new pillar of

operations. Consequently, the Company has been generating a certain degree of income on a consolidated basis.

Financial Position

The Company’s financial position deteriorated temporarily due to increased funding requirements resulted from the decrease in earnings

in 2009 and large-scale investments in the solar business in 2010. However, we still managed to maintain a sound financial position.

The level of dividends was decreased in 2010 to fund growth investment in the solar business and have remained at this level since.

Business Model Changes

In 2010, investment in the solar business was primarily focused on the Kunitomi Plant. Also, R&D initiatives were accelerated in this business,

leading to a rise in related expenses. In regard to employee numbers, the percentage of total employees attributed to the Energy Solution

Business increased as a result of the expansion of the solar business.

HSSE Total recordable case frequency was down due to efforts to raise safety awareness and prevent reoccurrence of accidents implemented as

part of the Goal Zero Movement. CO2 emissions decreased due to higher operational efficiency at Group refineries as well as the benefits

of investments conducted to improve energy efficiency at these facilities.

Net Sales

4,000

3,000

2,000

1,000

0

(Yen Billion)

2008 2009 2010 2011 2012

Net Income (Loss) after Taxes

30

0

-30

-60

(Yen Billion)

2008 2009 2010 2011 2012

Ordinary Income (Loss)

70

35

0

-35

-70

(Yen Billion)

2008 2009 2010 2011 2012

Ordinary income (loss)CCS ordinary income (loss)

2008 2009 2010 2011 2012

Cash Flow / Gearing Ratio

100

50

0

-50

-100

(Yen Billion)60

45

30

15

0

(%)28

21

14

7

0

(%)

2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012

Net Income (Loss) after Taxes per Share / Dividends per Share

100

50

0

-50

-100

-150

-200

(Yen)40

20

0

(Yen)

100

75

50

25

0

(%)

Total Shareholders’ Equity / Shareholders’ Equity Ratio

400

300

200

100

0

(Yen Billion)Total shareholders’ equityOperating cash flow Gearing ratio

Investing cash flow

Oil BusinessSolar businessOthers

Oil Business Energy Solution BusinessOthers

CO2 emissions

Shareholders’ equity ratioNet income (loss) after taxes per shareDividends per share

Capital Expenditures by Business

100

75

50

25

0

(Yen Billion)

Research and Development Expenses Number of Employees by Segment

6.0

4.5

3.0

1.5

0

(Yen Billion)

2008 2009 2010 2011 2012

6,000

5,000

4,000

3,000

02010 2011 2012

2008 2009 2010 2011 2012

Total Recordable Case Frequency(Showa Shell Group companies and business partners) (Group oil refineries) (Group oil refineries)

2.0

1.5

1.0

0.5

0

(%)

Unit Energy Consumption CO2 Emissions/Group Refinery Capacity Utilization Rate (%)

8,000

6,000

4,000

2,000

0

(Kilotonnes/year)

2008 2009 2010 2011 20122008 2009 2010 2011 2012

8.0

6.0

4.0

2.0

0

(%) Utilization rate

Net Sales

4,000

3,000

2,000

1,000

0

(Yen Billion)

2008 2009 2010 2011 2012


30

0

-30

-60

(Yen Billion)

2008 2009 2010 2011 2012


70

35

0

-35

-70

(Yen Billion)

2008 2009 2010 2011 2012


2008 2009 2010 2011 2012


100

50

0

-50

-100

(Yen Billion)60

45

30

15

0

(%)28

21

14

7

0

(%)

2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012


100

50

0

-50

-100

-150

-200

(Yen)40

20

0

(Yen)

100

75

50

25

0

(%)


400

300

200

100

0


Investing cash flow



CO2 emissions



100

75

50

25

0

(Yen Billion)


6.0

4.5

3.0

1.5

0

(Yen Billion)

2008 2009 2010 2011 2012

6,000

5,000

4,000

3,000

02010 2011 2012

2008 2009 2010 2011 2012


2.0

1.5

1.0

0.5

0

(%)


8,000

6,000

4,000

2,000

0

(Kilotonnes/year)

2008 2009 2010 2011 20122008 2009 2010 2011 2012

8.0

6.0

4.0

2.0

0


Net Sales

4,000

3,000

2,000

1,000

0

(Yen Billion)

2008 2009 2010 2011 2012


30

0

-30

-60

(Yen Billion)

2008 2009 2010 2011 2012


70

35

0

-35

-70

(Yen Billion)

2008 2009 2010 2011 2012


2008 2009 2010 2011 2012


100

50

0

-50

-100

(Yen Billion)60

45

30

15

0

(%)28

21

14

7

0

(%)

2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012


100

50

0

-50

-100

-150

-200

(Yen)40

20

0

(Yen)

100

75

50

25

0

(%)


400

300

200

100

0


Investing cash flow



CO2 emissions



100

75

50

25

0

(Yen Billion)


6.0

4.5

3.0

1.5

0

(Yen Billion)

2008 2009 2010 2011 2012

6,000

5,000

4,000

3,000

02010 2011 2012

2008 2009 2010 2011 2012


2.0

1.5

1.0

0.5

0

(%)


8,000

6,000

4,000

2,000

0

(Kilotonnes/year)

2008 2009 2010 2011 20122008 2009 2010 2011 2012

8.0

6.0

4.0

2.0

0


Net Sales

4,000

3,000

2,000

1,000

0

(Yen Billion)

2008 2009 2010 2011 2012


30

0

-30

-60

(Yen Billion)

2008 2009 2010 2011 2012


70

35

0

-35

-70

(Yen Billion)

2008 2009 2010 2011 2012


2008 2009 2010 2011 2012


100

50

0

-50

-100

(Yen Billion)60

45

30

15

0

(%)28

21

14

7

0

(%)

2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012


100

50

0

-50

-100

-150

-200

(Yen)40

20

0

(Yen)

100

75

50

25

0

(%)


400

300

200

100

0


Investing cash flow



CO2 emissions



100

75

50

25

0

(Yen Billion)


6.0

4.5

3.0

1.5

0

(Yen Billion)

2008 2009 2010 2011 2012

6,000

5,000

4,000

3,000

02010 2011 2012

2008 2009 2010 2011 2012


2.0

1.5

1.0

0.5

0

(%)


8,000

6,000

4,000

2,000

0

(Kilotonnes/year)

2008 2009 2010 2011 20122008 2009 2010 2011 2012

8.0

6.0

4.0

2.0

0


11

ProfileM

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of Operations

Hum

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omm

unity and Social C


Corporate G


Corporate D

ataH

SSE

Shigeya KatoChairman, Representative Director, and Chief Executive Officer (CEO)

MESSAGE FROM THE CEO

12

Over the past several years, the Showa Shell Group has been undertaking new challenges to create further value and fuel future growth. In this process, we have overcome several hardships while carefully predicting future trends in domestic demand and resource prices. In 2012, we began reaping the benefits of these efforts. Highly volatile global financial markets and crude oil prices placed temporary pressures on the profitability of our Oil Business. However, the profitability improvement measures we had implemented up until then allowed us to generate stable profits on a full-year basis, regardless of these pressures. Turning to our Energy Solution Business, performance in the electric power business re-mained stable while the solar business achieved a large improvement in profitability, and I believe that we have successfully laid the foundations for the next growth spurt in these businesses. Going forward, we will relentlessly work to push Showa Shell to the next stage of growth through the ongoing pursuit of business transformations so that we will evolve the Company into an organization that leads the industry over the next 50 years.

Showa Shell has been reforming its business structures to develop a solid corporate foundation to support its continued growth. In pursuit of such growth, we are leveraging our highly transparent governance systems and highly competent human resources that are able to flexibly respond to changes in the business environment.

Transforming to achieve growth as a sustainable energy company

Performance in Fiscal 2012

13

Managem

ent Message

Review of O

perationsProfile

Hum

an ResourcesC

orporate Governance

HSSE

Com

munity and Social

Contribution A

ctivitiesFinancial Section and

Corporate D

ata

The business environment for the energy industry is currently growing rapidly on a global scale. Meanwhile in Japan, the ideal form of energy is being reconsidered in light of the country’s experience with the Great East Japan Earthquake. The Showa Shell Group aims to address these changes head-on and regards them as growth opportunities, thereby realizing its vision to “become the energy solution provider that society and our customers require.” In 2012, we formulated the Medium-Term Business Action Plan to guide us on this quest.

The plan calls for us to implement concrete initiatives based on two approaches: pursu-ing organic growth by strengthening existing businesses and implementing “Step Changes” to give form to the Showa Shell of the future. Organic growth is core to the plan, and we will pursue such growth by stably supplying products and enhancing profitability in our Oil Business while strengthening the competitiveness of the solar business in the global market. At the same time, we realize that taking on bold new challenges, as we did 35 years ago when we first entered the solar business, will be absolutely essential if Showa Shell is to transform into a sustainable energy company that society and our customers require. For this reason, we will implement Step Changes that entail us stepping into new business areas. I have high expectations for the benefits of such Step Changes in the development of our electric power business.

In advancing the measures described in the Medium-Term Business Action Plan, it is vital that all employees are equally aware of the significance of this plan and share a sense of determination toward achieving our goals. Devoted action based on a steadfast will is the most important factor in driving the Showa Shell Group to the next stage of growth. Such action will require the development of a strong corporate culture that helps give form to the Talent Vision, which encourages us to take action based on a clear and realistic view of the business environment and social needs while placing an emphasis on teamwork. I in-tend to guide the Showa Shell Group in developing just such a corporate culture.

Showa Shell has developed strong corporate governance systems that are focused on the interests of shareholders and therefore ensure the transparency of management while also enabling quick decision-making and business execution. Since 2009, we have adhered to a policy of having half of the Board of Directors consist of outside directors, and subse-quently five out of the eight directors appointed at the General Shareholders’ Meeting held in March 2013 were outside directors. This has effectively strengthened the oversight and monitoring functions of the Board of Directors.

In addition, as our Energy Solution Business is growing and we have firmly established a business structure consisting of two pillars—this business and the Oil Business—we have

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instituted a new management system to clarify the division of management responsibility. Under this system, chief operating officers will be appointed to the Oil Business and the Energy Solution Business to serve as the highest managing officer for their respective business segment. The highest level of management for the Company will consist of the Group’s Chief Executive Officer (CEO), Chief Operating Officer (COO), and Chief Finan-cial Officer (CFO). I feel that this gives us a management system strong enough to push the Showa Shell Group to the next stage of growth.

The Company practices the basic policy of issuing stable and appealing dividends to shareholders while taking into consideration the Company’s financial position and poten-tial future growth opportunities. In 2010, we reduced the level of dividends to secure funds for large-scale investments in the solar business. However, the cash flows in this business are improving, as is our financial position. Going forward, we will work to our fullest to realize stable and appealing dividends while eying a balance between the need to conduct strategic investments to advance measures described in the Medium-Term Busi-ness Action Plan and maintain a sound financial position.

It is absolutely important for a company to generate income through its business activities to fuel its growth over the long term. In addition, I believe that it is also necessary for a company to be accepted by society as a good corporate citizen, which should be ac-complished by contributing to society through corporate activities.

Showa Shell plays an important role in society by providing a stable supply of the energy that supports our daily lives as well as economic activity. We take great pride in this fact. At the same time, as a company with long history of 113 years of supplying energy in accordance with changing social needs, we are aware of our responsibility to propose a next-generation energy mix appropriate for the future of society. After the oil shock of the 1970s, we commenced research and development of solar modules with the aim of supplying energy without relying on oil. This forward-thinking mentality will continue to guide us in the future as we advance the measures outlined in the Medium-Term Business Action Plan in order to continue growing together with society.

Shareholder Returns

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The Showa Shell Group’s

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Jun AraiRepresentative Director, Chief Operating Officer (COO)

Powering a New Stage of GrowthBy advancing the strategies of the Medium-Term Business Action Plan, we will build a solid operating foundation for our ongoing growth.

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A Operating income was down year on year when the influences of inventory evaluations are excluded. However, we improved the profitability of our Energy Solution Business

quarter by quarter, and I believe that fiscal 2012 was a great step toward a brighter future.In the Oil Business, the price of crude oil experienced a rapid decline of approximately

30% in the second quarter, resulting in the deterioration of operating conditions. Profitability worsened accordingly, leading us to record losses in the second quarter, and income declined on a full-year basis. Nevertheless, the measures we implemented to boost profitability in the latter half of the year proved successful, and, if the impacts of this tough period are excluded, we were able to generate stable income, as initially forecasted.

Turning to our Energy Solution Business, we were able to capture the surging demand in the fourth quarter for the solar business, and performance in the electric power business proved stable due to the tight supply and demand situation for electricity in Japan. Recording profits for the first time in our Energy Solution Business during the fourth quarter truly convinced us that our efforts are making solid progress, and resulted in strong financial performance as well. Tariff changes under the feed-in tariff scheme for renewable energy, which were initially expected to be decided in the spring, were finally decided in June. The rise in demand occurred later than forecast due to this delay. Regardless, we were able to cut costs to a greater degree than we had planned, and operating loss remained within the level we had initially projected.

A First, I would like to talk about the Oil Business. As a result of the 2011 closure of the Ohgimachi Factory of the Keihin Refinery, fixed costs were down during fiscal 2012

and the utilization rate of other Group refineries remained high throughout the year. I believe this was our first step toward long-term improvement in competitiveness.

On the sales side of operations, the number of customers using the Ponta joint point card, which is accepted throughout a retail network consisting of over 50 companies, increased, and we rolled-out other full-fledged retail measures, such as the “Shell EasyPay” payment sys-tem, which allows for quick payments when fueling. These measures have established a strong reputation among contract dealers and customers, and we expect to see further expansion in our customer base starting in fiscal 2013.

In the petrochemical field, with the aim of boosting the competitiveness of Group refineries going forward, consideration progressed regarding the possibilities of shifting production from oil products to petrochemicals and participating in a joint business with GS Caltex Corpora-tion of South Korea in the future. I believe these efforts have laid foundations for further progress in fiscal 2013 and onward.

In the solar business, production at the Kunitomi Plant, which manufactures next-generation CIS thin-film solar modules, was gradually accelerated. Also, raw material procurement costs declined. R&D ventures enabled us to improve the output of our modules to a greater extent than planned, and the output range of our product lineup rose to 155–165W, from 145–155W at the beginning of the year. As a result of these efforts, production cost per watt decreased by approximately 20% for the entire year. In sales, we focused on selling products domestically in light of the robust demand in Japan stemming from the feed-in tariff scheme. While domestic sales represented only 30% of total sales in fiscal 2011, this ratio grew to approximately 60% in fiscal 2012. We plan to further increase our focus on domestic sales in fiscal 2013.

Q1How was performance in fiscal 2012, and how would you evaluate this performance?

Q2Specifically, what measures were implemented during the year?

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A In 2009, we formulated EPOCH 2010, Showa Shell’s medium-term business vision for the Company 5–10 years in the future. This vision illustrated our goal to be the “energy

solution provider that society and our customers require.” After this plan was launched, we saw the occurrence of a number of events that would significantly impact the future of the energy market. These included the Lehman Shock, which resulted in a global financial crisis, as well as the Great East Japan Earthquake of 2011, the ensuing nuclear power plant issues, and the global shale gas revolution. Conditions are changing for all of Showa Shell’s businesses. De-mand for oil products is decreasing in Japan due to the impacts of the declining birthrate and aging population as well as increased environmental awareness and a stronger trend toward higher energy efficiency. Meanwhile, intense competition is expected in our Energy Solution Business, particularly in the solar business for which the market is expected to expand into the future. Faced with these challenges, we felt it was essential to develop a concrete action plan that outlines how we should proceed in this environment going forward.

The Medium-Term Business Action Plan was formulated as our plan for achieving the Showa Shell Group’s vision in such an environment. Looking ahead, there are many uncertain factors that will impact the future of both of our businesses. However, I realize that risks and changes are always accompanied by opportunities, and I feel that it is important to take a forward-thinking approach toward such risks and changes to capture the growth opportunities they present. Through the plan, I hope to share this mindset with all of the Group’s employees as well as our various other stakeholders. Based on this mindset, the Showa Shell Group will unite and push forward in its quest to become an organization that is viewed as necessary to society and consumers.

A Enhancing Profitability of the Oil BusinessI am confident that oil products will continue to play an important role in society as a

source of primary energy. Demand for these products is gradually declining in Japan. None-theless, we will continue to offer a stable supply of oil products while maintaining the high level of quality we have always provided. Moreover, we will pursue more efficient supply methods and raise the value of our products. We believe that our Oil Business has significant potential to continue growing, and will improve existing operations through these and other means to achieve ongoing organic growth. With regard to efficiency, I think it is important for Showa Shell to be No.1, the most competitive company in the industry. To this end, we will relentlessly cut costs and improve profitability. Furthermore, technological innovation will be advanced so that we may implement measures to win greater levels of support from customers by improving the value of our products and services.

On the production side, Showa Shell was the first in the industry to complete the rationaliza-tion of its refining capabilities. However, we will not stop there. Next, we will work to improve the value of the Group’s refineries. Brisk demand for xylene and other aromatic petrochemicals is expected in Asia going forward. To meet this demand, we will extract these chemicals from gasoline, which is experiencing a structural decrease in demand. In this manner, we will es-tablish systems at our refineries to enable us to respond flexibly to such shifts in demand. In

Q3Showa Shell recently an-nounced its Medium-Term Business Action Plan, which is oriented toward achieving growth over the medium- to long-term. What is the backdrop for the formulation of this report?

Q4What initiatives will be implemented in the oil, solar, and electric power businesses that will serve as pillars for supporting Showa Shell’s future growth, and how will business resources be allocated?

Oil BusinessBecome the most profitable refinerin Japan

Fostering seeds for future growthDevelop new products or business models for future growth

Solar BusinessBecome a global leader

Electric Power BusinessExpand business scale and the source of power generation

Strong DomesticBusiness Base

Global Business ExpansionGlobal Business Expansion

Strong DomesticBusiness Base

HSSE, Compliance

Key strategic pillars under the Medium-Term Business Action Plan

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regard to sales, it will be key for us to improve the value of our service stations. To this end, we have introduced new point of sale (POS) systems and IT tools. These strategic systems will supplement the Ponta card and “Shell EasyPay” systems already in place, and enable custom-ers to purchase fuel and automotive items at our service stations with less hassle and greater convenience. We expect this will lead to the expansion of our customer base. For lubricants, asphalt, and other products, we will strengthen sales of high-value-added products that meet customer needs.

Enhancing Competitiveness of the Solar BusinessFiscal 2012 proved to be a major turning point for Showa Shell’s solar business, which has a long history spanning over 30 years. This turning point was marked by the profits we recorded for the first time during the fourth quarter in our Energy Solution Business. I think this event was very meaningful, not only for the Showa Shell Group employees of today but also for the past Group members that supported us during the early years of solar module technology development.

A report by a certain investigation company stated that global demand for solar modules had risen from approximately 27 GW in 2011 to around 31 GW in 2012. However, while de-mand is expected to continue growing, the supply glut is forecasted to continue. In light of this situation, it will be of the utmost importance to be able to quickly supply solar modules and systems that are superior in terms of both economic and environmental performance. Showa Shell aims to advance onto the global stage and become one of its top players going forward. We realize that accomplishing this will require us to develop a technological advantage over competitors as well as a business model that allows us to generate appropriate profits.

First, it is necessary that we develop more sophisticated technologies that enable solar power to provide significant economic benefits in comparison to standard electricity prices. If this level of economic rationality is realized, demand for solar systems will rise even without the support of the feed-in tariff scheme or subsidies. Solar Frontier K.K. aims to continue ad-vancing research and development geared toward quickly accomplishing this.

With regard to business models, we must develop a business model that enables us to comprehensively provide solar power generation systems. This is because solar modules are merely electronic devices, and they cannot generate energy on their own, but rather need to be included in such systems. As such, we are developing a business model that allows us to provide high-value-added services for all areas of the supply chain on a one-stop basis, includ-ing research and development, module production, and system design, as well as develop-ment, construction, operation, and maintenance of solar power plants. As one facet of our efforts to create such a business model, Solar Frontier established a joint investment company with Development Bank of Japan Inc. in March 2013. We have thus established a system for promoting solar power plant development in Japan and improving the profitability of our op-erations in downstream areas of the supply chain.

Expanding the Electric Power BusinessAs a company that deals in a source of primary energy and is working to become an energy solution provider, perhaps our entry into the electric power business was inevitable. At the moment, we are supplying electricity mainly from the first and second units of the Ohgishima Power Station, a natural gas-fired thermal power plant located on land held by the Company and operated jointly with Tokyo Gas Co., Ltd. In fiscal 2012, we approved plans to construct a third unit at the power station. Going forward, we will expand the scale of our in-house power generation while also broadening the range of the clean and efficient power resources we employ to include such resources as biomass. This business represents an important energy solution we provide, and we will continue to develop it from a long-term perspective with a particular emphasis on economic benefits for businesses.

Allocating Business ResourcesThe Medium-Term Business Action Plan calls for the cash flows generated throughout the period of the plan to be allocated in a balanced manner to three areas: (1) investments

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to maintain operational safety and stability, (2) strategic capital investments for future growth, and (3) allocation toward maintaining a strong financial position and issuing share-holder returns.

As a supplier of energy, investment to maintain the operational safety and stability of our plants and investment to improve the competitiveness of existing production facilities is abso-lutely essential to achieve organic growth. At the same time, we must invest strategically in the Step Changes that will shape the future of the Showa Shell Group. In order to conduct such investments, a sound financial position will be required. In recognition of these facts, we will allocate resources to investments based on clear business strategies, financial position mainte-nance, and the issuance of stable and appealing returns to our shareholders, who are among the important of our stakeholders.

A Fiscal 2013 will be an important year as it marks the start of the Medium-Term Business Action Plan.

In the Oil Business, we plan to shut down the Yokkaichi Refinery—one of our principal refin-eries—for a large scale, mandatory periodic maintenance effort for the first time in four years. This will be a difficult undertaking, but we are devoted to completing the maintenance and restarting the plant on schedule. In sales, we will accelerate the implementation of retail measures with the aim of expanding our customer base. In addition, we will work together with our nationwide network of contract dealers to strategically expand sales of kerosene and diesel oil, which is increasing in relative importance amidst the gradual decline in gasoline demand. We are also planning a variety of initiatives with regard to lubricants and asphalt to ensure we can stably supply these products and increase the ratio of sales for high-value-added products.

Moving on to our Energy Solution Business, in the solar business we will run the Kunitomi Plant at full capacity throughout fiscal 2013, and will further increase the ratio of domestic sales from fiscal 2012. Demand in this business is robust, and we are already receiving business offers for fiscal 2014 and beyond. We also hope to steadily expand the track record of our one-stop service business model, which we believe will be the key to future growth. At the same time, our R&D efforts must not be delayed under any circumstances, and we will continue to advance development efforts geared toward cutting costs and improving the output of our products. In fiscal 2013, we are planning the introduction of new products, and will advance the development of new technologies to support further growth. In the electric power business, the tight supply and demand situation for electricity in Japan is forecasted to continue. Accordingly, we will contribute to Japanese society by providing a stable supply of electricity. By accomplishing this, we will work to stabilize revenues in this business.

A The Showa Shell Group’s policy is to prioritize improving its operations from the perspec-tives of health, safety, security, and the environment (HSSE) as well as compliance. Lever-

aging our solid foundations in these areas, we will unite our staff of enthusiastic employees to pursue the goals of the Medium-Term Business Action Plan. This, I feel, will form the foundation for growth in the medium term.

In regard to HSSE, we will improve the level of our efforts in this area by accumulating knowledge and experience in-house while also acting as a member of the Shell Group and implementing initiatives in accordance with globally recognized best practices. One example of our initiatives in this area would be the introduction of the Shell Group’s Process Safety system. This system prescribes measures for the accurate management of risk factors throughout operations at our incredibly complex refineries, thereby reducing the risk of major accidents and other dangers.

As for compliance, our business is growing increasingly more diverse and more global, and it is ever more important for each employee to properly understand laws and regulations and act accordingly. We have continued to conduct compliance-related education programs up until this point, and will further improve these programs so that our employees have the confi-dence of knowing they are acting appropriately in their business activities.

Q5What initiatives will be implemented during fiscal 2013, the first year of the Medium-Term Business Action Plan?

Q6What are your policies for developing the foundation of the Company to ensure continued growth?

For more information regarding the Company’s HSSE initiatives, please refer to page 50.

For more information regarding the Company’s compliance initiatives, please refer to pages 66–67.

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Furthermore, we realize that the Medium-Term Business Action Plan will be advanced by the efforts of every single person in the Showa Shell Group, from management to the general staff. For this reason, we must be sure that our human resources are motivated. It goes without saying that the type of human resources required to shape the Group’s future will change. In recognition of this, we are enhancing our personnel and education systems in accordance with the Talent Vision that was established in fiscal 2011. We also encourage employees to communicate amongst themselves and with management so that everyone throughout the Group is in line with the same vision and so that business may progress efficiently throughout the Group. I am work-ing to develop a corporate culture that encourages all members of the Showa Shell Group to be highly motivated toward accomplishing their goals, dedicated to constant self-improvement, not hindered by failure, and willing to take on new challenges even should they fail.

By establishing a foundation cemented by HSSE and compliance and supporting the ca-pable human resources that will advance our plans, we will work to accomplish the goals outlined in the Medium-Term Business Action Plan and lead the Company to success.

A I feel that providing oil products, solar modules, electricity, and various other energy- related products in accordance with future social needs is the Showa Shell Group’s

mission as an energy provider. Moreover, I believe that working toward fulfilling this mission will create shared value between the Group and society and customers.

Following the March 2011 Great East Japan Earthquake, there was a period during which people in the stricken regions were unable to use electricity or gas as they waited for electric-ity networks and city gas pipelines to be restored. Under these extreme circumstances, what was used to supply heat and light and operate emergency response vehicles and helicopters? The answer is oil-based fuels. Oil is much easier to store and transport than electricity or gas, making it an incredibly viable option in times of emergency. Furthermore, as a company that deals in both oil and solar modules, we are able to construct disaster-proof service stations. As they are equipped with solar modules for power, these service stations can supply fuel even during blackouts and supply water from their tanks. I think this sort of disaster preparedness represents a significant value that we provide to society.

When it comes to addressing CO2 emissions and other environmental issues, it is extremely important to consider the most eco-friendly way to use oil, as oil will continue to be an indis-pensable source of energy into the future. The pursuit of higher fuel efficiency among automo-bile manufacturers is truly a virtuous quest. For us to provide value to society, we must work to develop fuels and oil in response to trends such as this. In regard to operating our refineries, we will conduct investments geared toward reducing the amount of crude oil used to run equipment. As for solar modules, it is clear what we must do; we must contribute to the spread of electricity generation using this source of clean power. Another form of value we can pro-vide is represented by our short manufacturing process for next-generation CIS thin-film solar modules, as it emits less CO2. In these ways, we will contribute to society through our business to the greatest extent possible, working to create a better society for the next generation.

Furthermore, it is important for the Company to actively participate in the development of local communities and society, and thereby contribute to the creation of a more sustainable and more abundant future. In recognition of this fact, Showa Shell conducts a number of community- and social-supporting activities. With a particular emphasis on supporting the education of the next generation of children and young people that will be directly responsible for shaping the future of society, these activities include the Shell Art Award, the environmental photo contest, and an energy education program for children. We will continue conducting these and other activities with the aim of raising interest in energy, improving awareness with regard to the im-portance of protecting the environment and saving energy, and helping invigorate society.

Going forward, Showa Shell will continue to contribute to the future of energy in resource-scarce Japan as it works to play a key role in the development of a sustainable society.

Q7What do you feel is the shared value between the Showa Shell Group and society?

Jun AraiRepresentative Director, COO

For more information regarding community and social contribu-tion activities, please refer to pages 60–62.

Initiative

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Talent Vision

For more information regarding Talent Vision, please refer to pages 46–47.

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Investment StrategiesOver the past five years, Showa Shell has continuously invested in its mainstay Oil Business with the aim of maintaining the safety and reliability of operations and boosting profit-ability across all areas of the supply chain. Throughout this period, another major focus of investments was the solar business that we commercialized in 2005. Such investments were dedicated to expanding the business and raising cost competitiveness.

The Medium-Term Business Action Plan we launched in 2013 calls for the cash flows generated over the period of the plan—the five years from fiscal 2013 to 2017—to be allocated to three key areas in a balanced manner. These are (1) maintaining our existing businesses, (2) strategic investment for future growth, and (3) ensuring the strength of our financial position and provision of attractive dividends to shareholders. We think it very important to keep the cash flow allocation for these areas in good balance. As we aim to keep moving ahead on the growth path, we will observe our basic policy to make invest-ments within the operating cash flows we generate over the plan period while controlling our borrowings at an appropriate level. We will carefully evaluate both the strategic benefits and monetary return of these investments.

Strengthening Financial PositionA reliable financial base is of the utmost importance if we are to evolve into the “energy solution provider that society and our customers require.” As we have seen in the past, it is probable that in the future the unexpected influences of external factors, such as political or economic conditions or consumer trends, could temporarily disrupt business activities or results in performance against plans. No matter how such factors influence us, we need to be able to continuously perform our important social mission of providing a safe and stable supply of energy. We must therefore maintain a strong financial position in order to ensure we can fulfill this mission as well as secure growth into the future.

Since 2009, we have invested in the Kunitomi Plant in Miyazaki Prefecture as our flag-ship solar manufacturing plant. This investment resulted in a substantial increase in net

Financial Strategies Supporting the Medium-Term Business Action PlanDouglas WoodDirector, Chief Financial Officer

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Operational maintenance: to reinforce the operational safety of major facilities such as refineries to comply with legal and regulatory requirements, to save energy consumption throughout all areas of the supply chain, to expand the sales network by development of new service stations, etc.

Strategic investment options: to expand production capacity for petrochemicals, to conduct business rationalization including the formation of business alliances.


Operational maintenance: to improve productivity for existing plants in the solar business, to expand and update R&D facilities.

Strategic investment options: to install production facilities for commercializing new products in the solar business, to construct a model plant to examine new technologies for commercialization in the solar business, to expand power generation capacity for the electric power business.

Investment Plans Under the Medium-Term Business Action Plan

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interest-bearing debt. In the meantime, the solar business has faced a market environment which has been worse than our initial expectations (and indeed those of other market par-ticipants). Despite this, because we had sought progressively to strengthen our financial base, we were able to manage these challenges whilst still maintaining a robust balance sheet.

In the fourth quarter of fiscal 2012, the solar business turned positive on an EBITDA (earnings before interest, taxes, depreciation and amortization) basis. As we have been focused on maximizing operating cash flow across our businesses, we feel that the Company is sufficiently prepared to implement the investment strategies outlined in the Medium-Term Business Action Plan. To help the realization of these strategies, we will continue to strengthen our financial position to minimize the costs of funding and also to ensure an optimal mix of sources of finance to secure a stable flow of capital.

Fund-Raising PoliciesThe Company raises funds from financial institutions and capital markets. We make fund-ing decisions based on a comprehensive analysis of factors including conditions in the fi-nancial market and interest rate trends as we work to diversify fund sources and lower funding costs. The Company employs loans from a wide range of financial institutions in-cluding city banks, regional banks, industry-based cooperative financial institutions, and governmental financial institutions. We thereby aim to diversify the range of lenders from which we borrow. In addition, having acquired and maintained the appropriate credit ratings, we also actively raise funds from capital markets by issuing corporate bonds and commercial paper. Our business requires a large amount of fixed assets, and we need to take into consideration the time required to recover the associated capital investment. We therefore seek to maintain an appropriate ratio of long-term to short-term debt in order to ensure stability of funding.

Furthermore, we manage the funds for the entire Showa Shell Group through a central-ized system. As the Company handles funding, management, and allocation to subsidiar-ies, we are able to keep funding costs low and ensure the efficient management of funds.

Financial Risk Management The Company maintains revolving credit contracts totaling up to ¥160 billion with finan-cial institutions as part of a contingency plan to ensure the liquidity of capital under extraor-dinary circumstances. Of this amount, ¥150 billion is committed to disaster response purposes. As such, in the event that a major natural disaster damages our core production facilities, we will have access to sufficient capital to minimize the impacts on our ability to provide a stable supply of energy or quickly resume operations should they be halted.The Company has also taken out property and casualty insurance in consideration of all risks above a certain threshold. We believe this will allow us to minimize the impacts of large-scale natural disasters or accidents on our performance and prevent disruptions to business management should such events occur.

Moreover, the Company limits exposure to foreign exchange risks with regard to crude oil import as well as export of petroleum products and solar panels by hedging against exchange rate risks to the extent of the actual amounts of foreign currency-denominated receivables and payables.

Finally, regarding counterparty credit risk, we have in place disciplined credit risk evaluation and management processes for our businesses.

Shareholder ReturnsIn fiscal 2012, we paid a dividend of ¥18 per share, the same as in the previous fiscal year. Going forward, we will continue to distribute stable and attractive dividends while appropriately controlling financial risks related to the Medium-Term Business Action Plan and securing the resources necessary to maintain a sound financial position and imple-ment growth strategies.

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Short-term ratings a-1 J-1

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Business EnvironmentA large portion of Showa Shell’s oil products are sold in the Japanese market, and demand in this market is currently de-creasing due to a falling birthrate and an aging population, as well as the drive to reduce energy usage. However, oil is a major source of primary energy, and we therefore believe that a

certain degree of demand will continue into the future.In overseas markets, demand for oil products is forecast to

grow, particularly in Asia and the Middle East, where demand will be driven by economic growth. In addition, xylene and other aromatic petrochemicals are expected to see brisk de-mand centered on Asia.

Outlook for 2013 (As of February 2013)We project that an appropriate supply and demand balance will be maintained throughout 2013. In this year, the Company will work to expand its customer base with a focus on retail measures and continue selling high-value-added products that meet the needs of industrial customers. As a result of these efforts, we are forecasting year-on-year increases in operating income.

Performance in 2012Net sales were down year on year as a result of the decline in export volumes of oil products due to closure of the Ohgimachi Factory of the Keihin Refinery in 2011.

CCS ordinary income* decreased due to lower profit margins of domestic sales, as a result of the rapid decline in crude oil prices in the second quarter.* CCS ordinary income (ordinary income on a Current Cost of Supply basis):

Ordinary income based on costs excluding inventory valuation effects

Oil Demand Forecast for Japan and the Rest of Asia(Millions of barrels per day)

2011 2015 2020 2025 2030 2035

40

30

20

10

0

JapanAsia and Oceania (excluding Japan)

Source: Compiled from IEA World Energy Outlook 2012 New Policies Scenario

Net Sales Operating Income

3,000

2,000

1,000

0

(Yen Billion)

2013 (Forecast)201220112010

2,304.0

2,695.22,539.7

45.537.7

87.2

55.4

28.1

43.5 43.5

26.6

100

75

50

25

0

(Yen Billion)

2013 (Forecast)*201220112010

Operating income CCS ordinary income

* Note: Forecasts for 2013 include operating income figures recorded under “other” and “adjustment.”

3,000

2,000

1,000

0

(Yen Billion)

2013 (Forecast)201220112010

2,304.0

2,695.22,539.7

45.537.7

87.2

55.4

28.1

43.5 43.5

26.6

100

75

50

25

0

(Yen Billion)

2013 (Forecast)*201220112010

Operating income CCS ordinary income

* Note: Forecasts for 2013 include operating income figures recorded under “other” and “adjustment.”

Oil Business

Forecast


BUSINESS HIGHLIGHTS

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Outlook for 2013 (As of February 2013)In the solar business, we will continue to reduce production costs while further expanding sales in the domestic market, and oper-ating income in the electric power business is expected to remain stable. As a result, performance is projected to improve signifi-cantly, leading the Energy Solution Business to generate a profit for the first time on a full-year basis.

Performance in 2012Net sales increased year on year primarily due to the increase in sales in the solar business.

The supply glut in the solar module market persisted, and operat-ing conditions remained harsh as a result. Amidst these conditions, we substantially reduced production costs, and expanded sales in the Japanese market, where solar modules benefit from relatively high profitability. These sales increases were strongest in the fourth quarter. As a result, operating loss in the solar business showed a substantial year-on-year decrease. Meanwhile, the electric power business continued to generate stable operating income.

Business EnvironmentOur solar business is conducted by wholly owned subsidiary Solar Frontier K.K. As one source of renewable energy, strong demand for solar modules is forecasted in the global market. Demand is growing rapidly, especially in Japan, where it is

supported by the feed-in tariff scheme for renewable energy* and other measures promoting the introduction of solar power systems.* For more information regarding the feed-in tariff scheme for renewable

energy, please refer to page 40.

Global Solar Module Demand Forecast (By Regions)

Net Sales Operating Income (Loss)

100

75

50

25

0

(Yen Billion)0

-10

-20

-30

-40

(Yen Billion)

28.8

65.7

78.2

-11.5

-28.8

-15.4

2.5

2013 (Forecast)201220112010 2013 (Forecast)201220112010

100

75

50

25

0

(Yen Billion)0

-10

-20

-30

-40

(Yen Billion)

28.8

65.7

78.2

-11.5

-28.8

-15.4

2.5

2013 (Forecast)201220112010 2013 (Forecast)201220112010


Source: IHS Inc.

60,000

45,000

30,000

15,000

0

(MW)

2008 2012 2013 2014 2015 2016 2017201120102009

Asia(excluding Japan)

Japan

Africa

Middle East

Central and South America

North America

Europe

Forecast

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Oil Business Aiming to Receive Overwhelming Customer Support

With a foundation built on reinforced competitiveness and reliable supply capabilities, Showa Shell’s Oil Business contributes to society through the ongoing supply of products and services that meet the demands of customers.


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Showa Shell’s Oil Business has a long history in Japan, span-ning over 100 years. Throughout this history, we have con-tinued to grow by quickly responding to changes in the operating environment while providing a safe and stable supply of the oil products society needs together with the services that customers expect. We hold this spirit of service even today. As demand for oil products declines in Japan, we will stay true to this spirit as we leverage our nationwide network of contract dealers in pursuit of higher levels of prof-itability. At the same time, we are expanding the scope of our petrochemical operations from Japan into overseas mar-kets in our quest to ensure that Showa Shell continues to grow into the future.

Up until now, Showa Shell’s Oil Business primarily focused on selling oil products in Japan. However, due to such trends as improved fuel efficiency in automobiles and increased concern for energy savings among consumers, as well as the shift toward alternative fuel sources seen among industrial customers, de-mand for oil products in Japan has continued to decrease since it peaked in 1999. Regardless, oil maintains an important posi-tion as a source of primary energy, and it can therefore be ex-pected that demand for oil will continue to represent over 30% of total energy demand even as far into the future as 2030. Meanwhile, overseas oil demand is expected to remain strong, particularly in emerging markets. Specifically, we expect ongo-ing strong demand in the rapidly growing markets of Asia for raw materials for petrochemical products, such as xylene that is used in synthetic fibers. Guided by Showa Shell’s Medium-Term Business Action Plan, we recognize that such changes in the business environment represent opportunities for us to achieve higher levels of competitiveness. In accordance with this plan, we will advance strategies targeting improved profitability based on the two pillars of achieving organic growth and grow-ing through structural business transformations, which we call “Step Changes.”

To achieve organic growth, we will maintain the current scale of domestic sales while improving profit margins by raising the value of our products and services. At the same time, we will cut costs throughout the supply chain.

As one facet of these efforts, we aim to expand our customer base by winning the satisfaction of a diverse range of custom-ers. In this pursuit, we will leverage the strong network of contract dealers we have established throughout our long history to ad-vance strategies geared toward further differentiating our service stations. These will include offering services such as “Shell EasyPay,” a system that enables customers to refuel and make payments quickly and easily, and the Ponta joint point card. We will also offer customers a robust lineup of high-value-added products. In lubricants, we will provide Shell Tellus S4 ME, a

hydraulic actuation oil that contributes to energy savings and helps extend the lifespan of machinery. As for asphalt, we offer the CARIMEX Series, which makes road pavement more dura-ble. Furthermore, we are implementing initiatives to preemptively address changes in the demand structure. As a forerunner in pursuing improved operational efficiency, Showa Shell closed the Ohgimachi Factory of the Keihin Refinery in 2011. This de-cisive action not only enabled us to cut fixed costs, it also al-lowed us to increase efficiency by raising the utilization rate at other Group refineries. At the same time, we will improve the efficiency of our operations across all areas of the supply chain. As one facet of these efforts, in March 2013 we concluded a basic agreement with TonenGeneral Sekiyu K.K. to seek syn-ergy opportunities with regard to our oil product supply system. Going forward, we will continue to reinforce the Company’s competitiveness while also working to offer a stable supply of oil products with operational safety as our highest priority.

Next, aiming to achieve Step Changes—growth through structural business transformations—we will expand our petro-chemical business and pursue alliances with other companies in this business.

As mentioned previously, gasoline demand in Japan is ex-pected to continue declining. Meanwhile, Asia and other re-gions are rich with business opportunities driven by robust demand for petrochemicals. We see the expansion of Showa Shell’s petrochemical business as a means of addressing both of these circumstances. As one facet of our efforts in this area, in 2012 the Company began considering participation in a para-xylene project with GS Caltex Corporation of South Korea and Taiyo Oil Co., Ltd.

In these ways, Showa Shell will continue to develop its Oil Business based on producing and selling petroleum products in a safe and stable manner. We will also reform our operations by responding flexibly to changes in the business environment, and pursue higher levels of competitiveness to evolve Showa Shell into a company that receives overwhelming customer support.

Tsuyoshi KameokaExecutive Officer Vice President

Oil Business COO

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Refining

and Supply

Refinery Utilization Rate for the Showa Shell Group and Japanese Industry

Heavy oil cracking unit (flexi-coker) at the Keihin Refinery

100

90

80

70

60

50

(%)

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Industry average

Showa Shell Group refineries:Keihin Refinery of Toa Oil Co., Ltd.Yokkaichi Refinery of Showa Yokkaichi Sekiyu Co., Ltd.Yamaguchi Refinery of Seibu Oil Co., Ltd.

Source: Statistics of the Petroleum Association of Japan

Showa Shell Group

Yamaguchi Refinery of Seibu Oil Co., Ltd.(120,000 barrels per day)

Yokkaichi Refinery of Showa Yokkaichi Sekiyu Co., Ltd.(210,000 barrels per day)

Keihin Refinery of Toa Oil Co., Ltd.(65,000 barrels per day)

Showa Shell Group refineries

* Figures in parentheses indicate refining capacity

The Showa Shell Group aims to build an efficient supply system by main-taining a high utilization rate at Group refineries and adjusting refining capacity to match changes in the supply and demand balance, while securing a safe and stable supply of oil products.

Becoming a Top-Class Refiner in AsiaShowa Shell conducts petroleum refining at its three refineries: the Yokkaichi Refinery of Showa Yokkaichi Sekiyu Co., Ltd., the Keihin Refinery of Toa Oil Co., Ltd., and the Yamaguchi Refinery of Seibu Oil Co., Ltd. We also purchase petroleum products from Fuji Oil Co., Ltd., with which we have in place a business alliance, and supply these products to markets in Japan and overseas.

A law entitled “Sophisticated Methods of Energy Supply Structures” has been enacted in Japan with the aim of promoting the effective use of fossil fuels. This law requires oil refining companies to raise their cracking unit installation ratio to a specified level or higher by March 31, 2014.

To bolster its competitiveness, ahead of this obligation being made official, Showa Shell resolved to close the Ohgimachi Factory of the Keihin Refinery, which processed 120,000 barrels per day of crude oil. As planned, this facility was closed in September 2011. This move realized reductions in fixed costs and enabled us to raise the utilization rate at other Group refineries. Today, our refineries are operating at nearly full capacity, except for when they are shut down while undergoing mandatory maintenance.

Due to these efforts preceding the enactment of this law, the Showa Shell Group’s refineries now boast the highest utilization rate in Japan. However, we are not satisfied with this position, and aim to achieve an unrivaled status in Japan in terms of profitability going forward. Further-more, it will be necessary to secure a level of competitiveness that is “top class” in Asia if we are to pursue new business opportunities in the region.

Showa Shell is conducting a number of investments geared toward establishing such a posi-tion. These will include capital investment at Group refineries for raising production yield of high-value-added products made from low-cost materials as well as investments targeting more efficient use of the fuel at refineries themselves. As another initiative targeting enhanced com-petitiveness, in 2011 we established an alliance with Mitsubishi Chemical Corporation at the complex linking our Yokkaichi Refinery and its adjacent Yokkaichi Plant. Through this project, we will pursue further energy efficiency through the reciprocal use of the facilities and oil re-sources of both parties. The Japanese government is supporting this project to raise the com-plex’s competitiveness and promote the effective use of petroleum resources. Ultimately, this project will enable us to forgo processing the equivalent of approximately 70,000 kiloliters of crude oil, which equates to a reduction in CO2 emissions of approximately 180,000 tons per year.

Another major factor that will contribute to competitiveness will be ensuring the safe and stable operation of our refineries. Operational accidents not only cause severe economic losses, but also lead to distrust from the surrounding communities, which can endanger the ability of the facility to continue operations. Unplanned halts in operations due to facility malfunctions or human error have a significant negative impact on the profitability of refineries. To prevent such situations from occurring, the Showa Shell Group takes advantage of the Shell Group’s operational know-how to maintain operational safety in accordance with globally recognized best practices. In this way, we are work-ing to ensure that our refineries continue to operate in a safe and stable manner.


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Reinforcing Efficient Supply Systems in Japan and OverseasThe environment surrounding oil supply and demand is changing all the time, affected by inter-national economic situations, trends regarding energy sources, refining capacity addition or reduction, and consumption trends. Showa Shell is always pursing optimal levels of opera-tional efficiency in response to changes in domestic and international demand. In accordance of such changes, we decide the mix of products to be manufactured, and flexibly adjust crude oil procurement, refinery utilization rate and processing modes, and product sales plans both in Japan and overseas.

Showa Shell procures crude oil in a flexible manner through its alliance with Saudi Aramco, other companies in other Middle Eastern oil producing nations, and the Shell Group. Leveraging these alliances, we strive to procure crude oil in the manner that is best suited to Group refineries. Our alliance with Saudi Aramco—our primary supplier—enables us to flexibly choose types of crude oil to procure, and adjust tanker shipping sched-ules in accordance with our needs.

At the same time, Showa Shell has in place an agile and flexible system for exporting its products through the Shell Group’s global trading network, which boasts world-class trading volume. This allows us to optimally control the supply of products within Japan.

Realizing Sustainable and Efficient Operations Through Domestic AlliancesAiming to further solidify our systems for stably and efficiently supplying oil products, we con-cluded a basic agreement with TonenGeneral Sekiyu K.K. to seek synergy opportunities with regard to our oil product supply system. In accordance with this agreement, we are thoroughly evaluating methods of maximizing synergistic benefits through efforts in four areas: joint opera-tion of crude vessels, increased synergy effects realized by sharing feedstock between both parties refineries in Kawasaki, joint operation of depots and terminals, and domestic marine transport of oil products and products exchange.

To continue providing a stable supply of oil products to our customers, it will be critical to rationalize operating systems across the supply chain to achieve higher levels of sustainability. To accomplish this, we will consider the possibility of alliances with other companies or any other possibility as we aggressively pursue increased efficiency in our operations.

Expanding into Asia through International AlliancesAsian demand for petrochemicals continues to rise together with economic development. In the petrochemical arena—where Showa Shell is selling mixed xylene, benzene, propylene, and other raw materials for petrochemical products produced dur-ing the petroleum refining process—we are expanding our operations in search of business opportunities in Asia, where we expect further growth in demand for these products. We are stepping up production of raw materials for petrochemi-cal products, such as mixed xylene, and considering embark-ing on ventures related to the production of paraxylene, which is made from mixed xylene. Based on a memorandum of un-derstanding with GS Caltex Corporation of South Korea and Taiyo Oil Co., Ltd., signed in 2012, the Company has been considering participation in a project to increase the annual production at GS Caltex’s paraxylene plant in South Korea from 1.35 million tons per year to 2.35 million tons per year, making it one of the world’s largest plants.

Calgary

Houston

Barbados

London Rotterdam

Tokyo

PhilippinesSingapore

Dubai

The Shell Group’s Global Trading Network

Forecast of Northeast Asian Demand for Paraxylene

30,000

20,000

10,000

0

(Millions of tonnes)

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Japan, South Korea, and TaiwanChina

Source: Prepared by Showa Shell based on industry think tank information

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New “Shell EasyPay” payment system that employs a keyholder-like device containing a contactless IC chip

Ponta Members

6,000

5,000

4,000

3,000

2,000

1,000

0

60

50

40

30

20

10

0

(Companies)(Million People)

December 31,2012

December 31,2011

December 31,2010

As of the start of service inMarch 2010

Members (left scale)Participating sponsors (right scale)

Sales

Together with its contract dealers, we are providing high-value-added products and services that meet society’s needs as we aim to achieve an overwhelming lead in customer satisfaction.

Domestic Fuel SalesExpanding Customer Base through Services Fine-Tuned to Customer NeedsIn Japan, Showa Shell provides fuel products, such as gasoline, kerosene, diesel oil, and heavy fuel oil, through its contract dealers to customers via service stations and to industrial users in the manufacturing, transportation, electric power generation, agriculture, forestry, and fishing industries.

To boost profits in the Japanese market, which is forecast to dwindle, it is essential to build a strong customer base by expanding our sales network and enhancing our marketing capabili-ties. Accomplishing this will require that we continue to improve the value of products and services that we provide to customers.

In regard to sales at our service stations, we are working to encourage as many customers as possible to utilize our service stations by providing them with highly convenient services. As one facet of these efforts, in March 2010 we introduced the Ponta joint point card, a point service that boasts one of the largest memberships in Japan. This point card can be used at Lawson convenience stores, as well as a variety of retailers, service providers, and mail-order sales companies. It can even be used at financial institutions, and the number of organizations adopting this card continues to grow. The Ponta card was introduced with the aim of capturing new and repeat customers, and we are already seeing a rise in customers to our service sta-tions as a result, demonstrating the significant contributions of this service to expanding our customer base.

Furthermore, in 2012 we introduced “Shell EasyPay” as a speedy fueling and settlement system to simplify purchasing procedures at self-service stations. This system employs a key-holder with a contactless IC chip containing information on fueling patterns, such as type and amount of fuel, and preregistered credit card data. The introduction of this system greatly simpli-fied fueling, contributing to substantial improvements in customer convenience.

Not simply limited to fueling, Showa Shell’s service stations offer a wide range of services to support automobiles and motoring. To encourage customers to visit our stations, we work to-gether with contract dealers to provide service that is fine-tuned to meet differing needs related to regional location and other characteristics.

With regard to sales for industrial customers, we are working with our contract dealers on measures to cultivate new customers, expand our customer base, and bolster sales focused on middle distillates such as kerosene and diesel oil.

We believe that human resources capable of reading customer needs and able to respond quickly are indispensable in these business activities. Accordingly, we are cultivating the staff of our service stations via the proprietary training system we have developed over the years.


30

Shell Tellus S4 MEHydraulic actuation oil that contributes to energy savings and helps extend the lifespan of machinery

Shell BrandShowa Shell Sekiyu has received rights to use the Shell brand from the Shell Group. These rights give us access to the brand’s “Pecten” scallop shell em-blem, and other ascetic elements of the brand. The ascetic elements of this brand are uniform around the world, and are recognized for their image of innova-tiveness and reliability, and the ability to utilize these is of extreme value to the Company’s sales activities.

Starting in 2012, we began introducing the new design for Shell-brand service stations, which is used in over 100 countries across the globe. This entails extensive use of the Pecten emblem so that it may serve as the face of stations, and employing LED lighting and other eco-friendly fixtures.

A sense of reliability is an intrinsic part of the Shell brand, and the Shell Group has accordingly established stringent stan-dards for health, safety, security, and environment (HSSE). The Company develops its domestic operations in accordance with these standards.

Going forward, we will continue to advance our business activities based on the Shell Group’s international standards as we pursue higher levels of innovativeness and reliability in our quest to be the company customers and society chose.

For more information regarding the Company’s HSSE initiatives, please refer to page 50.

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Lubricants, Asphalt, Jet Fuel, and Marine FuelExpanding Sales of High-Value-Added ProductsShowa Shell sells lubricants, mainly through its contract dealers, for transport-related and indus-trial applications. Production activity at factories in Japan has a major effect on demand for lubricants. However, we have been witnessing a gradual rise in the need for products that im-prove the efficiency of factory operations and increase energy savings. To meet such needs, Showa Shell is working to expand sales of high-value-added products such as oil that reduces the need for oil changes and oil that helps extend the lifespan of machinery while also realizing energy savings. By providing such products that exceed customer expectations with regard to value and reliability, we have gradually expanded our share of the market. At the same time, we have aligned our product lineup with that of the Shell Group to the greatest extent possible. This enables customers to procure products smoothly in both Japan and overseas. Moreover, consolidating our complex product lineup makes it easier for customers to understand the products we offer.

In addition to these product initiatives, we are cultivating human resources capable of precisely anticipating customer needs and offering proposals based on abundant knowledge regarding the diverse range of lubricants and their various applications and characteristics.

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We also sell asphalt primarily through our contract dealers. Asphalt demand is influenced by trends in public spending and private-sector capital investment. Therefore, it can be expected that a stable supply of asphalt will be in high demand going forward in light of the ongoing effort to reconstruct after the Great East Japan Earthquake and the need to maintain and repair aging social infra-structure. As Japan’s only integrated manufacturer of asphalt, we are committed to providing a stable supply of asphalt to respond to this demand.

We are also providing high-value-added products to contribute to safe and convenient lifestyles by developing technologies for recycling roadway paving materials and eco-friendly products that preemptively address market needs. At the same time, we are cul-tivating human resources capable of providing service that exceeds

customer expectations when supplying such products.Domestic demand for jet and other airplane fuels is on a downward trend, as is demand for

shipping fuel, such as bunker fuel oil, owing to ongoing energy conservation efforts. As a member of the Shell Group, we are leveraging its worldwide network to meet customer needs throughout the world. Also, we are placing an emphasis on sales of high-value-added prod-ucts, and have launched Shell Alexia S4 wide range, marine-use cylinder oil for customers us-ing marine fuel as one effort in this area.

Fuel carriers refueling aircraft

Lineup of High-Value-Added Products

Shell Alexia S4In September 2012, Showa Shell began sales of Shell Alexia S4, the Shell Group’s wide range, marine-use cylinder oil. This product can be used in various vessels and engines and under a wide range of condi-tions, such as those pertaining to fuel type, engine load, and weather. As ship operators would have previously been required to change cylin-der oil based on operating conditions, Shell Alexia S4 frees them from this hassle. It also helps prevent engine wear. This high-value-added product has been highly evaluated for its ability to curb the process of changing lubricants and contribute to cost reductions, and has estab-lished a strong reputation among customers.

CARIMEX SeriesThe CARIMEX Series is a line of asphalt products that is long-lasting even under heavy traffic conditions. For this series, CARIMEX HD was used in the Sagami Traverse Road, a section of the Metropolitan Inter-City Expressway opened in March 2013. With its excellent drainage and low-noise properties, CARIMEX HD has made driving on this sec-tion of road extremely comfortable. Furthermore, we have introduced CARIMEX ART into this series. This eco-friendly product helps lower the amount of heat produced when mixing asphalt and aggregates, thereby reducing heat waste during the creation of asphalt concrete. Expressway paved using CARIMEX HD

COLUMN


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LPG SalesProviding Home Solutions for All Customers’ NeedsWe sell LPG (mainly propane for household use and butane for industrial applications) through our contract dealers. Demand for LPG is decreasing in accordance with the trend toward all-electricity-powered homes and the switch to city gas. However, since the Great East Japan Earthquake people have been re-acknowledging the benefits of eco-friendly LPG as a decen-tralized source of energy that is useful in the case of disaster.

Under these conditions, we are endeavoring to leverage the advantages of LPG home deliv-ery. We also distribute CIS thin-film solar modules made by Solar Frontier K.K. and Shell Lin-kLife, a home security product. In this way, we aim to provide home solutions, thereby further increasing the value we provide to customers. Furthermore, we are concentrating on the cultiva-tion of human resources together with contract dealers to enhance our ability to keep in close communication with customers and propose solutions to address the issues these customers face. By reinforcing our sales capabilities in this manner, we aim to expand our customer base.

Sustainable Growth in Cooperation with our Contract DealersProviding petroleum products involves cooperation with numerous business partners. Showa Shell’s contract dealers are particularly important partners, as they spearhead our brand and maintain close ties with local communities. They provide products and services to match com-munity needs and play an important role in interacting with customers.

In each business field, we have a “Showa Shell Dealer’s Association,” consisting of the contract dealers. Through this association, we raise awareness and insight about the business environment and share our business vision. We also hold training sessions and competitions to help dealers learn and share information with each other.

We also recognize the significant importance to our brand of employees at contract dealers, who are on the front lines of sales interactions. These include staff at service stations, who con-tribute to a safe and convenient motoring environment for our customers, and staff involved in the sale of lubricants, asphalt, and LPG to various industries. The Showa Shell Group understands that establishing more trust for its technologies and services from customers is an important way to boost customer satisfaction. To this end, we have in place internal qualification and training programs that are designed to enhance staff expertise as well as their technical knowledge.

By concentrating on the training of human resources, we provide added value that goes beyond mere product sales, in order to ensure sustainable growth with our contract dealers, as they are key business partners.

Initiatives to Improve HSSE Together with Business PartnersAs part of our efforts to ensure that we can supply LPG in a safe manner that guar-antees peace of mind for customers, we hold the LP Gas Plant HSSE Contest and conduct a full range of training programs to support contract dealers in cultivating safety awareness and implementing voluntary measures to improve safety. Represen-tatives from over 100 LP gas plants (filling stations and automated gas stands) par-ticipate in the annual LP Gas Plant HSSE Contest, where they undergo evaluations of HSSE-related areas of their operations, with plants that are judged superior re-ceiving awards. This event helps these representatives gain an understanding of how to address HSSE issues and improve their capabilities in this area.

COLUMN

Aiming for Partnerships and Human Resource Development

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Energy Solution Business Toward the Next Stage of Growth

By providing energy solutions that are both economical and ecological, Showa Shell’s Energy Solution Business is helping to achieve a sustainable society.

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Solar BusinessAt Showa Shell, we trace our legacy in solar module develop-ment back to the 1970s. Experiencing the oil shock first-hand as an oil company, we committed ourselves to finding a stable supply of energy for resource-scarce Japan. Our attention soon turned to CIS thin-film solar technology for its economi-cal, ecological advantages, and in 2005 we succeeded in commercializing it.

The market for solar energy is now rapidly expanding. Ap-proximately 30 GW were installed worldwide in 2012, and this number is projected to double over the next five years. Solar energy is taking on an important role in the projected future en-ergy mix, and countries are implementing measures to promote its growth. At present, China, the United States, and Japan are driving this demand.

But competition between module manufacturers has also in-tensified, and the market is currently faced with a glut of solar modules. As such, the industry has entered a “shakeout” phase in which it is difficult for even leading manufacturers to survive if they are weak in cost performance or funding.

It was under these conditions that our subsidiary, Solar Frontier K.K., established its standing as a highly reliable solar module manufacturer in Japan and as the world’s largest provider of CIS thin-film solar modules. The competitiveness of our 900 MW Kunitomi Plant, which began production in 2011, was central to growing our sales and strengthening our market presence. On the back of this, Solar Frontier successfully improved quarterly earnings throughout 2012.

Looking to future growth, it will be important to achieve a level of cost performance that will bring us to grid parity. And we must do so ahead of the competition. We will also offer high-value-added services to provide customers peace of mind when purchasing our products, including strong warranties and after-sales maintenance services. By offering our customers such high-value products and services, we will strive to first become the leader in the Japanese market before expanding worldwide in the medium term.

Electric Power BusinessShowa Shell entered the electric power business to more effec-tively utilize the assets associated with our core Oil Business, and we have bolstered our generation capacity accordingly. As part of these operations, Showa Shell constructed power plants that generate electricity using byproducts created during the petroleum refining process. In addition, the Ohgishima Power Station, a natural gas-fired thermal power plant in which Showa Shell holds a stake, was built on a vacant site where oil storage facilities once stood.

The electricity supply and demand situation in Japan is ex-pected to remain tight. Looking to respond to this situation, we approved plans for the construction of a third unit at the Ohgi-shima Power Station in 2012. And in 2013 we plan to begin operating power plants that utilize solar modules manufactured by Solar Frontier.

Despite the fact that electricity is an increasingly indispensable part of our daily lives, Japan still faces challenges in stably sup-plying this essential form of energy. To address these challenges, we plan to increase generation capacity over the period of our Medium-Term Business Action Plan by exploring how to more effectively utilize our existing assets and constructing eco-friendly solar and biomass power generation facilities. We will continue to grow the supply of clean and safe power, responding to soci-ety’s needs while enhancing our business performance.

With an Oil Business at the foundation of our operations, Showa Shell has developed a unique history. We are a com-pany that is responding to society’s changing energy demands as an energy provider. Through our Energy Solution Business, we are helping to address global energy challenges, from global warming to providing safe, reliable, and economical electricity. Showa Shell sees providing and growing these solutions as one of our core missions.

Hiroto TamaiExecutive Officer Vice PresidentEnergy Solution Business COO

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Solar Business

Subsidiary Solar Frontier K.K. produces and sells CIS thin-film solar modules that feature both economical and ecological benefits and employ Showa Shell’s proprietary technology. We aim to continue growing this business by developing superior technologies and increasing their use throughout the world, thereby enriching people’s lives while contributing to the realization of a sustainable society.

What is CIS and what are its ecological benefits

CIS is an eco-friendly thin-film solar module technology that uses key ingredients copper (C), indium (I), and selenium (S) to generate electricity.

Solar Frontier’s CIS thin-film solar modules differ from standard crystalline silicon modules in both their material makeup and manufacturing process. While most solar modules use crystalline silicon to gener-ate electricity, Solar Frontier’s modules use a proprietary copper, indium, and selenium-based compound.

With a semiconductor layer about 1/100th the thickness of a crystalline silicon solar cell, Solar Frontier’s CIS solar modules require fewer resources to produce. Combined with fewer production steps and a less energy-intensive production process, Solar Frontier’s modules offer an energy payback time (EPT)*1 far better than crystalline silicon modules.

Solar Frontier’s modules also do not use cadmium and are lead-free*2. By committing to a more eco-friendly design, Solar Frontier offers its customers greater peace of mind when developing both rooftop and ground-mounted installations.

A

EPT Comparison

(Years)

(When annual production volume is approximately 100 MW)

2.0

1.0

0Crystalline silicon solar

module

EPT=approx. 1.5 yrs.

EPT=approx. 1.1 yrs. EPT=

approx. 0.9 yrs.

Amorphous silicon

CIS thin-film solar module

Significantreduction

*1 Energy payback time (EPT): The period required for a module to generate the same amount of electricity consumed during the manufacturing process of the module.

*2 As defined by the Restriction of Hazardous Substances (RoHS) Directive

QCIS thin-film solar module Q&A

Voluntarily Meeting High Standards

Does not contain cadmium

Solar Frontier’s CIS thin-filmsolar modules

CIS (CIGS)

Cadmium telluride

Amorphous silicon

Microcrystalline

Hybrid

Monocrystalline

Polycrystalline

HIT(Heterojunction with intrinsic thin layer)

Spherical

Silicon

Compound

Silicon

Dye sensitization

Organic thin-film

Crystalline

Thin-film

Organic

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

Contains cadmium


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CIS thin-film solar modules produce more electricity (kilowatt-hours per kilowatt-peak) in actual operating conditions than standard crystalline silicon solar modules. This improves the economics for both system owners and end users.

Real-world data and independent tests have verified that Solar Frontier’s CIS thin-film solar modules gener-ate more electricity in actual operating conditions than crystalline silicon and other thin-film solar modules.

CIS thin-film solar modules produce more kilowatt-hours due to:1. High performance in low-light conditionsModule conversion efficiencies found on product datasheets are calculated using light intensity of 1,000 W/m2 in a controlled test environment. However, actual operating conditions usually involve a range between 400–800 W/m2, less than the intensity used in testing. Solar Frontier’s CIS thin-film solar modules are tuned to operate at higher levels than standard crystalline silicon modules within this more realistic range.2. High performance in hot temperaturesSolar modules are adversely affected by high temperatures. Solar Frontier’s CIS solar panels have a low temperature coefficient, enabling them to perform better in hotter conditions than standard crystal-line silicon modules.3. High performance in partial shadingUnder partially shaded conditions that would severely affect crystalline silicon modules, Solar Frontier’s CIS thin-film solar modules have more stable output due to their circuitry design.

4. The “light soaking” effectFollowing initial exposure to light, the output of CIS thin-film solar modules rises slightly to a stable conversion efficiency that is higher than labeled at the factory.

Made in Japan, Solar Frontier’s CIS thin-film solar modules are designed, built, and certified for long-term performance.

Solar Frontier’s CIS thin-film solar modules have passed internal and third-party comprehensive quality tests, including for resistance to long-term weathering, high-velocity impact, and desert heat. All Solar Frontier products are made in Japan using highly-automated production lines that were developed at Solar Frontier’s Atsugi Research Center (ARC).

Solar Frontier is recognized as the first Japanese manufacturer to offer a 20-year performance war-ranty in Japan. It is also the first company in Japan to acquire the JETPVm certification mark*, which examines product design quality, production processes, and the PV manufacturer’s ability to provide long-term product warranty and customer support.

* Granted by the Japan Electrical Safety & Environment Technology Laboratories (JET) after successful completion of tests to photovoltaic (PV) modules to ascertain safety and reliability

Power Generation by Month for Each Module

Solar irradiation on inclined surface

Spherical silicon

Amorphous silicon

Polycrystalline silicon

Monocrystalline silicon

Total power generated (kWh) Total irradiation (kWh/m2)

1,800

1,400

1,000

180

140

100

60600Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec. Jan. Feb. Mar.

Source: Hokuto Site, NEDO Megasolar Project, NTT Facilities Inc.

Compound(Solar Frontier’s products)

How well do Solar Frontier’s CIS thin-film modules perform compared to other solar modulesQ

How reliable are Solar Frontier’s CIS thin-film solar modules in the long termQ

　

＋

－

－

＋Shade

Flow of electricity

Shade

Flow of electricity

　

＋

－

－

＋Shade

Flow of electricity

Shade

Flow of electricity

Crystalline silicon solar module

CIS thin-film solar module

When a cell in the module ceases to generate electricity, the entire circuit ceases to function.

Shadow may cause a temporary drop in output, but has only a minimal effect on the entire module.

A

A

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Technology

Development

15%

14%

13%

12%2010 2011 2012 2013 2016

Energy Conversion

AA 17.8%AA 19.7%

AA 15.7%

150W 12.2% AA 13.3%

160W 13.0% AA 14.2%

165W 13.4% AA 14.6%

170W 13.9% AA 15.0%

180W 14.7% AA 15.9%

AA: Aperture Area30cm square sub-module

0.5cm x 0.5cm cell taken from 30cm x 30cm submodule

Transfer of technology to products

Atsugi Research Center

Energy Conversion Improvement Roadmap

The Atsugi Research Center (ARC) in Kanagawa Prefecture has installed a pilot plant that employs the same production process as actual factories. This enables faster transitions from research and development to mass production.

Speed is essential to succeeding in the solar business. One of the key elements Solar Frontier utilizes in expanding its business globally is its world-class technological capabilities.

Strengthening Cost CompetitivenessImproving conversion efficiency* is a key factor in reducing the manufacturing cost of solar modules. Since its foundation, Solar Frontier has successfully set new CIS efficiency records each year. As part of its research and development efforts at the ARC, Solar Frontier uses a pilot plant that employs the same production process as its factories. In March 2011, the ARC set a world record CIS conversion efficiency of 17.2% on a 30cm x 30cm sub-module, and exceeded this record in February 2012 with 17.8% efficiency. The ARC also achieved conver-sion efficiency of 19.7% on a 0.5cm x 0.5cm CIS cell in January 2013—a world record for thin-film solar cells that do not contain cadmium, and very close to the world record of 20.3% for thin-film solar cells that do.

Solar Frontier today manufactures CIS modules with conversion efficiencies exceeding 13%, thereby achieving the nameplate efficiency figure of polycrystalline silicon solar modules. Go-ing forward, Solar Frontier will continue to focus on improving the conversion efficiency of its solar modules and transferring its laboratory achievements to its factories.

Developing High-Value-Added ProductsSolar Frontier is performing research and development related to new products that have the potential to open new markets. While Solar Frontier is currently manufacturing solar modules with CIS semiconductor layers deposited on a substrate glass, its technologies have significant poten-tial to be adapted for use in high-value-added products. Such products include, for example, modules that can be incorporated into construction materials or applied to curved surfaces. New products will be a key ingredient in the medium- to long-term growth of the company.

Ventures for Future GrowthSince 2010, Solar Frontier and IBM Corporation (U.S.) have performed joint research and development on CZTS (copper, zinc, tin, sulfur, and selenium) solar modules. These modules are made from materials that are both affordable and easy to obtain. As such, they present significant opportunities for cost competitiveness, making them ideal for mass production.

Solar Frontier and IBM successfully achieved conversion efficiency of 11.1% in August 2012, setting a new world record for CZTS solar panels. Solar Frontier will continue to inves-tigate the potential of CZTS with the aim of creating a new driver of future growth.

* Conversion efficiency: An index using standard testing conditions to indicate how efficiently solar modules convert the energy from sunlight into electric-ity. Higher conversion efficiency repre-sents higher output per unit of sunlight.


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Production Plant

Kunitomi Plant

Solar Frontier manufactures the majority of its CIS thin-film solar panels at the Kunitomi Plant, one of the largest solar panel factories in the world.

Achieving Full Operations at the Kunitomi PlantIn February 2011, Solar Frontier began commercial operations at the Kunitomi Plant. With a production capacity of 900 MW, it is one of the largest solar module factories in the world and the largest in Japan. Efforts in 2011 were concentrated on bringing operations online at the plant. After this was accomplished, Solar Frontier focused its attention in 2012 on boosting operational efficiency and enhancing the performance of products manufactured at this plant, thereby significantly reducing production costs. As a result, Solar Frontier successfully increased solar module output from 145–155W at the beginning of 2012 to 155–165W at the begin-ning of 2013, while also reducing material procurement costs. In early 2013, Solar Frontier began operating the Kunitomi Plant at full capacity to meet the sharp rise in demand in Japan. These developments reduced production costs significantly below 2011 levels.

The Kunitomi Plant is scheduled to continue running at full production throughout 2013, and will pursue higher levels of efficiency to further strengthen cost competitiveness.

The Second Miyazaki Plant (MP2), which began operation in 2009 and boasts a produc-tion capacity of 60 MW, primarily produces smaller CIS solar modules for residential use. Solar Frontier has continued to improve production efficiency at MP2 and enhance the perfor-mance of its products, achieving a production capacity that exceeded the originally planned capacity in 2012. Production at MP2 was halted at the end of 2012 to make adjustments for the production of new, differentiated products. The plant resumed pro-duction in July 2013.

Increasing Solar Frontier’s Future Production CapacitySolar Frontier aims to be a global leader in the field of solar energy. Backed by its production technology, the company plans to increase its production capacity from its current scale of approximately 1 GW (1,000 MW). Key to this will be the ARC, where research and develop-ment to draw out the potential of CIS thin-film solar modules and their mass production technol-ogy is being conducted. Continuous transfer of ARC know-how to Solar Frontier’s production facilities will be the driver of its cost competitiveness and technological leadership.

Solar Frontier intends to introduce its CIS thin-film solar module technologies into new facto-ries based on the successful model of its factories in Japan. Decisions on locations for new factories will depend on a number of considerations. These include access to markets with high demand, presence of the infrastructure needed for efficient operation, and the beneficial rela-tionships with complementary companies.

Production Plant

First Miyazaki Plant (20 MW)Second Miyazaki Plant (60 MW)Kunitomi Plant (900 MW)

* Figures in parentheses indicate production capacity

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Sales Strategy

Bustling activity at PV EXPO 2012

Source: Japan Photovoltaic Energy Association

3,000

2,000

1,000

0

(MW)

2008 2012201120102009

Non-residentialResidential

Domestic Solar Module Shipment Volume

In addition to focusing on sales in Japan amidst high demand, Solar Frontier is strengthening its system operations through the development of a high-value-added business model. This model will be an important tool for expanding our operations in the global market.

Growing DemandIn light of global warming, safety, and other issues pertaining to energy, there is a global movement to accelerate the spread of renewable energy. This is subsequently driving new de-mand for solar power systems. Market growth in Europe, which was previously the highest worldwide, has begun to taper off. However, growth remains strong in the United States and China, and Japan has also recently seen strong demand due to the influence of its feed-in tariff (FIT) scheme for renewable energy. Furthermore, medium- to long-term increases in demand are expected in Asia, the Middle East, and other regions where economic growth is brisk and sunlight is abundant. As solar power systems become increasingly more common, the costs of introducing these systems will decrease further, making them even more economically sound. As a result, solar energy will increasingly play a role in the world as a power source with both economic and environmental benefits.

Solar Frontier began ramping up sales of its products in Japan in the latter half of 2012 to respond to growth in demand. In addition to promoting sales of solar modules, it is also devel-oping a sales model that includes a comprehensive lineup of high-value-added services for solar power systems. This will be an essential component of Solar Frontier’s growing global leadership in the field of solar energy solutions.

Feed-in Tariff Scheme for Renewable EnergyThe FIT scheme was introduced in Japan in July 2012 with the goals of improving Japan’s energy self-sufficiency and safety, addressing global warming, furthering the development of industry, and making renewable energy an important component of Japan’s power supply. Under this scheme, electric utilities are required to purchase all electricity generated from renewable energy sources (solar, wind, hydroelectric, geothermal, and biomass power) at a fixed price over a defined period of time. The terms of this scheme are defined by the Act on Special Measures concerning the Procurement of Renewable Electric Energy by Operators of Electric Utilities.

The purchase prices of this scheme are revised in April of each year, and these prices remain fixed until the following March. Until March 2013, the purchase price applicable for solar power systems with outputs of over 10 kW was set at ¥42.0 per kilowatt-hour. This became ¥37.8 per kilowatt-hour starting in April 2013. Systems smaller than 10 kW are applicable for a purchase price of ¥38.0 per kilowatt-hour.


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CIS thin-film solar modules made by Solar Frontier installed on a house in Japan

Reliable Japanese Products for Households NationwideDemand for residential-use solar power systems has continued to grow as a result of the the Excess Electricity Purchasing Scheme for Photovoltaic Power* and subsidies provided by mu-nicipal governments. As electricity rates rise and solar costs fall, demand for these systems is expected to continue growing into the future.

Solar Frontier aims to increase sales of residential-use solar power systems. In this quest, it will leverage the strengths of its CIS thin-film solar modules together with its growing brand recognition. These strengths include high-quality production in Japan, superior aesthetic design, and increased reliability and customer support.

However, in order to expand sales further, it will be necessary to strengthen sales capabilities. To this end, Solar Frontier is reinforcing its network of sales agents throughout Japan. In addition to contract dealers in the Oil Business, which have close ties to local communities, Solar Frontier is expanding its network to include residential home builders, refurbishment specialists, and building contractors. Solar Frontier is also bolstering its sales capabilities by educating sales agents about its products and by offering support for their sales activities.

Reliable, Income-Generating Products and Services that Satisfy Owners NationwideFollowing the introduction of the FIT scheme for renewable energy, the construction of solar power plants accelerated across Japan. Since the income of plant owners is directly linked to the actual electricity generated, these systems must be reliable as they are expected to operate for lengthy periods (over 20 years). This long lifetime requirement has served to increase the importance of reliable post-installation services in purchasing decisions. Solar Frontier provides economical and highly reliable products and services to satisfy the needs of its customers, and sales have increased as a result.

High-Value-Added Business ModelThere are a number of steps involved in the process of setting up large-scale solar (“megasolar”) projects, and various tasks must be conducted throughout their 20-year operational lifetime. This includes selecting a site for the project, designing the facilities, arranging funding, procur-ing materials, receiving approval for facilities, conducting negotiations with power utilities, constructing facilities, and connecting the power source to the power grid. Tasks to be com-pleted after commencing operations are equally diverse, and include assigning managers, monitoring the site to ensure stable generation, inspecting and cleaning facilities, and submit-ting periodic reports to authorities.

Process of Starting Up Solar Power Plant Operation

Owners / Investors

Planning Design Fund procurement

Material procurement Construction Start up Operation

* The Excess Electricity Purchasing Scheme for Photovoltaic Power: Under this scheme, electric utilities are mandated to purchase the unused surplus of electricity that has been generated at their customers’ PV facilities of less than 10 kW. This scheme was introduced in Japan in 2009.

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Through its business in Japan and over-seas, Solar Frontier has accumulated a breadth of knowledge related to areas spanning from the development of solar power systems to their operation. Leverag-ing this knowledge, Solar Frontier aims to provide customers high-value-added ser-vices on a one-stop basis for all of their megasolar project needs.

To assist Solar Frontier in its operations, the company conducts projects on a joint basis with various business partners. On the engineering front, it has established a strategic partnership with Germany’s

BELECTRIC, a contractor of megasolar construction projects around the world. As part of this alliance, Solar Frontier established PV CIStems as a joint venture with BELECTRIC in March 2012. Located in Germany, this company provides solar power systems. Initially, business activities that took advantage of this partnership were conducted overseas, but in 2012 Solar Frontier began leveraging the benefits of this partnership in Japan as well. As one example of these efforts, it started two megasolar projects on idle land owned by Yano Industry Co., Ltd., in Miyazaki Prefecture.

Also, in March 2013 Solar Frontier established a joint investment company with the Devel-opment Bank of Japan Inc. (DBJ) with the purpose of investing in megasolar projects in Japan. This company leverages Solar Frontiers’ solar power system development expertise to support the speedy completion of megasolar projects.

In 2013, Solar Frontier will continue to build on its experience and expertise regarding megasolar projects in Japan. In developing this foundation, it will thereby improve profitabil-ity. Once firmly established in Japan, Solar Frontier will apply this experience to its overseas expansion efforts.

Kunitomi No.1 MegasolarThis 3.3 MW megasolar facility was constructed on idle land owned by Yano Industry, and 2.2 MW of this generation capacity is operated by Solar Frontier.

Solar power plant constructed by BELECTRIC using Solar Frontier’s products in Brandenburg, Germany

Source: IHS Inc.

60,000

45,000

30,000

15,000

0

(MW)Non-residential

2012 2013 2014 2015 2016 201720112010

Residential

Independent power source

Global Solar Module Demand Forecast (By Application)

Forecast


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Electric Power Business

Showa Shell has progressively expanded the scale of the electric power business by effectively utilizing its existing assets. Through this business, we are working to stably provide the electricity necessary for people and society, while employing more efficient and cleaner sources of power.

Highly Efficient Natural Gas-Fired Thermal Power Plant— Ohgishima Power StationIn Japan, deregulation has opened the door for new operators, including Showa Shell, to sell electricity to special and conventional high-voltage power users, defined as those users with contract demand of over 50 kW.

To provide energy solutions by making effective use of a former crude oil storage site, in 2003 we established Ohgishima Power Co., Ltd., with Tokyo Gas Co., Ltd. In 2010, this company began operating the first and second units of the Ohgishima Power Station (Yoko-hama, Kanagawa Prefecture; output of approximately 800,000 kW). The station is powered by natural gas, which is a relatively clean energy source, and achieves highly efficient power generation by introducing a leading-edge, energy-saving combined cycle gas turbine*. The plant also has the advantage of its location, as natural gas can be supplied by the nearby To-kyo Gas terminal, and it is close to the Tokyo metropolitan area—where electricity is most needed—thereby keeping transmission losses to a minimum. Showa Shell receives approxi-mately 200,000 kW of the Ohgishima Power Station’s total output of around 800,000 kW. This output is primarily sold to customers in the Tokyo metropolitan area.

In October 2012, Ohgishima Power decided to construct a third unit (with an output of approximately 400,000 kW) at the Ohgishima Power Station on a plot of land adjacent to the first and second units. Construction was commenced thereafter. Legally required environmental impact assessments at the third unit have already been completed, and the facility is scheduled to begin operation in early 2016. Leveraging this facility, we will quickly increase the degree to which we contribute to the provision of a stable supply of power to Japan’s electricity market.

* Combined cycle gas turbine: In addition to gas being burned to run the generator turbine, exhaust heat is also dedicated to steam generation. This steam is routed to a steam turbine for power generation. By employing this leading-edge system, the Ohgishima Power Station achieves high energy conversion efficiency, of around 58% (lowest heat value standard, power-generating terminal).

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Power Plant Utilizing Byproducts from Petroleum Refining ProcessesShowa Shell’s subsidiary Genex Co., Ltd., is an electricity wholesaler that supplies electric power by effectively utilizing off-gas and heavy oil (asphalt) created during petroleum refining processes conducted at the Keihin Refinery of Toa Oil Co., Ltd. Genex’s power plant employs a cogeneration system that delivers high overall energy efficiency. This system is operated in an optimal manner by both Genex and the Keihin Refinery, which contains Genex’s plant. The electricity generated by this system is sold to Tokyo Electric Power Company, Incorporated and is also supplied to the Keihin Refinery in tandem with steam to meet the power needs of that facility.

Solar Power Plants Using Solar Frontier’s CIS Thin-Film Solar ModulesShowa Shell aims to effectively utilize the land previously used for oil business facilities and leverage Solar Frontier K.K.’s superior CIS thin-film solar modules. To this end, in January 2013 the Company concluded an agreement with COSMO OIL CO., LTD., and Development Bank of Japan Inc. to conduct a joint large-scale solar (“megasolar”) project. This project entails the establishment of a joint venture company and the construction of solar power plants using Solar Frontier’s CIS thin-film solar modules. Such plants will be constructed at a total of eight locations, including the former site of Ohgishima Oil Terminal Co., Ltd., which was a joint venture be-tween subsidiary Toa Oil and COSMO OIL; as well as the sites of former COSMO OIL depots. Some of the plants are scheduled to begin selling power to utilities during 2013.

The Showa Shell Group also operates other facilities that generate electricity for use by Group facilities or sale to power utili-ties. These include megasolar genera-tion facilities installed on the roofs and grounds of solar module produc-tion plants and the Niigata Yukiguni-gata Megasolar Power Plant, which employs specialized construction methods and calculated angles to enable solar power to be generated in snow-heavy Niigata Prefecture.

Expanding Power Generation Capacity Through Various Power Sources in Response to Social NeedsShowa Shell aims to contribute to the electricity market in Japan by providing a stable supply of electricity generated using clean energy sources and offered at competitive prices. In order to accomplish this, we plan to expand our generation capacity to around 1 million kW. At the same time, the Showa Shell Group will work to expand electricity supplies using eco-friendly and sustainable power sources, such as biomass and other new power sources in addition to those that we are currently using.

By developing power sources in response to the needs of society and customers, we will provide Japan with a stable supply of electricity.

Genex’s Mizue Power Station

Niigata Yukigunigata Megasolar


44

Oil BusinessStriving to continue providing the products that society and customers need, Showa Shell is pursuing the development and commercialization of high-quality, high-performance fuels, lubri-cants, greases, asphalt, and other products that offer strong environmental and energy-saving performance through its R&D structure centered on the Central Research Laboratory. The Com-pany is also developing next-generation clean energy systems. Furthermore, Showa Shell ex-changes human resources and the latest intelligence with Shell R&D centers in the United States, the Netherlands, and Germany to develop cutting-edge technologies.

Developing High-Value-Added Products—Shell Heat CleanShell Heat Clean is a fuel made specifically for oil fan heaters. It is made from materials pro-duced through GTL* processes at a Shell Group-operated plant in Malaysia. The product has superior combustion qualities and is more eco-friendly than conventional kerosene, as it has less than 1/10th the sulfur content. The fuel also produces less kerosene odor and has a long shelf life prior to deterioration. We sell this product at service stations, and also offer home-delivery services through Internet sales. Shell Heat Clean has won the support of customers for its per-formance as well as for the convenience of the home delivery services provided for this product.

For more examples of high-value-added products, please refer to pages 31–32

Energy Solution Business—Solar BusinessEstablished in 2009, the Atsugi Research Center (ARC) conducts R&D ventures geared toward increasing the output of existing solar module products, improving production technologies, and developing and commercializing high-value-added products. ARC employs the same equip-ment as is used in factories conducting commercial production, thereby smoothing the process of introducing developed technologies into commercial production lines. Leveraging this center, we have developed an R&D structure that enables us to realize the speedy development and commercialization of technologies that is needed to survive in this rapidly evolving industry.

For details on technology developments related to the solar business, please refer to page 38

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

Public Symposiums Held by Energy Sustainability ForumIn 2007, Showa Shell established the Energy Sustainability Forum in collaboration with the Integrated Research System for Sustain-ability Science (IR3S) operated by the University of Tokyo. The forum was designed to pursue the development of a long-term vision for the future of energy. Since 2008, the forum has held a total of eight public symposiums, and we have offered suggestions to society through the discussions held therein. The eighth symposium, held in February 2013, was on the theme of new energy de-velopments after the Great East Japan Earthquake and progress toward the realization of a low-carbon society. At this symposium, suggestions were offered by experts from a wide range of viewpoints on subjects including new energy developments and the difficulties of introducing new energy sources in Japan as well as methods of making Japan more self-sufficient in terms of energy.

For more information, please refer to the Company’s website: http://www2.ir3s.u-tokyo.ac.jp/esf/

COLUMN

Atsugi Research Center (ARC)

R&D efforts in the oil business will be conducted while fully leveraging the benefits of our partnership with the Shell Group. In the solar business, efforts will be focused on CIS thin-film solar modules, which are created using technologies with particularly high potential for the future. Showa Shell will also work to develop technologies and products that will contribute to the realization of a low-carbon society.


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Human Resources

Developing Competitive Human ResourcesIn order to become a globally competitive energy solution provider and accurately respond to customers’ various needs, it is important that our human resources be highly motivated toward advancing our business strategies. To this end, we strategically develop competitive human resources by communicating our Talent Vision and by developing training systems and a working environment.

Initiative

OutboundTeam Spirit

Talent Vision

46

In recent years, there have been drastic changes in Showa Shell’s business environment including the establishment of highly competitive refineries overseas and the growing presence of overseas solar module manufacturers leveraging the scales of their economies, making it necessary for the Group to develop its business in a harsher business environment. In such an environment, we must rapidly advance business strategies if we are to respond to future market changes and continue improving corporate value. It will be our human re-sources that advance these strategies, and we are therefore aware of the fact that it will be impossible to continue developing our business without competitive human resources. Based on this realization, we formulated our new Talent Vision and began enhancing training systems in 2011. Then in 2012, we launched training programs targeting the dissemination of this vision and the increased competitiveness of our human resources.

Training SystemsOur training systems are focused on strategically strengthening human resources through programs in three areas: development of competency and way of thinking, development of professional talent, and improvement of adaptability to an ever increasing global business environment. In these areas, we are conducting seminars for specific business fields to which any Group em-ployee may attend; training arranged based on number of years worked, qualifications, and position; and voluntary training to share the Talent Vision among all employees and help realize this vision.

• Discussions with employees from other divisions ex-posed me to perspectives I was not yet aware of, and were therefore very worthwhile.

• The high level of output at the training was highly constructive.

• It was a beneficial opportunity to systematically learn leadership skills.

• I realized the importance of clear goals when address-ing challenges, and will take careful consideration of this in the future.

Feedback from Participants in New Leadership Training

Training Programs of New Managers, MBO,

and Managers

ElectiveDomesticOff-SiteTraining

Basic Courses byHR Division

Training Programs ofNew Grads and Based on

Number of Years at the Company

AdvancedCourses by

BusinessSegment

Training Programsof General Managers

Basic Management Training

Leadership Training

Pre- Employment

Junior Employees

(1～3 Years)

Solid Employees

Manager

GM

HR Division

Development of Competency and Way of Thinking

Development of Professional TalentImprovement of Adaptability toGlobal Business Environment

Others

Business SegmentsHR Division &

Business SegmentsSupport for

Self-Education

Basic Leadership Training

Test

SpecializedSkill Dev.

Courses byBusinessSegments

Support forSpecializedSkill Dev.Courses

Outside ofthe Company

ShellOverseasTraining

Elective Overseas Off-Site Training

Studying Abroad Program

TOEIC Test (Offered

Companywide)Correspondence

Education / English Training

by Schooling

Training before Entering

Toward Realization

of the Talent Vision

Talent VisionOur Talent Vision defines the credo and behavioral guidelines that we expect employees to adhere to as we strive toward sustain-able growth and development. The three pillars of this vision are Initiative, Outbound, and Team Spirit. These are the characteris-tics we intend for our employees to share, regardless of age, qualification, or position.

InitiativeTaking events and changes happening around seriously with a sense of

ownership, setting the goal autonomously, and acting for better result.

OutboundAlways attempting to understand clients’ needs, broadening one’s mind

outward, making continuous originality and ingenuity, and acting.

Team SpiritValuing teamwork and contributing to the team by having an attitude of

growing together with the team members, for making better result than

working individually.

Formulation of the Talent Vision

Training Programs

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Respect for Human RightsWe comply with international labor standards and respect each of our employees. Showa Shell’s Code of Conduct requires us to conduct business as a responsible member of society, observe laws, and respect fundamental human rights. With regard to ensuring the human rights of workers, we promote initiatives to create opportunities for fair and impartial treatment eliminating discrimination, on many fronts: from hiring, transfers, treatment, and educational opportunities to retirement.

Discussions with Labor UnionsWe engage in discussions with our labor unions on a regular basis. These discussions are held on a variety of themes, includ-ing management issues, workplace culture, workflow improve-ment, and work-life balance. Through intensive discussions, we exchange opinions regarding issues faced by management and employees, consider possible solutions, and otherwise seek out ways of creating a workplace environment in which all employ-ees can utilize their skills to the fullest extent. The Integrated Hu-man Resources Division emails the results of such discussions to all employees, and these results are also posted on our intranet.

Efforts to Ensure Fair, Impartial, and Diverse HiringWe have in place a structure to make fair and impartial hiring decisions without regard to nationality, gender, or disability sta-tus, and adhere to the Japan Business Federation (Nippon Keidanren)’s Corporate Charter for Screening and Employing New Graduates. Specific efforts to ensure fair, impartial, and diverse hiring include the appointment of a Fair Hiring and Hu-man Rights Director.

Reemployment of People Retiring at Retirement AgeWe have in place a reemployment system for reemploying ambi-tious and capable people aged 60 and over, putting the knowl-edge and expertise they have accumulated over the course of their careers to good use. In 2012, 45.5% of employees that retired after reaching the normal retirement age of 60 expressed the desire to use this reemployment system.

Employment of WomenWe have in place welfare systems to correspond to women’s life events, such as pregnancy and maternity, and strive to create an environment in which women can be motivated to work to their fullest and continue working over the long term. As of December 31, 2012, women accounted for 20.4% of our workforce, and we continue to promote women in the workplace.

Employing Differently Abled PeopleWe are actively developing a workplace environment in which differently abled people can work to their fullest. Going forward, we will continue to employ people with disabilities, aiming to exceed the legally mandated level of having 2.0% of our total staff accounted for by such individuals.

Employment Situation (Showa Shell on a non-consolidated basis)

* As of December 31, 2012

Number of employees 946

Average age 44.5 years old

Average length of employment 20.6 years

Female employment ratio 20.4%

Number of new graduates hired in 2012 26

Women among new graduates hired over past 20 years 42.0%

Number of mid-career personnel hired in 2012 7

HUMAN RESOURCES

Our employees are vital growth drivers for Showa Shell and they are valuable stakeholders. In recognition of this fact, we are commit-ted to developing a comfortable workplace environment in which they are able to develop their skills.

We are enhancing employee welfare systems and conducting employee opinion surveys, and have also formulated a Policy for Diversity and Inclusiveness with the aim of developing a workplace culture in which employees respect their colleagues’ differences and have ample access to diverse ideas and values, and in which they are able to learn and growth through this awareness.

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Systems to Promote a Work-Life BalanceWe have in place a number of programs that enable individual employees to choose their own working style, based on their indi-vidual situation and stage of life. The range of programs we sup-ply exceeds legally required levels. In this manner, we aim to create employee-friendly workplaces where employees can take advantage of their skills and find their work fulfilling. We have provided a full range of systems that enable female employees to work flexibly surrounding such life events as pregnancy and mater-nity, while enabling them to make full use of their skills. We have a childcare leave system as well as a shortened-work hour system and other systems designed to accommodate their needs. We also have various programs that encourage a work-life balance. Both male and female employees can take advantage of these systems to accommodate flexible working styles and voluntary activities. For these efforts, Showa Shell has acquired the next-generation certification mark known as “Kurumin” from Japan’s Ministry of Health, Labour and Welfare every year since 2007.

Going forward, to further encourage the use of these pro-grams, we will continue improving the operation of these pro-grams in response to the needs of employees wishing to take part while also cultivating a corporate culture that is conducive to the use of these systems.

Employee Opinion SurveysEmployee opinion surveys are instituted each year. The ques-tions presented in these surveys are the same for the Shell Group, and include questions related to issues with manage-ment or particular divisions and improving workplace environ-ments. In 2012, 96.0% of employees responded to these surveys. Division-specific issues discovered through responses are discussed at related operating sites under the guidance of division heads, and improvements are pursued thereafter.

Systems and Usage Numbers* Figures in parentheses indicate number of men

System User TestimonyI have taken advantage of Showa Shell’s childcare leave system twice, once for each of my two children. When I was carrying my second child, my physical condition dete-riorated. Showa Shell’s shortened-work hour system was an immense help at this time, as it allowed me to work based on my condition during my pregnancy. Now my eldest is in elementary school and my youngest is in nursery school. I still actively use Showa Shell’s support systems to take leave when my children are sick or otherwise in need of me. However, the support that Showa Shell offers is not only limited to its systems. I am also incredibly grateful for the corporate culture that is understanding toward my efforts to balance my work with my children.

Aya YoshidaInternational Sales Division

Key Results of the Shell People Survey

More information regarding systems for promoting work-life balance can be found in CSR Book 2013, available on the Company’s website.http://www.showa-shell.co.jp/english/csr/index.html

2010 2011 2012

Childcare or nursing care leave 9 (1) 5 (1) 11 (1)

Shortened working hours for childcare or nursing care 4 (1) 4 (1) 3 (0)

Leave to care for a sick child 26(15) 27(17) 27(16)

Telecommuting 6 (1) 4 (1) 5 (1)

Self-development leave of absence 0 1 (1) 2 (1)

Community service leave 1 (1) 2 (2) 0 Employee satisfaction

Human resources

development

Diversity and inclusiveness

Favorable Neutral Unfavorable

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Establishing Strong Corporate FoundationsIn accordance with its Management Philosophy, Showa Shell has formulated a Basic Policy for Health, Safety, Security, and Environment (HSSE). Over the almost 30 years since the establish-ment of Showa Shell Sekiyu K.K. in 1985, we have continued to pursue ongoing HSSE perfor-mance improvements in line with this policy. We consider HSSE initiatives of foremost importance in fulfilling our social responsibility as an energy company. Accordingly, we are promoting these activities throughout the Group, with direction from top management.

HSSE Definitions

Provide a working environment that ensures workplaces and businesses are safe, healthy, and comfortable for employees.

Preserve regional and global environments.

Ensure the personal and physical safety of sites and other locations, and maintain product quality.

Prevent threats due to crimes, disaster, and other emergencies, and respond appropriately in emergency situations.

More information regarding HSSE policies can be found on the Company’s website.http://www.showa-shell.co.jp/english/profile/mp/hsse.html

Environment

SafetyHealth

Security

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HSSE Management System (HSSE-MS)The Shell Group has developed the HSSE-MS as a voluntary system to track and continuously improve HSSE performance, and this system is also employed by us. In addition, our Group refineries and other principal operating sites have acquired certification under the ISO 14001 international environmental management standard, and we have instituted an environmental management system based on this standard.

*1 Hazard and Effects Management Process (HEMP): A process used to confirm the disaster potential (hazards) related to tasks and equipment, and to envision the damage those hazards might cause. The risks of a hypotheti-cal disaster are then assessed using a Risk Assessment Matrix (RAM), and the highest risks are analyzed using a HEMP Worksheet. Once an area for improvement is confirmed, a corrective measures plan is formulated.

*2 Risk Assessment Matrix (RAM): A management table for assessing the effects and incidence probability of risks by person, capital, environment, and popularity categories.

*3 TRIPOD: An accident analysis technique used by the Shell Group.

Causal Analysis(TRIPOD*3)

Hazard and EffectsManagement Process

(HEMP)*1

Risk Assessment Matrix(RAM)*2

HSSE Priority StrategyRisk Management Committee

Correction Plan/RecurrentPrevention Policy

Each Division/Companywide(on a Case-by-Case Basis)

Follow-upHSSE (Self) Audit

HSSE Action PlanEach Division

Review(Periodic)

Act Plan

Do

Check

Accident

A list of operating sites that have acquired ISO 14001 certification can be found in CSR Book 2013 available on the Company’s website.http://www.showa-shell.co.jp/english/csr/index.html

Established at the head office and each work site, these committees dis-cuss matters regarding safety, such as the causes of occupational acci-dents and recurrence prevention plans, as well as matters regarding hygiene, such as the prevention of health problems among employees, and efforts to maintain and improve their health.

Investigates various matters related to HSSE at all work sites.

Company level

Workplace level

Risk Management CommitteeChair: COO

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

Follows the fundamental policies regarding HSSE and discusses matters pertaining to the formulation of HSSE plans, progress monitoring, and performance reviews.

Reports

Showa Shell Group HSSE Conference

Strives to share HSSE activity information to improve the HSSE performance of each Showa Shell Group company.

Product Safety Sub-Committee

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

Security Liaison Committee Meeting (SLCM)

HSSE Sub-Committee

Safety and Hygiene Committees (At All Work Sites) HSSE Conference (At All Work Sites)

HSSE Promotion SystemIn 2012, we advanced HSSE initiatives with the HSSE Committee as the highest HSSE decision-making body. This committee approves HSSE-related plans, conducts performance reviews, supervises progress, and otherwise guides HSSE promotion activities throughout the Group.

In May 2013, the HSSE Committee was replaced by the newly established Risk Management Committee, which now serves as the highest HSSE decision-making body. The Group’s Chief Operating Officer (COO) chairs this new committee as it manages HSSE, compliance, and all other aspects of internal control. The committee meets four times a year, and important items raised during these meetings are reported to the Board of Directors. Under the Risk Management Committee, we have established site-level meeting teams as well as four subcommittees devoted to different areas of discussion, with the membership of these subcommittees including represen-tatives from related Group companies and heads of departments and offices in the Showa Shell head office.

HSSE Promotion and Management System

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Importance of Safety ManagementJun AraiRepresentative Director, Chief Operating Officer, Chairman of the Risk Management Committee

“HSSE and compliance must be prioritized above all else.” I am always reminding employees of this fact. Ensuring the safety of Showa Shell Group employees is, of course, the responsibility of the Company. However, we should also be aware of the fact that we cannot improve corporate value without guaranteed safety.

The Goal Zero Movement discussed in this report has already had a positive influ-ence, as evidenced by surveys and feedback from operating sites, and we intend to continue conducting this movement throughout the Group going forward. Goal Zero is our aim to reduce to zero the number of major accidents involving people that result in lost work time—a goal we are always pursuing. However, there is no easy way of accomplishing this goal. In 2012, the movement was advanced under the slogan of “Everyone, boldly and imaginatively pursue Goal Zero!” In 2013, our advance to-ward the achievement of Goal Zero will continue under guidance of Showa Shell’s senior management as we remind all employees of the importance of a high level of safety awareness in their everyday work.

Safety Day 2012— A Day to Think About SafetyThe Shell Group has been holding Safety Day on an ongoing basis as a day dedicated to focusing even more so on safety, thereby helping to further educate employees on the subject of safety. Safety Day 2012 was held on June 6 at Shell Group operating sites around the world, with the theme of “Time for Safety.”

Showa Shell instituted its own Safety Day in Japan on that day as well, with workshops held for small groups on the department and section level. In addition, employees viewed safety education

videos, and we held forums in which employees could discuss signs of possible safety oversights, areas to improve in everyday opera-tions, and other safety-related themes, as well as how such knowledge can be reflected in one’s work.

Goal Zero DeclarationsTo prevent occupational accidents, we compiled a list of the measures and actions needed to prevent the realization of the risks present in each division. These were then used to create Goal Zero Declaration posters, which were displayed to raise safety awareness among employees, and we also implemented preventative measures.

Examples of Goal Zero Declarations We shall always use seat belts when we drive or ride in cars. (Head office division)

We will not procrastinate or neglect response to issues. (Refinery)

We shall use pointing-and-calling alerts during operations. (Depot)

We shall always use protective gear when conducting experiments or other tasks. (R&D center)

Goal Zero Movement Newsletter Including Statements from ExecutivesOur executives have written statements ex-pressing their commitment toward accom-plishing Goal Zero. These were included in a newsletter containing articles on safety, and distributed to employees to raise the motivation of all Group employees to par-ticipate in the Goal Zero Movement.

COO Arai visiting the Keihin Refinery of Toa Oil Co., Ltd., in July 2012

We realize the extreme importance of preventing accidents that result in lost work time, and are approaching this task from the perspectives of both the hard and soft elements of operations. Hard element initiatives include developing risk management proce-dures and manuals, whereas soft element initiatives include spreading safety awareness. The Goal Zero Movement is a soft element initiative geared toward spreading safety awareness. This movement was initially conducted during the safety reinforcement period in 2011, and we have continued to conduct this movement since then.

Goal Zero Movement

HSSE

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HSSE Site Visits by ExecutivesSince 2006, Showa Shell has had all of its executives partici-pate in site visits to its refineries, oil depots, and other work sites to observe and talk with on-site staff about activities aimed at preventing work-related and facility accidents. In 2012, with the aim of further improving HSSE, executives visited 73 sites, where they helped spread the shared Company stance toward accom-plishing Goal Zero.

Goal Zero Movement SurveysIn 2012, HSSE representatives at each division and site conducted surveys with regard to the activities being conducted as part of the Goal Zero Movement. The ratio of positive responses was high for all questions, demonstrating the extent to which this movement has become entrenched at operating sites. The survey also helped clarify the issues faced in the movement, such as the difficulty of using the same tools to advance activities—a result of Showa Shell’s diverse range of operations.

Are Goal Zero Declarations periodically confirmed at meetings, etc.?

Was Safety Day beneficial?

Are actions related to Goal Zero Declarations conducted on a voluntary basis?

Were statements written by executives helpful?

Total Recordable Case FrequencyWe have been continually advancing the Goal Zero Movement and working to prevent the reoccurrence of accidents that result in lost work time by conducting investigations for each occur-rence of such accidents and instituting prevention measures throughout the Group. As a result, total recordable case fre-quency, calculated as the frequency of accidents per one million labor hours, has declined. However, we are still seeing the occurrence of serious occupational accidents. For this reason, we have introduced the Shell Group’s Life-Saving Rules, and will continue implementing measures to reduce and hopefully eliminate occupational accidents.

For details on Life-Saving Rules, please refer to page 54.

95% 92%

97% 96%

• Confirmation is conducted at the start of all-hands meetings and morning meetings, helping raise safety awareness.

• Making declarations has been set as a goal, allowing all employees to work while remaining considerate of safety.

• It was a good opportunity to discuss safety within teams.

• Further consideration of office safety measures is necessary.

• The movement is in its second year, and it has become well entrenched at the workplace.

• Declarations are confirmed through group readings at meetings, etc., raising safety awareness among all employees.

• Statements enabled focus areas to be shared among divisions, helping raise safety awareness.

• Heads of operating sites issued safety-related messages from their own perspective, providing an opportunity to become aware as well as helping raise safety awareness.

Survey Results

Total Recordable Case Frequency (Showa Shell Group companies and business partners)

2.0

1.5

1.0

0.5

0

（%）

2008 2009 2010 2011 2012

1.4

*1 Incidence rates (%) are per 1 million labor hours.*2 Figures include Showa Shell Group companies and business partners.*3 Recordable cases of all occupational accidents, including those that do not

result in lost work time.

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Safety and Hygiene CommitteesIn accordance with the Occupational Health and Safety Act, Safety and Hygiene Committees have been established with membership consisting of representatives from the Company and from labor unions. These committees provide opportunities to discuss circumstances related to occupational health and safety throughout the Company. Feedback regarding issues is provided periodically and areas needing improvement are identified.

Employee Health Management and Mental HealthOn the health front, we conduct employee health exams twice each year. If an employee is called for a reexamination, we en-courage them to undergo extensive testing.

We have conducted the Japan Productivity Center (JPC) Mental Health Inventory (JMI) every other year since 2001 to

Life-Saving RulesThe Shell Group’s Life-Saving Rules have been defined to prevent accidents and are applicable to all Shell Group employees around the world. In formulating these rules, the Shell Group analyzed the primary causes of major occupational accidents that occurred during the Group’s operations over the nine-year period from 2000 to 2008, and a total of 12 rules were estab-lished based on these analyses.

In 2013, Showa Shell began employing these rules. We are working to spread awareness regarding these rules and to en-sure that they are adhered to. To this end, we have distributed posters and cards featuring the 12 icons associated with the rules to all divisions, operating sites, business partners, and af-filiated companies.

Going forward, we will pursue higher levels of safety aware-ness through these and other activities as we work to eliminate accidents.

assess employees’ mental health and to provide employees with other opportunities to check their own health status. Further-more, in 2012 medical staff (industrial counselors and health nurses) held individual interviews with all employees in order to develop an understanding of each employee’s mental condi-tion, and to offer advice or suggest work style changes should problems be discovered.

Health Counseling DeskWe have set up a Health Counseling Desk on Heart and Body Health Plaza, an intranet site dedicated to sharing information on health-related topics. This site enables employees to seek coun-seling regarding their physical or mental health with full privacy.

It is a social responsibility of Showa Shell to secure a safe workplace environment for its employees, and we also realize that such an environment is essential to the continuation of our business activities.

Based on the Labor Standards Act, the Occupational Health and Safety Act, and such internal rules as HSSE, we have formulated the Safety and Hygiene Management Rule to ensure the safety of our workplaces and the mental and physical health of our employ-ees. We endeavor to create an appropriate working environment in accordance with these regulations.

Showa Shell works to enhance safety awareness. In addition to having in place the Safety Rule, we have defined ways of responding quickly in the event of an accident—prescribing how to determine the causes of accidents and how to prevent recurrence—and have put in place a safety recognition system. In particular, we conduct the Safety & Quality First (SQF) Campaign with our contract dealers and business partners to ensure safety and quality assurance measures, with the aim of achieving zero accidents.

Health

Safety

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Disaster Drills at Refineries and Other WorkplacesWe hold comprehensive disaster drills in cooperation with busi-ness partners and government bodies that anticipate a large-scale earthquake at our refineries and other workplaces. Conducting such drills on an ongoing basis enhances employ-ees’ response skills, and we revise and improve our systems to assure the safety of refineries and other workplaces.

Fire-Fighting DrillsIn the event of fire, a quick response is essential to prevent the fire from turning into a major disaster.

Showa Shell works to improve employees’ basic understand-ing of fire-fighting and conducts fire-fighting drills using actual fires that have been specially designed to prepare employees to fight various types of fires. The Niigata Disaster Control Training Center, which opened in 1993, serves as a site for fire drills for company employees, as well as people from affiliated compa-nies and service stations. In recent years, we have also been working to fulfill our responsibility as a company that contributes to local communities by opening the center for use as a site for companies in and outside Niigata Prefecture, and as a drill site for a fire-fighting school. In the 19 years since the center first opened, some 4,987 people have undergone training there.

Risk Management System Spanning the Entire Supply ChainThe Showa Shell Group deals in energy, an important part of social infrastructure. As such, the establishment of systems to en-sure that we can continue to supply energy even under extreme circumstances is among our most important responsibilities to society. For this purpose, we have formulated a business continu-ity plan (BCP). This plan includes provisions to guarantee that the products can be ordered and shipped anywhere in Japan, even if an earthquake directly below the Tokyo metropolitan area, an outbreak of a new strain of influenza, or some other disruption occurs. The plan also provides for the continuation of these ac-tivities in the event that the head office ceases to function due to such disruptions. We conduct yearly drills based on the content of this plan. Through drills, we rehearse setting up an alternative Disaster Control Headquarters in the Kinki Branch, evaluate the process leading up to the enactment of the BCP, and practice taking orders and subsequently shipping ordered oil products without the current systems in place by using email and fax. Such drills are conducted through collaboration with our affiliates spanning the entire supply chain, from the Group refineries to business partners that transport our products and the contract dealers that operate our service stations. After the Great East Ja-pan Earthquake, we revised the BCP to incorporate even more detailed division-specific measures and also bolstered our infra-structure for enacting the plan, which entailed introducing com-munication facilities for conducting satellite phone calls as well as other equipment.

Refinery disaster drill

Comprehensive disaster response drill (alternative Disaster Control Headquarters in the Kinki Branch)

Fire-fighting drill at the Niigata Disaster Control Training Center

As a company that handles the energy that is essential to our way of life, our social mission is to provide a stable supply of products and services even in the event of disaster or other emergency. Accordingly, we have in place structures to ensure business continuity, have drafted emergency response plans, and conduct regular drills as part of our efforts to strengthen our Group crisis management system.

Security

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Structure for Promoting Environmental PreservationFormulated in accordance with the abovementioned Basic Policy for Health, Safety, Security, and Environment, our Environmental Preservation Guidelines spell out our basic policy for protecting the environment in the course of our business. Based on these guidelines, we operate an HSSE-MS to determine, evaluate, and manage environmental risks, to improve our environmental performance on a continuous basis. Our refineries and other principal work sites have acquired certification under the ISO 14001 international environmental management standard, and we create systematic environmental preservation measures.

A list of operating sites that have acquired ISO 14001 certification can be found in CSR Book 2013 available on the Company’s website.http://www.showa-shell.co.jp/english/csr/index.html

Atmospheric Pollution PreventionSulfur oxides (SOx) and nitrogen oxides (NOx) are produced by fuel oils and gases in refinery furnaces and boilers. The Group strictly maintains SOx emissions below regulated levels by using low-sulfur fuel oil and sulfur-free fuel gas treated with gas-cleaning equipment. Efforts to prevent atmospheric pollution by NOx emissions also include improved combustion methods achieved through the introduction of low NOx burners, and the installation of flue gas denitration equipment.

Medium-Term Environmental Action PlanWith regard to environmental initiatives, we have formulated a Medium-Term Environmental Action Plan out of recognition for the need to manage such activities in a focused and systematic man-ner. We review the plan’s medium-term objectives on an annual basis. In 2012, we achieved our goals of reducing unit energy consumption (achieve an average reduction of 13% for fiscal years 2008–2012 against fiscal 1990 levels) and of achieving zero emissions at refineries (an industrial waste output rate of 1% or less). In addition, we promote the usage of solar power through means such as establishing sales methods for megasolar systems using CIS thin-film solar modules. In 2013, we will formulate a new Medium-Term Environmental Action Plan, and the entire Com-pany will work together to realize the goals contained therein.

More information regarding the Medium-Term Environmental Action Plan can be found in CSR Book 2013, available on the Company’s website.http://www.showa-shell.co.jp/english/csr/index.html

Water Pollution PreventionThe water used at oil refineries is strictly managed so that it meets environmental regulations related to chemical oxygen demand (COD)* and oil content. Coolant water is confirmed to have no oil content before it is discharged into the ocean. Water quality is managed through wastewater purification, either through oil separators, chemical treatment using flocculating agents, or through the use of activated sludge treatment equipment. Showa Shell uses very large crude carriers (VLCCs), all of which are

Preventing Environmental Pollution

The Showa Shell Group’s Business Model for Preventing Global Warming

　　　

CO2 emission reductions

Ongoing initiatives

Implement efficiency improvement and energy-saving measures centered on the Oil Business, Sell high-value-added products with reduced environmental impact

2

Promote expansionof solar power usage

1

Showa Shell has established an appropriate environmental management system (EMS), which it utilizes as it works to reduce the en-vironmental impacts of its operations. At the same time, we are advancing an ongoing campaign to help prevent global warming by reducing overall CO2 emissions from society through the development and provision of eco-friendly products that meet society’s needs.

The Environment

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Industrial Waste Reduction at Group RefineriesThe petroleum refining process generates industrial waste, in-cluding sludge and disposable catalysts. The Group is building a Companywide waste management system to ensure the opti-mum disposal of waste and reuse of resources. As a result of ongoing efforts to promote the recycling of industrial waste, in 2012 final waste output by refineries amounted to 0.3% of the total amount generated, or 107 tonnes. Accordingly, the Group has continued to meet its zero-emissions goal (emissions of 1% or less) since 2008.

Reducing Waste and Promoting Recycling in the Solar Business Group company Solar Frontier K.K. is a member of PV Cycle, a European organization established to promote the collection and recycling of end-of-life solar panels. Solar Frontier is also partici-pating in the joint development of Japan’s first technology for so-lar power system recycling, a project being promoted by the Kitakyushu Foundation for the Advancement of Industry, Science and Technology.

In addition, packaging for solar modules was changed from conventional cardboard boxes to reusable packaging using corner pieces, thereby reducing waste production. This change was instituted in conjunction with the start of operations at the Kunitomi Plant in 2011. This packaging method won a Large-sized Equipment Packaging Category Award in the 2012 Japan Packaging Contest held by the Japan Packaging Institute.

Waste Reduction Initiatives

double-hulled tankers, reducing the risk of crude oil leakage even in the unlikely event of hull damage due to running aground or a collision. Also, to curtail the movement of microorganisms that might cause environmental or human health problems and to preserve biodiversity, the ballast water that is loaded when the vessel is empty is replaced in the open ocean before the vessel arrives at its destination.* Chemical oxygen demand (COD): An indicator of the degree of water

pollution. Higher COD values indicate higher levels of water pollution.

Soil Contamination CountermeasuresThe Showa Shell Group conducts soil contamination surveys and implements countermeasures at approximately 1,000 ser-vice station sites. We continue to conduct these surveys when facilities are closed or remodeled. We also participate in a committee for reviewing the application of the Water Pollution Control Act and the Soil Contamination Countermeasures Act,

and provide feedback based on the knowledge and experience gained from our own countermeasures.

Chemical Substance Management SystemIn accordance with laws and regulations and HSSE manage-ment rules, Showa Shell has drawn up regulations on the man-agement of chemical substances, chemical substance management regulations related to products, and regulations on the management of toxic and poisonous substances.

These regulations are aimed at preventing negative effects on people, property, and the environment of products that we use, as well as their containers, packaging, and chemical products used. In addition, we are reinforcing our overall management system, spanning development to use and disposal.

Amount and Rate of Final Industrial Waste Output from Group Refineries

Solar module packaging method

5,000

4,000

3,000

2,000

1,000

0

(Tonnes/year)5.0

4.0

3.0

2.0

1.0

0

(Waste output rate)

2005 2006 2007 2008 2009 2010 2011 2012

Waste output amount Waste output rate

Zero emissions achieved at refineries industrywide(Waste output rate of 1% or less)

1070.3%

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Plant we have improved production efficiency, and also realized more efficient transportation by changing the materials used to package solar modules.

On the operations front as well, we are reducing environmental impact through such measures as adjusting freezer temperatures and exhaust fans to achieve efficient operations. In addition, a portion of the electricity used in our plants is supplied by mega-solar facilities installed on the site of our Second Miyazaki Plant and the roof of our Kuni-tomi Plant. These facilities have a combined generation capacity of three megawatts.

Efforts during Crude Oil ProcurementWhen the VLCCs that we use when procuring crude oil pass through a strait or enter the ports they serve, they travel at reduced speeds to reduce both fuel consumption and CO2 emissions.

Production InitiativesRefineriesTo promote energy conservation by maximizing the effective use of energy generated during oil refining processes, we invest in equipment such as heat exchangers, waste heat recovery boil-ers, and exhaust gas recycling equipment. The Petroleum Asso-ciation of Japan (PAJ) is promoting its Low-Carbon Society Implementation Plan, which calls for energy-saving measures to be taken to replace a total of 530 megaliters of crude oil per year by fiscal 2020. Showa Shell is actively promoting energy-saving measures at its refineries, and is striving to reduce its CO2 emis-sions, using “unit energy consumption” as its indictor. In 2012, unit energy consumption was 7.16 (kiloliters/megaliter), down 24% from fiscal 1990 levels. This surpasses the level that the PAJ has introduced (average reduction of 13% for fiscal years 2008–2012 against fiscal 1990 levels), as well as the average industry value.

Solar Module PlantsCIS thin-film solar modules are designed and manufactured with a high degree of environmental awareness, from the materials they use to their recycling processes. Compared with modules made of crystalline silicon, the generation layer of these modules is only 1/100th as thick, which saves raw materials. Also, the production process is simple and short, and they can be pro-duced with relatively little energy. Furthermore, at the Kunitomi

HSSE

Preventing Environmental Pollution and Reducing Waste

Kunitomi Plant

Showa Shell Total Adverse Environmental Impact for 2012

• CO2 emissions 4,754 kilotonnes• Total waste 42,079 tonnes• Sulfur oxides (SOx) 2,689 tonnes• Nitrogen oxides (NOx) 2,176 tonnes• Soot dust 37 tonnes

• CO2 emissions 509 kilotonnes

Crude oil procurement and transport

IN

OUT OUT

• Fuel (crude oil equivalent) 184 megaliters• Energy 7 petajoules*

Manufacturing plants (refineries)

CO2 Emissions and Unit Energy Consumption at Group Refineries

• Fuel (crude oil equivalent) 1,591 megaliters• Energy 61 petajoules• Electric power 202,753 megawatts• Water 32,531 megaliters• Seawater 115,000 megaliters

*Fuel calculations are in petajoules (1 PJ = 1015 J)

15,000

12,000

9,000

6,000

3,000

0

(Kilotonnes/year) 12.00

10.00

8.00

6.00

4.00

(Unit)

1990 2005 2006 2007 2008 2009 2010 2011 2012

Refinery industry average reduction of 13% for fiscal years

2008–2012 against fiscal 1990 levelsTarget value: 8.87

4,754

7.16

8.56

3,965

10.19

9.45

CO2 emissions Unit energy consumption (Industrywide)Unit energy consumption (Showa Shell)

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Logistics InitiativesGround ShipmentsWe are working to curtail CO2 emissions by avoiding sudden acceleration—which also has safety implications—as well as stopping engines when vehicles are idling and making distribu-tion routes more efficient. In response to the electric power short-ages in the summer of 2012, we restricted the hours of operation of truck delivery pumps to cut peak time power use.

Maritime ShipmentsIn marine transportation, we promote the use of larger domestic vessels and endeavor to reduce CO2 emissions by improving transportation efficiency and reducing fuel consumption. We keep two fuel-efficient electrical propulsion vessels in continuous operation, and have raised energy efficiency on all vessels by using a fuel-saving supplement. We are also keeping fuel con-sumption low by monitoring transport speeds.

Initiatives at Sales LocationsIn 2011, after the Great East Japan Earthquake, Japan was presented with a tight supply and demand situation for electricity during the summer months. To help address this issue, we in-stalled solar modules on the upper canopies of several of its service stations located in the service areas of Tokyo Electric Power Company, Incorporated, and Tohoku Electric Power Co., Inc. Solar modules were installed on 214 service stations, over half of the stations in these areas. In this manner, we are imple-menting unique energy-saving and environmental preservation measures.

Furthermore, in 2012 the government of Japan issued a re-quest that electricity be conserved during the winter months. Showa Shell responded by expanding the scope these efforts to the service areas of The Kansai Electric Power Company, Incor-porated, Kyushu Electric Power Company, Incorporated, and

other power companies. Solar modules were installed at an ad-ditional 241 service stations, making for a total of 455 service stations at December 31, 2012, over half of the service stations owned by Showa Shell.

Development and Sales of High-Value-Added Products with Reduced Environmental ImpactShowa Shell is developing and selling a wide variety of high-value-added products that contribute to reductions in the environ-mental impacts of customers during usage. These include Shell Pura, a high-octane automobile gasoline that substantially cuts harmful gas emissions; Shell Helix, a lubricant that contributes to energy savings; and New Melophalt, asphalt that ameliorates the summer rise in road surface temperatures. Furthermore, through the manufacture and sale of CIS thin-film solar modules, we are also encouraging the spread of renewable energy.

For more information on high-value-added products, please refer to pages 31–32 and 45

Initiatives at OfficesAt offices and other operating sites, we are conducting the ECO TRY21 environmental action program based on the directive of “do what you can.” In 2012, we extended the period over which we encourage employees to wear cooler clothes in the hot summer months to cut back on air conditioner usage (Cool Biz), turned off lights during lunch breaks, turned off PC monitors when they were not being used, and conducted meetings with-out using paper materials.

•CO2 emissions 173 kilotonnes•Total waste 12,741 tonnes•Wastewater 497,353 tonnes

Other manufacturing plantsFor asphalt, lubricant, LPG, petrochemical products, etc.

Distribution and marketingGround and marine shipments, oil depots, and service stations

(approx. 3,600 stations)

•CO2 emissions 228 kilotonnes

•Fuel (crude oil equivalent) 85 megaliters•Energy 3 petajoules•Electric power 271,077 megawatts•Water 3,811 megaliters

•Fuel (crude oil equivalent) 134 megaliters•Energy 5 petajoules

Customers (consumption)

•Gasoline 9,060 megaliters•Jet fuel 2,158 megaliters•Heating oil 2,830 megaliters•Diesel oil 4,999 megaliters•Heavy fuel oil 3,562 megaliters•Other petroleum products 4,616 megaliters

•CO2 emissions 67,958 kilotonnes

IN IN IN

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Support for Educating the Next Generation of ChildrenShowa Shell conducts environmental preservation and international

community support activities with an emphasis on supporting the edu-

cation of the children and young people that will be directly respon-

sible for shaping the future of society. Through these efforts, we are

working as an energy solution provider to provide a different type

of “energy” to local communities and society as a whole. In this

report, we would like to focus on one of these various activities:

our environmental photo contest.

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environmental and social issues, and we have seen schools take advantage of this opportunity in a number of ways, such as having students construct collages or other artistic works and then write short essays on their feelings with regard to the pictures. Furthermore, we have established a school category in which we present awards to entire schools, and over 110 schools en-tered this category in 2012.

Award-winning works are then exhibited in shopping malls and other facilities throughout Japan. This enables the winner’s passion toward the environment to inspire the people that see their work, and then spread to the surrounding communities and then ideally throughout society.

Environmental Photo Contest in Kumamoto —Spreading Awareness—Inspired by Showa Shell’s environmental photo contest and its ideals, Kumamoto Prefecture began holding its own contest, ap-propriately named “Things to Preserve and Correct around Our Town in Kumamoto,” in 2007. This contest is expected to help raise environmental awareness and town pride among young children and other Kumamoto residents alike. We hope to con-tinue spreading awareness by encouraging other organizations to launch similar initiatives.

Showa Shell’s environmental photo contest was created with the goal of providing or-dinary citizens with a chance to look at the scenery around them, become aware of the environmental issues present

therein, and think of how to resolve these issues. This contest was first held in 2005, and we have been able to hold it every year since thanks to the support of the Ministry of the Environment and several companies and organizations that also agree with the ideals embodied in the contest. Due to such support, we success-fully held our 8th environmental photo contest in 2012.

Participants in the contest were asked to take pictures of the close-to-home scenery they want to preserve as well as scenes that represent issues they want to correct as soon as possible. These pictures were then submitted together with their comments. The 8th environmental photo contest attracted a total of 3,438 entries in the junior category and 240 in the general category. The junior category of this contest is utilized by schools across Japan as a means of teaching students about the environment or as a homework assignment for summer vacation. To schools, this contest serves as an opportunity to make students aware of

Winning Submission in the Junior Category of the 8th Environmental Photo ContestWhen the contest was first started, entries were primarily focused on themes such as waste disposal, water pollution, and gas exhaust. However, in recent years we have seen a rise in submissions on various other environmental themes, such as biodiver-sity, introduced species issues, depopulation, eco-friendly lifestyles, and proper family relationships. The winner of the gold medal in the junior category of the 8th environmental photo contest was Emi Matsumoto, who submitted a remarkable work on the theme of “life.”

COMMENT Emi Matsumoto (14) Fukushima PrefectureWhen two lives have to compete for survival, the result is always death. Life is extinguished to fuel the life of another; this type of death can be said to have a purpose. This is the proper cycle of life that we should work to protect. However, when life collides with the lifeless on an asphalt plain, the result is a meaningless death, and sadly this type of meaningless death is becoming all too common. Our actions are disrupting the normal cycle of life and death. If we are to protect an environment for the living, we must reevaluate how we look at life.

Title: The Cycle of Life

Other award-winning submissions can be viewed on the following website. http://www.showa-shell.co.jp/photo/

Eighth Environmental Photo Contest “Things to Preserve and Correct around Our Town”

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Project for the Reforestation of Mt. Fuji

COMMUNITY AND SOCIAL CONTRIBUTION ACTIVITIES

Discussion with Teachers from Schools Receiving Awards in the 8th Environmental Photo Contest

Mr. Matou, Tohrei Gakuen Fujisawa Junior High School (center)Mr. Nakagawa, Shimotsui Nishi Elementary School, Kurashiki City (left)Tomoji Nakamura, General Manager, Public Affairs Division, Showa Shell Sekiyu K.K. (right)

In late October 2012, an award ceremony was held for the recipients of copper, silver, and gold medals in the 8th environ-mental photo contest as well as for the schools that had received awards in the school category. We took advantage of this op-portunity to speak with the teachers of award-winning schools.

We asked why they chose to participate in the contest. Mr. Matou, a science teacher at Tohrei Gakuen Fujisawa Junior High School, saw an art work book for the contest and thought it would be the perfect assignment for summer vaca-tion homework to help students learn about environmental is-sues. Mr. Nakagawa, of Shimotsui Nishi Elementary School in Kurashiki City, had previously conducted an environmental education program for fifth grade students called “Clean Project” in which students participated in cleanup activities at the beach and other areas of the community. He decided to have students participate in the contest to help deepen their understanding of the environment.

The next topic was the wish for company support in educat-ing the next generation of children. Tohrei Gakuen Fujisawa Junior High School holds special classes 10 times a year. These classes can be arranged freely on a wide range of

topics. For this reason, Mr. Matou looks forward to the possi-bility of having Showa Shell and other companies conduct classes at his school on environmental issues and other sub-jects. Mr. Nakagawa expressed his desire for classes to be conducted by a provider of solar modules, as these modules are a source of renewable energy. It is our hope to incorpo-rate the opinions of these two teachers in future environmental photo contests, as well as other programs geared toward supporting the education of the next generation of children.

Aside from the environmental photo contest, Showa Shell con-ducted a wide range of other community and social contribution activities in 2012. Some of these activities are listed on this page.

Further, CSR Book 2013, available on the Company’s web-site, contains more detailed information regarding these activi-ties and other activities, as well as other CSR-related information.


CSR Book 2013

CSR Book 2013


2013 / 07 / 01 [15:37]

Support for the participation of the Tsukuba West Symphony Junior Orchestra in overseas concerts

Program enabling students from special-needs schools to experience our workplaces

Shell Art Award 2012

Energy education program for children in summer vacation

Provision of office space to Refugees International Japan

CSR Book 2013 Contents

Major Initiatives in 2012

Our Value Chain and StrengthsHSSE HSSE Promotion and

Management System Goal Zero Movement Health Safety Security The Environment Medium-Term Environmental

Action Plan (2010–2012) Medium-Term Environmental

Action Plan (2013–2015) Status of ISO 9001

(Product Quality) Certification Status of ISO 14001

(Environmental) Certification Status of OHSAS 18001

Certification Environmental Accounting

As a Company Corporate governance Together with our customers Together with our shareholders

and investors Together with our employees Together with our business

partners Together with communities and

societyResults and review of CSR activities in 2012 and future targetsISO 26000 Comparison Table

Support education for

the next generation


activities


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the next generation


the next generation

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Corporate Governance

Showa Shell strives to improve the transparency and efficiency of management as part of its continued quest for ongoing growth and higher corporate value. To this end, we are developing optimal corporate governance systems that incorporate objective opinions from external perspective and are responsive to changes in society and legislation.

Global Management Structure

Term of office for directors shortened to 1 year

Majority of directors made outside directors

Each business segment assigned a COO

Corporate Governance Structure Reforms Instituted in March 2013

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Corporate Governance Structure

To enhance its management efficiency in response to ongoing changes in the business environment, the Company has clarified responsibilities and authority, strengthened the business execu-tion oversight function, accelerated decision-making, and raised the efficiency of business execution.

Efforts to Build a Corporate Governance System1997 Number of directors reduced from 26 to 22

1999 Number of directors reduced from 18 to 11Executive officer system adopted

2003Executive officer system revisedManagement Executive Committee establishedOutside directors increased by 1

2005 Outside directors increased by 1

2007 Executive retirement allowance system abolished

2009 Outside directors increased by 1(4 of 8 directors now outside directors)

2013Outside directors increased by 1(5 of 8 directors now outside directors)Term of directors shortened from 2 years to 1 year

In March 2013, the Showa Shell Group reformed its corpo-rate governance structure to enable management to function better on a global scale. Reforms implemented include the clari-fication of responsibility and the strengthening of governance systems. In addition, the term of office for directors was shortened from two years to one, the number of outside directors was in-creased, and a Chief Operating Officer (COO) was assigned in each business segment. We believe these reforms will enable management to respond more flexibly to changes in the business environment. Under the new system, business execution in the Oil Business Center and the Energy Solution Business Center will be performed by their respective COOs, who will respond in a flexible manner to the rapidly changing business environment.

Meanwhile, the Group’s Chief Executive Officer (CEO), Chief Operating Officer (COO), and Chief Financial Officer (CFO) will make decisions regarding medium- to long-term strategies and important matters that exceed the boundaries of business divisions and impact the entire Group.

Furthermore, the Risk Management Committee was estab-lished to handle all areas of risk management for the entire Company. The committee also serves as an advisory body to the Board of Directors and the Group’s COO, who chairs the com-mittee. In this way, we have further strengthened the foundations supporting the Company.

These new management systems will be utilized effectively to advance the strategies described in the Medium-Term Business Action Plan as we pursue improved corporate value for the Showa Shell Group.

Board of Directors and DirectorsThe Company’s Board of Directors comprises eight directors, five of whom are outside directors. The Board is charged with mak-ing important decisions, including those of business strategy, and supervising the execution of business.

The Chairman and Representative Director chairs the Board of Directors, which has a limited number of members and makes decisions promptly. To encourage big-picture, objective manage-ment that incorporates diverse viewpoints, the majority of the di-rectors are outside directors. To provide outside directors with ample time for deliberation at Board of Directors’ meetings, meeting materials are distributed and explained ahead of time, enabling lively deliberation at each meeting.

Furthermore, two of the five outside directors are independent directors, thereby ensuring that the interests of general sharehold-ers are protected and that the Company’s management main-tains an objective perspective.

Board of Auditors and AuditorsThe Company has introduced an auditor system. The Board of Auditors is composed of two standing auditors and two highly independent outside auditors. Outside auditors in particular are selected for their broad-based knowledge and independence, as well as the objectivity, neutrality, and specialized expertise that the auditing process requires. Auditors perform a supervisory function for the management team.

Auditors formulate auditing standards and audit plans, attend Board of Directors’ and other important meetings, receive the status of operations from directors and executive officers, and audit divisions, offices, subsidiaries, and other organizations. In this manner, they conduct business audits related to the execution of business by the Board of Directors, as well as accounting au-dits. The auditors also receive reports on internal audits con-ducted by the Internal Audit Division and receive reports on audit results and information on items for consideration by the account-ing auditors.


Board of Directors

Group executive management

Companywide issuesStrategic issues

Division-related issuesBusiness execution

CEO

COO CFO


(Combination of the Internal Control Promotion

Committee and the HSSE Committee)

Energy Solution Business Management Executive

CommitteeChairman: Executive Officer,

Energy Solution Business COO

Oil Business Management Executive Committee

Chairman: Executive Officer, Oil Business COO

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To ensure the viability of audits by auditors, an audit support structure is in place in which dedicated audit staff are assigned to assist the auditors. Furthermore, the Internal Audit Division, account-ing auditors, and management departments in charge of internal control support auditors through ongoing communication. To sup-port outside auditors, Board of Directors’ meeting materials and materials pertaining to important issues at other important meetings are distributed to them ahead of time. If necessary, such materials are explained to these auditors before and after such meetings.

Executive Officer System and Management Executive CommitteesThe Company employs an executive officer system to speed de-cision-making and to improve the efficiency of business execu-tion by clearly defining the authority and responsibilities of directors and executive officers.

Management Executive Committees have been established for the Oil Business and the Energy Solution Business as the de-cision-making bodies for important items of business execution in these businesses. These committees meet twice a month. Each

Outside Directors (As of March 28, 2013) Name Position / background Reason for appointment

Yoshihiko Miyauchi Independent DirectorChairman, Director Representative Officer Group CEO, ORIX Corporation

Mr. Miyauchi was selected for his broad-based knowledge, including management from a Japanese perspective and his extensive experience as an outside director at other companies, with the expectation that his appointment would strengthen the management supervisory function from an objective standpoint.

Yukio Masuda Independent DirectorAdvisor, Mitsubishi Corporation

Having many years of experience in the energy business segment at Mitsubishi Corporation, Mr. Masuda was selected for his extensive knowledge of the energy business in Japan and overseas, with the expectation that his appointment would strengthen the management supervisory function.

Ahmad O. Al-Khowaiter Chief Engineer, Saudi Aramco (Saudi Arabia)

Mr. Al-Khowaiter was selected for his deep understanding of the oil business at Aramco, with the expectation that his appointment would strengthen the management supervisory function from a global standpoint.

Minoru Takeda General Manager, Shell Upstream International

Mr. Takeda was selected for his deep understanding of the multinational oil business of the Shell Group and his experience at Japanese oil companies, with the expectation that his appointment would strengthen the management supervisory function.

Chiew Nguang-Yong Director, Shell Chemicals Seraya Pte Ltd (Singapore)

Mr. Nguang-Yong was selected for the knowledge he acquired through his involvement in the development of the Shell Group’s globally expansive business, with the expectation that his appointment would strengthen the management supervisory function.

Outside Directors and Auditors

To ensure management transparency, five of the Company’s eight directors and two of the Company’s four auditors are out-side officers. The outside officers provide big-picture, objective, and diverse viewpoints and require explanations from manage-ment. The outside officers engage in active deliberation at meet-ings of the Board of Directors and Board of Auditors based on

their differing viewpoints.In 2012, the outside directors attended approximately 90% of

the Board of Directors’ meetings. Also, the outside auditors at-tended approximately 90% of the Board of Directors’ and the Board of Auditors’ meetings.

committee is chaired by the COO of their respective business segment, enabling management duties to be carried out swiftly in each business.

Various other committees, such as the Investment Committee and the Ordering Committee, are in place to provide advice on important decisions. This structure is designed to incorporate specialized points of view into decision-making.

Accounting AuditsThe Company has appointed PricewaterhouseCoopers Aarata as its accounting auditor, which performs audits and is paid compensation for these audits.

Audit Compensation (Year Ended December 31, 2012)

Showa Shell (Yen million)

Consolidated subsidiaries (Yen million)

Compensation based on audit certification activities 116 53

Compensation based on non-audit activities 0 0

Outside Auditors (As of March 28, 2013)Name Position / background Reason for appointment

Midori Miyazaki Independent AuditorDean, Chiba Shoka University, Department of Policy Information

Ms. Miyazaki was selected for her multifaceted involvement as a professor at Chiba Shoka University and her broad-ranging insight, with the expectation that her perspective, unaffected by the standard economic sphere, would strengthen the auditing function.

Kenji Yamagishi Independent AuditorAttorneyPresident of The Japan Federation of Bar Associations

Mr. Yamagishi was selected for experience in important posts at the Bar Association and his broad-based knowledge and deep scholarly understanding as an attorney, with the expectation that he would strengthen management supervision from the standpoints of the legality and appropriateness of business execution.

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We have also established the General Rule for Procurement to ensure that our procurement activities are fair, transparent and based on consideration for social and environmental facets, in-cluding compliance with laws and corporate ethics, resource protection, and environmental preservation. We also offer Pro-curement Guidelines to business partners to facilitate their under-standing of our considerations regarding procurement.

We conduct compliance training to ensure that employees understand the importance of compliance put into practice. We distribute our Compliance Book, which explains policies on specific actions, and also conduct web-based learning on these policies once or more each year. To supplement this book, we have established the Room of Compliance intranet site, which enables employees to easily search for relevant case studies and laws with regard to specific areas of compliance. In addition, we conduct training and web-based learning that incorporate concrete case studies of legal and other types of compliance. In particular, we conduct regular training at each division with re-spect to the Antitrust Law, using specific examples from each divi-sion and responding to issues raised by working-level employees. Furthermore, as our operations become increasingly more global, interactions with government officials are expected to become ever more common. In light of this fact, in 2012 we conducted

The total remuneration to all directors decided by the resolution of the General Shareholders’ Meeting held on March 30, 1994, is ¥65 million or less per month. Within the limit of the total amount, monthly base remuneration to each director is de-termined using a remuneration table by rank, except for Douglas Wood, for whom base remuneration is determined by a second-ment contract with the Shell Group.

The total remuneration to all auditors decided by the resolution of the General Shareholders’ Meeting held on March 28, 2008, is ¥10 million or less per month. Within the limit of the total amount, remuneration to each auditor is determined by the mutual agreement among all auditors.

The amount of bonus to directors and auditors is based on the consideration of economic circumstances and business perfor-mance during the period, and determined each year by the reso-lution of a General Shareholders’ Meeting.

Retirement allowances to directors and auditors were abol-ished as of the General Shareholders’ Meeting held on March 29, 2007.

The Company has stipulated its Code of Conduct to provide general and universally applicable guidelines for the develop-ment of corporate activities. In addition to legal compliance, this code specifies responsibilities toward society, by the observance of high corporate ethical standards.

To ensure operational appropriateness, the Company has formulated a Basic Policy on Internal Control and established an internal control system to provide autonomous monitoring as the Company pursues its business. To create a more effective internal control system for the entire Showa Shell Group, the Company has encouraged the formulation and thorough understanding of internal control regulations at affiliated companies and confirms their operational status.

ComplianceThe Showa Shell Group recognizes that compliance among the Group and its employees is paramount to fulfilling its social re-sponsibility as it goes about its business activities. Accordingly, the Group continues pursuing compliance initiatives.

The Group has formulated a variety of compliance-related regulations, including Compliance Rules for the Antitrust Law, Government Anticorruption Rules, Insider Trading Control Rule, Environmental Preservation Guidelines, and Export Control Rule.

Summary of Liability Limitation AgreementOutside directors (Yoshihiko Miyauchi, Yukio Masuda, Ahmad O. Al-Khowaiter, Minoru Takeda, and Chiew Nguang-Yong) and outside auditors (Midori Miyazaki and Kenji Yamagishi) entered into a liability limitation agreement with the Company in

relation to the limitation of liability specified in Clause 1, Article 423, of the Companies Act. Amounts of liability under this agreement shall be the higher amount of ¥10 million and the amount designated by the Companies Act.

Director and Auditor Remuneration (Year Ended December 31, 2012)

Executive category Total remuneration (Yen million)

Total remuneration by category (Yen million)

Number of executives subject to bonuses (People)

Base remuneration

Bonuses

Directors (excluding outside directors) 350 350 – 5

Auditors (excluding outside auditors) 72 72 – 3

Outside directors and auditors 54 54 – 6

The above includes remuneration paid to three executives: one director who resigned and one auditor who retired at the close of the 100th General Shareholders’ Meeting held on March 30, 2012; and one director who retired at the close of the 101st General Shareholders’ Meeting held on March 28, 2013. The number of directors and auditors as of December 31, 2012, was eight and four, respectively.

Executive Remuneration

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Risk ManagementPreviously, the Company had one committee for managing risks related to health, safety, security, and environment (HSSE) and another for other risks. However, in May 2013 we established the Risk Management Committee as a body for governing all risks faced by the Company with the aim of facilitating more ef-ficient and flexible management. As an advisory body to the Board of Directors and the Group’s COO, who chairs the com-mittee, the Risk Management Committee discusses and makes decisions regarding the establishment and operation of systems related to internal control, corporate risk management, informa-tion management, and HSSE management. The committee also offers suggestions to the Oil Business Management Executive Committee and the Energy Solution Business Management Ex-ecutive Committee.

To manage risks related to HSSE, in line with its basic policies the Company has formulated Regulations for Disaster Control Headquarters and other related regulations and drawn up a business continuity plan (BCP). In addition, the Company up-dates its Emergency Communication Flow Chart, which is pre-pared for in case of an accident or disaster, and conducts drills on a constant basis. When accidents and disasters do occur, the underlying causes are investigated and the findings are utilized for recurrence prevention measures that are disseminated throughout the Company.

As lessons in particular from the Great East Japan Earthquake, which struck on March 11, 2011, the Company has updated its

training and web-based learning with regard to Government Anticorruption Rules.

As a whistle-blowing system, we have introduced an employee consultation service, Voice of People (VOP), that encourages em-ployees to raise corporate ethics concerns and to offer construc-tive proposals to the Company, and have created routes to receive employee input both within and outside the Company. We have formulated Rules of the Group Companies’ Help Line, “Voice of People (VOP),” covering the system’s operation, and systems are in place to protect the confidentiality of people undergoing consul-tation and to prevent them from adverse impacts. We have ex-tended the application of these systems beyond our own employees to include employees at the Company’s subsidiaries.

Showa Shell’s policy with regard to criminal organizations is to handle them in accordance with the law, with the view that organizations of this kind represent a threat to the order and safety of civil society. The departments in charge of related mat-ters have been designated, and contact is maintained with the police and other external specialist institutions.

Compliance Book

Corporate Governance System and Internal Control System

Business Divisions and Affiliated Companies

Reports Reports Notice Notice

[Business Execution]

Internal Audit Division

Reports Instructions Instructions Auditing

Oil Business Management

Executive Committee

Executive Officer, Oil Business

COO

Executive Directors/

Executive Officers

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Executive Officer, Energy Solution Business COO

Executive Directors/

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Information Disclosure

Sub-Committee

Harassment consulting service

VOP internal

consulting service

VOP external

consulting service

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NoticeReports

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Compliance Committee

Committee Audit

Reports Reports Reports Reports

Reports

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Monitoring

Coordination

Planning approval

Auditing Auditing

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Accounting AuditorsChairman and

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DirectorsAuditors

Nominations Nominations NominationsReports Reports Reports

CoordinationAuditing

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Information Management and DisclosureWe have established rules for appropriately managing the Com-pany’s information assets. These regulations assign to depart-ment managers the responsibility for managing information and spell out the control method that is required at each level of confidentiality, including “secret” and “restricted to internal use only.” Furthermore, in light of the increasing use of social media, we have developed guidelines for employees using such media on a private basis to prevent them for making statements with regard to the Company that could be misunderstood or acci-dently leak information.

We have also formulated a Basic Policy for Information Disclo-sure. Based on this policy, to promote an understanding and fair evaluation of the Group among various stakeholders, we work to ensure that important information is disclosed equitably, accu-rately, and in a timely manner. We have set up the Information Disclosure Sub-Committee as the institution in charge of managing this process and making judgments on the handling of information to be disclosed. To comply with timely disclosure regulations, we publicize information via the system for transmitting disclosure in-formation in a timely manner provided by the Tokyo Stock Ex-change (TDnet), as well as on our website. We also work to disclose other information quickly and proactively, based on the judgment of the Information Disclosure Sub-Committee.

Our investor relations (IR) activities targeting shareholders and other investors include large meetings or conference calls for se-curities analysts and institutional investors in Japan every quarterly performance announcement. We distribute presentation materials for performance results on our website. In addition to maintaining communication with institutional investors in Japan and overseas through investor visits and conferences, we disseminate informa-tion for individual investors, chiefly via our website.

Furthermore, we distribute annual shareholder meeting convo-cation notices at an early date and have in place a system whereby shareholders can exercise their voting rights over the Internet. These activities are designed to promote participation in shareholder meetings. Furthermore, we publish a business report booklet for shareholders (in Japanese only), and seek to enhance communication through shareholder questionnaires.

crisis management plan (CMP) and its Code of Conduct for Emergency. The Company has also reviewed its BCP in anticipa-tion of an earthquake striking directly below the Tokyo metropoli-tan area and is undertaking initiatives to further promote its crisis management. Based on the HSSE-MS, the Health, Safety, Secu-rity and Environment (HSSE) Division monitors execution of the Plan-Do-Check-Act (PDCA) process throughout the Company and regularly audits the status of HSSE management. Moreover, the Risk Management Committee conducts management reviews and works continuously to make improvements.

With regard to risks that need to be checked from a Compa-nywide perspective, such as the compliance and HSSE promo-tion structures and the business control structure, we have established business control checklists to enable comprehensive monitoring. Using these checklists, executives and division heads evaluate the risk management systems of their divisions on a yearly basis, implementing improvement measures as necessary. The results of these efforts are reported to the Risk Management Committee.

For risks faced by specific divisions, each year Showa Shell prepares a Companywide business control matrix. We use this matrix to identify the risks associated with business targets and ascertain the level of impact and control status of these risks. Measures are formulated in response to identified risks, and a review of measures implemented in the previous fiscal year is reported to the Risk Management Committee together with a plan for measures in the current fiscal year.

For details on HSSE management, please refer to page 51.For details on crisis management, please refer to page 55.

Accuracy of Financial ReportingBased on the internal control reporting system stipulated by the Financial Instruments and Exchange Act, Showa Shell has submit-ted a report on internal controls since 2009. Before this system was applied, the Company had reconfirmed the flow of opera-tions in each division, identified potential risks, and encouraged the creation of rules to prevent risks, with the aim of ensuring operational accuracy as well as the reliability of financial report-ing. We are continuously improving these activities even after establishment of the current system, with specialized units being primarily responsible for conducting appropriate evaluations and monitoring. In 2012, we evaluated the effectiveness of the Group’s internal controls on financial reporting and submitted a report to the authorities with the evaluation results.

The Showa Shell Group’s initiatives go beyond merely respond-ing to legal requirements. We seek to ensure further improvements in operational transparency, effectiveness, and efficiency.


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The following is a statement from Independent Director Yukio Masuda with regard to Showa Shell Sekiyu K.K.’s corporate governance systems, and how they can contribute to future improvements in corporate value.

Yukio MasudaIndependent Director

Yukio Masuda has served as an Independent Director at the Company since March 2009. He is also currently an advisor to Mitsubishi Corporation. He has a long history in Mitsubishi’s energy business segment, and was a representative director from June 2001 to June 2006.

officers to exchange opinions directly with management, thereby ensuring a focus on the needs of minority shareholders while also improving the transparency and fairness of management.

The new management system that was instituted in conjunc-tion with the start of the Medium-Term Business Action Plan should display its merits going forward. In this rapidly changing operating environment, the ability to respond flexibly by making speedy decisions on the operating side of business is more im-portant than ever. In light of this, two COOs were appointed under the new management system, one for each business divi-sion. I think this was a brilliant decision as it enables business execution to be conducted quickly while also clarifying the re-sponsibilities of management. I look forward to seeing Showa Shell practice speedy management. The Board of Auditors is also functioning effectively. At meetings of the Board of Direc-tors, management is presented with requests from auditors. This demonstrates the fact that the supervisory functions of auditors are active and incredibly sound.

I believe that a company’s corporate value and the very meaning for its existence are created through sustainable growth achieved under the guidance of sound management. Corporate gover-nance therefore refers to the systems that allow for decisions to be made to realize such sustainable growth. In other words, corpo-rate governance is the systems that are used to improve perfor-mance and grow a company without causing problems.

Looking at the corporate governance systems of Showa Shell from this perspective, I would first like to say that the Board of Directors is truly fulfilling its purpose. Not only are the majority of its members outside directors, but they also come from different backgrounds and have different areas of expertise. As such, de-liberations are incredibly spirited, and opinions based on a vari-ety of perspectives are presented. Moreover, in-house members of management are very receptive toward the opinions of these outside directors, adding further energy to debates.

Also, two outside directors and two outside auditors are inde-pendent officers. The Company arranges opportunities for these

Q. How would you evaluate Showa Shell’s corporate governance systems?

information, business suggestions, and other forms of business execution support on a daily basis. Through these efforts, I am working to play a greater part in the management of the Com-pany and deepen my contributions. I am also well aware of my duty to protect the interests of general shareholders, and I there-fore am also careful to retain a perspective that sufficiently con-siders the medium- to long-term development of the Company as I participate in management.

I devoted a good part of my career to the energy business of Mitsubishi Corporation, and in the past I have worked together with a number of global energy companies, including Royal Dutch Shell plc. It is my hope to make use of this experience to assist Showa Shell in developing its business on a global scale, and the suggestions I make at the meetings of the Board of Di-rectors are geared toward this end. Aside from my contributions at these meetings, I provide Showa Shell’s management with

Q. What role do you feel you should play as an outside director and as an independent director?

Interview with Outside Director

Today, the speed at which the operating environment and busi-nesses evolve is faster than it has ever been. As such, manage-ment must be prepared to take on new challenges. To facilitate this, all employees must fully understand the policies made by the Board of Directors and the measures developed by the Manage-ment Executive Committees. This is more important than ever. At the same time, it is critical that the Company timely communicate with markets, shareholders, and media sources to enable them to better understand its activities.

Going forward, it will be necessary for both Showa Shell’s Oil Business and its Energy Solution Business to win out against an even harsher operating environment. It is always people who move a company, and in an environment as difficult as the current one, it is ever more important that management and employees be unified under a shared belief. Everyone working at the Showa Shell Group must advance the strategies detailed in the Medium-Term Business Action Plan with a high degree of motivation. The end result of such efforts, I believe, will lead to increased value for shareholders and all other stakeholders of the Company.

Q. What do you see as necessary for Showa Shell to further improve its corporate value?

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The Chief Executive Officer directly supervises Internal Audit and takes charge in General Business Principle.The Chief Operating Officer directly supervises the Petro Chemical Business Promotion Team.

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BOARD OF DIRECTORS AND CORPORATE AUDITORS(As of March 28, 2013)

Chairman, Representative Director, Chief Executive OfficerA Shigeya Kato

Representative Director, Chief Operating OfficerB Jun Arai

Director, Chief Financial OfficerC Douglas WoodGroup Functions (Finance & Control, Credit & Financial Risk Management, Procurement, and IT Planning)

Outside DirectorsD Yoshihiko Miyauchi E Yukio Masuda F Ahmad O. Al-Khowaiter G Minoru Takeda H Chiew Nguang-Yong

AuditorsI Tadamitsu FukuchiJ Kiyotaka Yamada

Outside AuditorsK Midori MiyazakiL Kenji Yamagishi

Brooks Herring Reporting to CEO; in charge of Special Missions, Transformation Team and Energy Solution Business Center (Solar Frontier K.K.)

Executive OfficersMasayuki Kobayashi Oil Business Center (Supply, Oil Products, Crude Oil & Marine, and Marine)

Tsutomu YoshiokaGroup Functions (Finance & Control and Credit & Financial Risk Management)

Hiroyuki MurataOil Business Center (Sales and Branch Office)

Kenichi MorishitaOil Business Center (Marketing Planning, Retail Sales, Retail EPOCH Project Team and Commercial Sales)

Tatsuya SuzukiOil Business Center (Manager in Metropoli-tan Branch)

Satoru Kuriyagawa General Manager, Energy Solution Business Center (Director, Solar Frontier K.K.)

Makoto AbeOil Business Center (International Sales, Lubricants & Bitumen and Home Solution)

Hiroshi WatanabeGroup Functions (Corporate Planning (including Corporate Governance))

Executive Officer Vice PresidentsEnergy Solution Business COOHiroto TamaiEnergy Solution Business Center (President, Representative Director, Solar Frontier K.K.)

Oil Business COOTsuyoshi Kameoka Oil Business Center

Senior Executive OfficersAtsuhiko HiranoGeneral Manager, Energy Solution Business Center (Director, Solar Frontier K.K.)

Tomonori OkadaOil Business Center (Research & Development and Laboratory), Group Functions (Corporate Planning (including Corporate Governance) and Overseas Intellectual Property Strategy)

Corporate Executive OfficersMisao HamamotoOil Business Center (Manufacturing, Distribution & Operations, New Business Promotion and Import Terminal)

Tomoaki ItouGeneral Manager, Energy Solution Business Center (Director, Solar Frontier K.K.)

Yuri InoueGroup Functions (Legal (including Personal Data Protection))

Katsuaki ShindomeGroup Functions (Public Affairs, Secretariat, HSSE, Human Resources, Internal Control Promotion and General Affairs)

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72 Twelve-Year Summary of Selected Financial Data

74 Business Risks

76 Consolidated Balance Sheets

78 Consolidated Statements of Income and Consolidated Statements of Comprehensive Income

79 Consolidated Statements of Changes in Net Assets

80 Consolidated Statements of Cash Flows

81 Notes to the Consolidated Financial Statements

95 Independent Auditor’s Report

96 Network

98 Major Subsidiaries and Affiliates

99 Investor Information

FINANCIAL SECTION AND CORPORATE DATA

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Showa Shell Sekiyu K.K. and Consolidated SubsidiariesYears ended December 31

Yen Million

2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001For the year:Net sales ¥2,629,261 ¥2,771,418 ¥2,346,081 ¥2,022,520 ¥3,272,801 ¥3,082,641 ¥2,921,287 ¥2,268,488 ¥1,839,445 ¥1,726,917 ¥1,620,359 ¥1,664,954 Cost of sales 2,481,144 2,582,339 2,183,535 1,956,623 3,161,950 2,874,422 2,728,137 2,056,023 1,665,978 1,570,155 1,460,458 1,513,626 Gross profit 148,117 189,078 162,545 65,896 110,851 208,219 193,149 212,465 173,466 156,761 159,901 151,328 Selling, general and administrative expenses 133,419 128,790 125,844 123,038 123,134 119,405 118,847 114,084 113,280 120,787 123,500 123,274 Operating income (loss) 14,697 60,288 36,701 (57,142) (12,283) 88,813 74,301 98,381 60,185 35,974 36,400 28,053 Ordinary income (loss) 12,674 61,807 42,148 (56,455) (10,065) 92,709 77,675 100,497 61,927 38,188 40,101 29,052 CCS ordinary income (loss)*1 11,224 30,020 34,286 (11,691) 45,697 44,271 58,074 53,279 40,426 36,336 29,312 40,119Net income (loss) after taxes 1,013 23,110 15,956 (57,619) (16,221) 43,729 46,249 58,370 2,362 21,000 18,665 2,610 At year-end:Total shareholders’ equity*2 ¥ 249,826 ¥ 255,865 ¥ 240,204 ¥ 235,517 ¥ 306,813 ¥ 338,933 ¥ 309,411 ¥ 275,232 ¥ 226,955 ¥ 234,773 ¥ 221,604 ¥ 212,168 Total assets 1,233,193 1,208,442 1,193,149 1,172,739 1,209,956 1,339,114 1,195,015 1,145,191 905,823 882,299 916,690 909,902 Net interest-bearing debt*3 247,552 262,800 280,108 275,837 206,363 166,655 173,881 162,180 106,229 105,568 142,880 145,272 Depreciation and amortization 43,620 43,329 33,949 35,277 31,239 26,708 27,329 23,979 24,653 25,138 26,729 28,598 Capital expenditures 20,987 39,559 81,733 49,933 37,606 23,617 32,540 17,442 12,408 11,574 13,823 7,690 Capital employed*4 515,554 534,228 541,256 533,590 586,290 522,068 499,939 467,063 341,738 355,725 372,136 383,107 Cash flows:Cash flows from operating activities ¥ 41,922 ¥ 50,551 ¥ 89,836 ¥ (7,395) ¥ 26,631 ¥ 44,796 ¥ 29,312 ¥ 25,806 ¥ 29,598 ¥ 54,704 ¥ 23,262 ¥ 83,277 Cash flows from investing activities (17,747) (24,560) (82,510) (47,761) (42,932) (25,687) (28,883) (28,548) (19,194) (7,874) (10,710) 31,067 Free cash flow*5 24,174 25,991 7,325 (55,156) (16,301) 19,108 429 (2,742) 10,403 46,830 12,551 114,344 Cash flows from financing activities (21,391) (31,159) (8,671) 4,371 72,337 (21,029) (13,712) 20,725 (17,700) (39,167) (30,474) (106,997)Per share data:Net income (loss) after taxes per share (yen) ¥ 2.69 ¥ 61.36 ¥ 42.37 ¥ (152.99) ¥ (43.07) ¥ 116.12 ¥ 122.95 ¥ 155.31 ¥ 6.14 ¥ 55.96 ¥ 49.69 ¥ 6.95 Total shareholders’ equity per share (yen) 663.33 679.37 637.78 625.33 814.63 899.90 822.20 732.08 605.25 627.07 592.18 565.36 Dividends per share (yen) 18 18 18 36 36 36 36 35 30 25 25 20 Payout ratio (%)*6 224.9 310.3 30.3 — — 29.8 32.4 24.5 355.5 46.9 50.0 268.9 Performance and financial indicators:Return on sales (operating profit basis) (%) 0.6% 2.2% 1.6% — — 2.9% 2.5% 4.4% 3.3% 2.1% 2.2% 1.7%Return on sales (net income basis) (%) 0.0 0.8 0.7 — — 1.4 1.6 2.6 0.1 1.2 1.2 0.2 Return on assets (%) 0.1 1.9 1.3 — — 3.3 3.9 5.1 0.3 2.4 2.0 0.3 Return on equity (%)*2, 7 0.4 9.3 6.7 — — 13.5 15.8 23.2 1.0 9.2 8.6 1.2 Shareholders’ equity ratio (%)*2, 8 20.3 21.2 20.1 20.1% 25.4% 25.3 25.9 24.0 25.1 26.6 24.2 23.3 Current ratio (%)*9 104.3 103.2 90.2 83.0 95.4 102.3 95.9 91.0 83.8 80.5 76.2 76.0 Gearing ratio (%)*10 49.8 50.7 53.8 53.9 40.2 33.0 36.0 37.1 31.9 31.0 39.2 40.6 Number of shares outstanding at year-end (thousand shares)*11 376,623 376,624 376,625 376,627 376,630 376,633 376,323 375,863 374,868 374,303 374,125 375,280

Operations data:Crude oil refined (thousand kl)*12 21,053 26,212 25,168 25,804 26,784 28,413 27,554 28,555 28,371 28,387 26,786 28,959 Group refinery capacity utilization rate (%)*12 91.6 93.2 84.2 86.3 89.4 95.1 92.2 95.6 92.4 94.3 89.6 94.6 Petroleum product sales volume (thousand kl)*13 27,223 30,462 29,637 29,198 31,581 32,262 31,461 30,702 38,244 39,840 39,827 41,905 Number of service stations*14 3,633 3,782 3,948 4,143 4,305 4,481 4,575 4,746 4,853 5,017 5,228 5,474 Number of self-service stations*14 978 963 960 947 852 719 583 413 308 267 195 97

* 1 CCS ordinary income (ordinary income on a Current Cost of Supply basis): Ordinary income based on costs excluding inventory valuation effects* 2 The definition of “shareholders’ equity” was revised under the new Corporation Law in 2006, and “shareholders’ equity” under the new law excludes minority interests. Please note referred numbers above are based on the new definition of “shareholders’ equity,” not including minority interests. “Return on equity” and “Shareholders’ equity ratio” are

also calculated using these numbers.* 3 Net interest-bearing debt = Interest-bearing debt – Cash and deposits* 4 Capital employed = Total shareholders’ equity + Total debts* 5 Free cash flow = Cash flows from operating activities + Cash flows from investing activities* 6 Payout ratio = Dividends per share/Net income per share (non-consolidated)* 7 Return on equity = Net income/Average total shareholders’ equity* 8 Shareholders’ equity ratio = Total shareholders’ equity/Total assets* 9 Current ratio = Total current assets/Total current liabilities*10 Gearing ratio = (Total debts – Cash and deposits)/(Capital employed – Cash and deposits)*11 Treasury stock is excluded. The amount of treasury stock includes Showa Shell Sekiyu stock held by affiliates accounted for by the equity method.*12 Total for Yokkaichi Refinery, Keihin Refinery, and Yamaguchi Refinery.*13 Volume of oil products sales includes sales of gasoline, jet fuel, heating oil, diesel oil, heavy fuel oil, naphtha, LPG, lubricants, bitumen, crude for burning, coal, cokes, and cargo trade. (Figures from the 2005 financial year onward do not include cargo trade.)*14 Individual service station data.

TWELVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA

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Showa Shell Sekiyu K.K. and Consolidated SubsidiariesYears ended December 31

Yen Million

2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001For the year:Net sales ¥2,629,261 ¥2,771,418 ¥2,346,081 ¥2,022,520 ¥3,272,801 ¥3,082,641 ¥2,921,287 ¥2,268,488 ¥1,839,445 ¥1,726,917 ¥1,620,359 ¥1,664,954 Cost of sales 2,481,144 2,582,339 2,183,535 1,956,623 3,161,950 2,874,422 2,728,137 2,056,023 1,665,978 1,570,155 1,460,458 1,513,626 Gross profit 148,117 189,078 162,545 65,896 110,851 208,219 193,149 212,465 173,466 156,761 159,901 151,328 Selling, general and administrative expenses 133,419 128,790 125,844 123,038 123,134 119,405 118,847 114,084 113,280 120,787 123,500 123,274 Operating income (loss) 14,697 60,288 36,701 (57,142) (12,283) 88,813 74,301 98,381 60,185 35,974 36,400 28,053 Ordinary income (loss) 12,674 61,807 42,148 (56,455) (10,065) 92,709 77,675 100,497 61,927 38,188 40,101 29,052 CCS ordinary income (loss)*1 11,224 30,020 34,286 (11,691) 45,697 44,271 58,074 53,279 40,426 36,336 29,312 40,119Net income (loss) after taxes 1,013 23,110 15,956 (57,619) (16,221) 43,729 46,249 58,370 2,362 21,000 18,665 2,610 At year-end:Total shareholders’ equity*2 ¥ 249,826 ¥ 255,865 ¥ 240,204 ¥ 235,517 ¥ 306,813 ¥ 338,933 ¥ 309,411 ¥ 275,232 ¥ 226,955 ¥ 234,773 ¥ 221,604 ¥ 212,168 Total assets 1,233,193 1,208,442 1,193,149 1,172,739 1,209,956 1,339,114 1,195,015 1,145,191 905,823 882,299 916,690 909,902 Net interest-bearing debt*3 247,552 262,800 280,108 275,837 206,363 166,655 173,881 162,180 106,229 105,568 142,880 145,272 Depreciation and amortization 43,620 43,329 33,949 35,277 31,239 26,708 27,329 23,979 24,653 25,138 26,729 28,598 Capital expenditures 20,987 39,559 81,733 49,933 37,606 23,617 32,540 17,442 12,408 11,574 13,823 7,690 Capital employed*4 515,554 534,228 541,256 533,590 586,290 522,068 499,939 467,063 341,738 355,725 372,136 383,107 Cash flows:Cash flows from operating activities ¥ 41,922 ¥ 50,551 ¥ 89,836 ¥ (7,395) ¥ 26,631 ¥ 44,796 ¥ 29,312 ¥ 25,806 ¥ 29,598 ¥ 54,704 ¥ 23,262 ¥ 83,277 Cash flows from investing activities (17,747) (24,560) (82,510) (47,761) (42,932) (25,687) (28,883) (28,548) (19,194) (7,874) (10,710) 31,067 Free cash flow*5 24,174 25,991 7,325 (55,156) (16,301) 19,108 429 (2,742) 10,403 46,830 12,551 114,344 Cash flows from financing activities (21,391) (31,159) (8,671) 4,371 72,337 (21,029) (13,712) 20,725 (17,700) (39,167) (30,474) (106,997)Per share data:Net income (loss) after taxes per share (yen) ¥ 2.69 ¥ 61.36 ¥ 42.37 ¥ (152.99) ¥ (43.07) ¥ 116.12 ¥ 122.95 ¥ 155.31 ¥ 6.14 ¥ 55.96 ¥ 49.69 ¥ 6.95 Total shareholders’ equity per share (yen) 663.33 679.37 637.78 625.33 814.63 899.90 822.20 732.08 605.25 627.07 592.18 565.36 Dividends per share (yen) 18 18 18 36 36 36 36 35 30 25 25 20 Payout ratio (%)*6 224.9 310.3 30.3 — — 29.8 32.4 24.5 355.5 46.9 50.0 268.9 Performance and financial indicators:Return on sales (operating profit basis) (%) 0.6% 2.2% 1.6% — — 2.9% 2.5% 4.4% 3.3% 2.1% 2.2% 1.7%Return on sales (net income basis) (%) 0.0 0.8 0.7 — — 1.4 1.6 2.6 0.1 1.2 1.2 0.2 Return on assets (%) 0.1 1.9 1.3 — — 3.3 3.9 5.1 0.3 2.4 2.0 0.3 Return on equity (%)*2, 7 0.4 9.3 6.7 — — 13.5 15.8 23.2 1.0 9.2 8.6 1.2 Shareholders’ equity ratio (%)*2, 8 20.3 21.2 20.1 20.1% 25.4% 25.3 25.9 24.0 25.1 26.6 24.2 23.3 Current ratio (%)*9 104.3 103.2 90.2 83.0 95.4 102.3 95.9 91.0 83.8 80.5 76.2 76.0 Gearing ratio (%)*10 49.8 50.7 53.8 53.9 40.2 33.0 36.0 37.1 31.9 31.0 39.2 40.6 Number of shares outstanding at year-end (thousand shares)*11 376,623 376,624 376,625 376,627 376,630 376,633 376,323 375,863 374,868 374,303 374,125 375,280

Operations data:Crude oil refined (thousand kl)*12 21,053 26,212 25,168 25,804 26,784 28,413 27,554 28,555 28,371 28,387 26,786 28,959 Group refinery capacity utilization rate (%)*12 91.6 93.2 84.2 86.3 89.4 95.1 92.2 95.6 92.4 94.3 89.6 94.6 Petroleum product sales volume (thousand kl)*13 27,223 30,462 29,637 29,198 31,581 32,262 31,461 30,702 38,244 39,840 39,827 41,905 Number of service stations*14 3,633 3,782 3,948 4,143 4,305 4,481 4,575 4,746 4,853 5,017 5,228 5,474 Number of self-service stations*14 978 963 960 947 852 719 583 413 308 267 195 97

* 1 CCS ordinary income (ordinary income on a Current Cost of Supply basis): Ordinary income based on costs excluding inventory valuation effects* 2 The definition of “shareholders’ equity” was revised under the new Corporation Law in 2006, and “shareholders’ equity” under the new law excludes minority interests. Please note referred numbers above are based on the new definition of “shareholders’ equity,” not including minority interests. “Return on equity” and “Shareholders’ equity ratio” are

also calculated using these numbers.* 3 Net interest-bearing debt = Interest-bearing debt – Cash and deposits* 4 Capital employed = Total shareholders’ equity + Total debts* 5 Free cash flow = Cash flows from operating activities + Cash flows from investing activities* 6 Payout ratio = Dividends per share/Net income per share (non-consolidated)* 7 Return on equity = Net income/Average total shareholders’ equity* 8 Shareholders’ equity ratio = Total shareholders’ equity/Total assets* 9 Current ratio = Total current assets/Total current liabilities*10 Gearing ratio = (Total debts – Cash and deposits)/(Capital employed – Cash and deposits)*11 Treasury stock is excluded. The amount of treasury stock includes Showa Shell Sekiyu stock held by affiliates accounted for by the equity method.*12 Total for Yokkaichi Refinery, Keihin Refinery, and Yamaguchi Refinery.*13 Volume of oil products sales includes sales of gasoline, jet fuel, heating oil, diesel oil, heavy fuel oil, naphtha, LPG, lubricants, bitumen, crude for burning, coal, cokes, and cargo trade. (Figures from the 2005 financial year onward do not include cargo trade.)*14 Individual service station data.

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The Showa Shell Group has created a system to monitor and manage

business risk, and endeavors to mitigate the risks associated with its busi-

ness operations. Among such risks, we consider the following to be im-

portant risks related to the businesses of the Showa Shell Group and its

financial position that could have a material effect on the decisions of

investors. The risks described below are those risks evaluated to be mate-

rial by the Showa Shell Group (on a consolidated basis) at the end of the

financial year under review. This list is not meant to be, and should be not

construed as, a comprehensive list of every risk affecting the Group. Fur-

thermore, the matters discussed here concerning future circumstances are

those matters evaluated by the Showa Shell Group at the end of the finan-

cial year under review.

1. RISKS RELATED TO THE EFFECTS OF ENERGY DEMAND AND MARKET CONDITIONS

Domestic demand for oil products is affected by, and changes with,

factors such as the economic situation in Japan and domestic energy

supply and demand. Moreover, Japan’s domestic oil products market

is affected by factors such as the demand trend, price competition with

other companies in the industry, overseas prices for oil products, and

comparative price competition with other forms of energy. The solar

powered cell market is also affected by factors such as the supply-demand

balance and price competition with other companies in the industry.

These fluctuating factors also exert an influence on the quantities and

prices of products that the Showa Shell Group sells, including exports,

and cause changes to the Group’s earnings.

2. RISKS RELATED TO CHANGES IN PRICES OF CRUDE OIL AND MATERIALS, AND EXCHANGE RATES

A) Impact on sales margin and working capital

Because the cost of sales on a yen basis of oil products the Group sells

domestically is affected by changes in crude oil prices and foreign ex-

change rates, the basic policy is to reflect these influences in its sales

prices. The cost of sales on a yen basis of solar panels the Group sells

domestically and overseas is also affected by changes in material prices

and foreign exchange rates. The basic policy is to reflect these influences

in its sales prices.

However, if it is difficult to reflect these changes in sales prices due to

factors such as the global market environment, the changes will cause

fluctuations in the Group earnings.

In addition, there is a possibility that the amount of working capital the

Group requires will increase if there is a rise in crude oil or raw material

prices or a rapid change in foreign exchange rates.

b) Impact of inventory valuation

The Group mainly uses the weighted-average method to value invento-

ries. When prices for crude oil, raw materials, and products decline, the

Group’s cost of sales is increased by the effect of inventory valuation that

is relatively expensive at the beginning of the period, which is a negative

factor for earnings. When prices for crude oil, raw materials, and

products rise, on the other hand, the cost of sales is reduced by the effect

of inventory valuation that is relatively inexpensive at the beginning of the

period, which is a positive factor for earnings.

As this illustrates, there is a possibility that changes in prices of crude

oil, materials, and products will affect the Group’s operating results and

its financial position.

3. RISKS RELATED TO SOURCES OF CRUDE OIL AND MATERIALS PROCUREMENT

The Group procures crude oil from overseas, mainly countries in the

Middle East. There is a possibility that the financial position and operating

results of the Group will be affected by obstacles to its procurement of

crude oil such as a case where international political climate, in addition

to that in an oil producing country adversely and an appropriate

alternative supply source cannot be ensured. There is also a possibility

that the financial position and operating results of the Group will be

affected by obstacles to its procurement of the rare metals that are used

for solar panels, such as an unexpected adverse situation arising in the

supplying district.

4. RISKS CONCERNING COMPETITION WITH OTHER COMPANIES OR TECHNICAL INNOVATION

The Group is exposed to tough competition with other oil companies due

to refinery overcapacity and excess number of service stations in addition

to declining domestic oil demand. With rapid technical innovation in the

solar business, change in the technical standards and cost-competitive

edge will affect the global competition. Although the Group will make

efforts to maintain and improve competitiveness, including strategic

alliances and collaboration, there is a possibility that its financial position

and business performance will be affected if it cannot operate with

adequate efficiency under such a competitive environment.

BUSINESS RISKS

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5. RISKS RELATED TO ENVIRONMENTAL REGULATIONS AND TAX LEVIES

In the event that new environmental regulations regarding carbon dioxide

emissions or fossil fuel consumption are introduced in the future in Japan,

there is a possibility that the financial position and operating results of the

Group will be affected because of bearing additional capital expenditures

or incremental costs. Regarding the solar business, there is a possibility

that the financial position and operating results of the Group will be

affected in the event that changes in governmental subsidy policies in

various countries influence domestic and global demand trends for solar

powered cells.

6. RISKS RELATED TO TERMINATION OR RESTRICTION OF BUSINESS ACTIVITIES AS THE RESULT OF DISASTER, ACCIDENT, ETC.

The Group has enacted a basic policy concerning health, safety, security,

and environmental conservation (environment), based on HSSE

management rules, and strives to ensure safe operations and minimize

risks that arise in the event of a disaster or the spread of contagious

diseases such as a new strain of influenza, through the use of appropriate

insurance, including property and casualty insurance, as well as

formulation of the risk control plan and the Business Continuity Plan with

its related discipline. There is a possibility, however, that each office and

facility of the Group, including its refineries and plants for producing solar

panels, will face obstacles to its operations in the event that a situation

such as a disaster beyond the anticipated scope occurs, and this would

affect the Group’s financial position and operating results. There is also a

possibility of being similarly affected by the termination or restriction of its

business activities as the result of an occurrence such as a serious

industrial injury, equipment accident, or information system fault.

7. RISKS RELATED TO THE ESTABLISHMENT OF INTERNAL CONTROL SYSTEMS

The Group strives to enhance compliance by appointing a director in

charge of the Group’s Code of Conduct, implementing compliance rules

for the antitrust law, establishing and operating a risk management

system, and by implementing internal audits. However, in the event that

the established internal control system does not function effectively and

the Group is not able to avoid compliance risks completely, there is a

possibility that the trust of its stakeholders will be lost, and the financial

position and business performance of the Group will be affected.

8. RISKS RELATED TO INTELLECTUAL PROPERTY RIGHTS

In addition to competition in technology development, strategy for

intellectual property rights is becoming increasingly important.

Accordingly, the Company has formed a specialized unit to manage and

strengthen the protection of its intellectual property rights, including know-

how. However, in the event that there are areas where these measures

are insufficient, there may still be possibilities of disputes regarding the

infringement of intellectual property rights and outflows of know-how.

Such circumstances may have an impact on the financial condition and

the management performance of the Group.

9. RISKS RELATED TO PRODUCT LIABILITY

The Group manufactures products based on strict quality control standards

and has product liability insurance in case a product defect does occur.

However, in the event of a largescale recall or lawsuit due to an

unforeseen situation, there is a possibility that the Group will become

legally liable, and there is a possibility that such an event will lower the

brand image of the Group and have a resultant impact on the financial

position and operating results of the Group.

10. RISKS RELATED TO CONTROL OF PERSONAL DATA

The Group obtains and uses personal data, including information on its

customers, in relation to its businesses such as product sales, and has

created in-house management systems for the administration of this data.

Although the Group strives to protect such information with extreme

caution, in the event that such data is disclosed outside the Group and

misused for some reason, there is a possibility that the Group will become

legally liable, and there is also a possibility that the Group brand image

will be damaged, and that the financial position and business

performance of the Group will be negatively affected.

11. RISKS RELATED TO RETIREMENT BENEFITS

The Group’s pension benefit obligations and costs are computed by

actuarial calculation, and basic rates such as the discount rate and the

expected rate of return on pension plan assets have been set as actuarial

assumptions. In the event that actual numerical values for the basic rates

differ from these assumptions, or in the event that the assumptions are

revised, these changes will affect the amount of the pension benefit

obligation and the costs recognized in the future because the effects will

be cumulative and will be recognized regularly in the future periods.

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CONSOLIDATED BALANCE SHEETS

Showa Shell Sekiyu K.K. and Consolidated SubsidiariesAs of December 31, 2012 and 2011

Yen Million

2012 2011ASSETS Current assets Cash and deposits (Notes 11 and 15) ¥ 18,175 ¥ 15,562 Notes and accounts receivable–trade (Notes 11, 15 and 18) 377,552 325,622 Merchandise and finished goods 152,362 143,721 Work in process 1,985 943 Raw materials and supplies (Note 15) 123,141 129,280 Deferred tax assets (Note 8) 6,642 7,322 Other current assets (Notes 11 and 12) 32,057 37,107 Allowance for doubtful accounts (591) (856) Total current assets 711,325 658,704

Noncurrent assets Property, plant and equipment Buildings and structures 103,422 109,486 Tanks 10,314 10,892 Machinery, equipment and vehicles 147,409 167,247 Land 157,735 158,856 Construction in progress 5,478 1,843 Other property, plant and equipment 6,303 6,245 Total property, plant and equipment (Notes 6, 14 and 15) 430,662 454,571

Intangible assets Goodwill 1,409 1,731 Leasehold rights 4,025 4,057 Software 4,857 4,983 Other intangible assets 240 259 Total intangible assets 10,532 11,031

Investments and other assets Investment securities (Notes 5 and 11) 37,684 38,701 Long-term loans receivable 5,740 6,159 Deferred tax assets (Note 8) 21,614 22,977 Other investments and other assets (Notes 11 and 12) 16,306 17,047 Allowance for doubtful accounts (672) (750) Total investments and other assets 80,672 84,135 Total noncurrent assets 521,867 549,737 Total assets ¥1,233,193 ¥1,208,442

The accompanying notes are an integral part of these financial statements.

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Yen Million

2012 2011LIABILITIES Current liabilities Notes and accounts payable–trade (Notes 11 and 18) ¥ 336,884 ¥ 294,276 Short-term loans payable (Notes 7, 11 and 15) 65,933 58,340 Current portion of bonds (Notes 7 and 11) 15,000 — Accounts payable–other (Notes 11 and 15) 172,522 177,452 Income taxes payable 6,604 3,725 Accrued expenses 9,840 10,341 Provision for employees’ bonuses 2,359 2,359 Provision for directors’ bonuses 4 32 Commercial paper (Notes 7 and 11) 26,000 52,000 Other current liabilities (Notes 7 and 11) 47,148 39,824 Total current liabilities 682,297 638,351

Noncurrent liabilities Bonds payable (Notes 7 and 11) 20,000 35,000 Long-term loans payable (Notes 7, 11 and 15) 138,794 133,022 Deferred tax liabilities (Note 8) 3,539 3,711 Provision for employees’ retirement benefits (Note 9) 74,493 75,335 Provision for directors’ retirement benefits (Note 4) — 479 Provision for special repairs 15,890 16,308 Other noncurrent liabilities (Notes 7 and 10) 24,394 27,080 Total noncurrent liabilities 277,111 290,938 Total liabilities 959,409 929,290

Net assets Shareholders’ equity Capital stock Authorized 440,000,000 shares Issued 376,850,400 shares in 2012 and 2011 34,197 34,197 Capital surplus 22,113 22,113 Retained earnings 193,250 199,182 Treasury stock 227,342 shares as of December 31, 2012 and 226,299 shares as of December 31, 2011 (184) (184) Total shareholders’ equity 249,375 255,308 Accumulated other comprehensive income Unrealized gain (loss) on available-for-sale securities 325 557 Deferred gain (loss) on derivatives under hedge accounting 125 — Total accumulated other comprehensive income 450 557 Minority interests 23,957 23,286 Total net assets 273,783 279,152 Total liabilities and net assets ¥1,233,193 ¥1,208,442

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CONSOLIDATED STATEMENTS OF INCOME

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Showa Shell Sekiyu K.K. and Consolidated SubsidiariesYears ended December 31, 2012 and 2011

Yen Million

2012 2011Net sales (Notes 18 and 19) ¥2,629,261 ¥2,771,418Cost of sales (Notes 9, 18 and 19) 2,481,144 2,582,339Gross profit 148,117 189,078Selling, general and administrative expenses (Notes 9 and 13) 133,419 128,790Operating income 14,697 60,288Non-operating income Interest income 165 213 Dividends income 1,583 258 Foreign exchange gains — 1,507 Reversal of allowance for doubtful accounts 317 — Equity in earnings of affiliates (Note 19) — 1,804 Gain on investments in silent partnerships 1,421 1,472 Other 1,673 1,385

5,161 6,642Non-operating expenses Interest expense 2,365 2,423 Sales discounts 1,936 1,700 Foreign exchange losses 175 — Equity in losses of affiliates (Note 19) 924 — Other 1,781 998

7,183 5,123Ordinary income 12,674 61,807Extraordinary income Gain on sales of property, plant and equipment 1,733 8,951 Gain on sales of investment securities and others (Note 5) 1 284 Reversal of provision for special repairs — 62 Subsidies 1,871 3,546 Other 392 1,251

3,998 14,094Extraordinary loss Loss on disposal of property, plant and equipment 1,943 3,210 Loss on valuation of investment securities 20 53 Impairment loss (Notes 14 and 19) 978 11,423 Expenses related to upgrading of equipment 517 — Other 834 4,504

4,293 19,191Income before income taxes and minority interests 12,379 56,710Income taxes (Note 8) Current 8,163 4,136 Deferred 1,744 28,445Total income taxes 9,908 32,581Income before minority interests 2,470 24,129Minority interests in income 1,457 1,018Net income ¥ 1,013 ¥ 23,110

Yen

2012 2011Per share data Net income–primary ¥ 2.69 ¥ 61.36 Net income–diluted Not prepared due to

having no dilutive sharesNot prepared due to

having no dilutive shares Dividend 18.00 18.00 Net assets 663.33 679.37The accompanying notes are an integral part of these financial statements.


Yen Million

2012 2011Income before minority interests ¥2,470 ¥24,129 Other comprehensive income Unrealized gain (loss) on available-for-sale securities (214) (477) Deferred gain (loss) on derivatives under hedge accounting 125 — Share of other comprehensive income in affiliates (14) (89) Total other comprehensive income (Note 17) (104) (566)Comprehensive income 2,366 23,562 Total comprehensive income attributable to: Owners of the parent 906 22,549 Minority interests ¥1,460 ¥ 1,012

The accompanying notes are an integral part of these financial statements.

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Yen Million

2012 2011Shareholders’ equity Capital stock Balance at the beginning of current period ¥ 34,197 ¥ 34,197 Changes of items during the period Total changes of items during the period — — Balance at the end of current period 34,197 34,197 Capital surplus Balance at the beginning of current period 22,113 22,113 Changes of items during the period Disposal of treasury stock — (0) Total changes of items during the period — (0) Balance at the end of current period 22,113 22,113 Retained earnings Balance at the beginning of current period 199,182 182,959 Changes of items during the period Dividends from surplus (6,780) (6,780) Net income 1,013 23,110 Change of scope of consolidation (164) (107) Total changes of items during the period (5,932) 16,222 Balance at the end of current period 193,250 199,182 Treasury stock Balance at the beginning of current period (184) (183) Changes of items during the period Purchase of treasury stock (0) (0) Disposal of treasury stock — 0 Total changes of items during the period (0) (0) Balance at the end of current period (184) (184) Total shareholders’ equity Balance at the beginning of current period 255,308 239,087 Changes of items during the period Dividends from surplus (6,780) (6,780) Net income 1,013 23,110 Purchase of treasury stock (0) (0) Disposal of treasury stock — 0 Change of scope of consolidation (164) (107) Total changes of items during the period (5,932) 16,221 Balance at the end of current period 249,375 255,308 Accumulated other comprehensive income Unrealized gain (loss) on available-for-sale securities Balance at the beginning of current period 557 1,117 Changes of items during the period Net changes of items other than shareholders’ equity (231) (560) Total changes of items during the period (231) (560) Balance at the end of current period 325 557 Deferred gain (loss) on derivatives under hedge accounting Balance at the beginning of current period — — Changes of items during the period Net changes of items other than shareholders’ equity 125 — Total changes of items during the period 125 — Balance at the end of current period 125 — Total accumulated other comprehensive income Balance at the beginning of current period 557 1,117 Changes of items during the period Net changes of items other than shareholders’ equity (106) (560) Total changes of items during the period (106) (560) Balance at the end of current period 450 557 Minority interests Balance at the beginning of current period 23,286 22,801 Changes of items during the period Purchase of shares of consolidated subsidiaries (214) — Net changes of items other than shareholders’ equity 884 485 Total changes of items during the period 670 485 Balance at the end of current period 23,957 23,286 Total net assets Balance at the beginning of current period 279,152 263,006 Changes of items during the period Dividends from surplus (6,780) (6,780) Net income 1,013 23,110 Purchase of treasury stock (0) (0) Disposal of treasury stock — 0 Change of scope of consolidation (164) (107) Purchase of shares of consolidated subsidiaries (214) — Net changes of items other than shareholders’ equity 778 (74) Total changes of items during the period (5,368) 16,146 Balance at the end of current period ¥273,783 ¥279,152

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

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Yen Million

2012 2011Net cash provided by (used in) operating activities Income before income taxes and minority interests ¥ 12,379 ¥ 56,710 Depreciation and amortization 43,620 43,329 Impairment loss 978 11,423 Loss (gain) on disposal of property, plant and equipment 1,943 3,210 Loss (gain) on sales of property, plant and equipment (1,733) (8,951) Loss (gain) on valuation of investment securities 20 53 Increase (decrease) in allowance for doubtful accounts (342) 476 Increase (decrease) in provision for employees’ retirement benefits (842) 2,943 Increase (decrease) in provision for special repairs (417) 4,621 Interest and dividends income (1,748) (472) Interest expense and sales discounts 4,301 4,124 (Increase) decrease in notes and accounts receivable–trade (51,930) (34,817) (Increase) decrease in inventories (3,542) (37,663) Increase (decrease) in notes and accounts payable 35,216 22,406 Other, net 12,564 (9,697) Sub-total 50,466 57,698 Interest and dividends income 1,756 480 Interest expense paid (4,304) (4,061) Income taxes (paid) refunded (5,996) (3,565) Net cash provided by (used in) operating activities 41,922 50,551Net cash provided by (used in) investing activities Purchase of property, plant and equipment (20,041) (42,900) Purchase of intangible assets (2,058) (2,193) Proceeds from sales of property, plant and equipment 3,427 15,886 Purchase of investment securities (74) (8) Proceeds from sales of investment securities 6 14 Net (increase) decrease in short-term loans receivable 2,203 4,091 Payments for long-term loans receivable (942) (4) Collection of long-term loans receivable 4 4 Other, net (272) 550 Net cash provided by (used in) investing activities (17,747) (24,560)Net cash provided by (used in) financing activities Net increase (decrease) in short-term loans payable 17,561 8,471 Net increase (decrease) in commercial paper (26,000) (63,000) Proceeds from long-term loans payable 8,500 35,300 Repayments of long-term loans payable (12,696) (3,260) Redemption of bonds — (200) Purchase of treasury stock (0) (0) Repayments of lease obligations (1,400) (1,165) Cash dividends paid (6,780) (6,780) Cash dividends paid to minority shareholders (575) (544) Other, net — 20 Net cash provided by (used in) financing activities (21,391) (31,159)Net increase (decrease) in cash and cash equivalents 2,783 (5,168)Cash and cash equivalents at beginning of period 14,466 19,746Decrease in cash and cash equivalents resulting from exclusion of a subsidiary from consolidation (270) (111)Cash and cash equivalents at end of period ¥ 16,979 ¥ 14,466

Reconciliation between cash and cash equivalents at year-end and cash and deposits on the balance sheets

Yen Million

2012 2011Cash and deposits on the balance sheets ¥18,175 ¥15,562Time deposit exceeding 3 months (1,196) (1,095)Cash and cash equivalents ¥16,979 ¥14,466

CONSOLIDATED STATEMENTS OF CASH FLOWS

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The accompanying consolidated financial statements of Showa Shell

Sekiyu K.K. (the “Company”) and its consolidated subsidiaries (together,

the “Companies”) have been prepared in accordance with the provisions

set forth in the Financial Instruments and Exchange Act of Japan and its

related accounting regulations, and in conformity with accounting princi-

ples and practices generally accepted in Japan, which are different in

certain respects from the application and disclosure requirements of Inter-

national Financial Reporting Standards.

As permitted by the Financial Instruments and Exchange Act of Japan,

fractions below ¥1 million are rounded off. This causes certain totals in

the financial statements to not be equivalent to the sums of each item.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(1) POLICIES OF CONSOLIDATIONa) Consolidated subsidiaries as of December 31, 2012

(31 companies)Showa Yokkaichi Sekiyu Co., Ltd. K.K. Rising SunNippon Grease Co., Ltd. Genex Co., Ltd.Leef Energy K.K. On-Site Power Co., Ltd.Wakamatsu Gas K.K. Showa Shell Sempaku K.K.Nissho Koyu K.K. Heiwa Kisen Kaisha, Ltd.Nagase Oil Ltd. Chuo Shell Sekiyu Hanbai K.K.Jonen Co. Tokyo Shell Pack K.K.Toa Oil Co., Ltd. K.K. Shinyo SekiyuShoseki Kako Co., Ltd. Shoseki Engineering & Petro Star Kansai Co., Ltd. Construction Co., Ltd.Nakagawa Oil Co., Ltd. Solar Frontier K.K.K.K. Sun Road Enessance Holdings Co., Ltd.

Other 8 companies

Enessance Sapporo and Hakodate Gas, which had previously been

our consolidated subsidiaries, were merged with Enessance Hokkaido. The

number of consolidated subsidiaries decreased as a result of this merger.

Shoseki Overseas Oil Development Co., Ltd., which had previously

been our consolidated subsidiary, has dissolved and stopped all operat-

ing activities and consequently, was found to be immaterial and was ex-

cluded from our consolidated subsidiaries. The number of consolidated

subsidiaries decreased as a result of this exclusion.

Certain subsidiaries, such as Watani Energy Co., are excluded from

consolidation because their influence is immaterial to the consolidated

financial statements.

b) Accounting closing dates

The account closing dates of the consolidated subsidiaries are as follows.

Account closing date Number of subsidiaries

September 30 7

October 31 1

December 31 23

The consolidated financial statements incorporate the accounts of the

parent company and those of the other subsidiaries as of their respective

account closing dates, with adjustments for significant transactions occur-

ring subsequent to their accounting closing dates, but prior to the parent’s

balance sheet date.

(2) EQUITY-METHOD AFFILIATESEquity-method affiliates as of December 31, 2012: (13 companies)

Seibu Oil Co., Ltd. Joyo Shell Sekiyu Hanbai K.K.Japan Oil Network Co., Ltd. Mieseki Shoji K.K.Central Sekiyu Gas Co., Ltd. Dia shoseki Co. Ltd.Shell Tokuhatsu K.K. Niigata Joint Oil Stockpiling Co., Ltd.Ogishima Power Co., Ltd. Marubeni Energy CorporationToyotsu Petrotex Corporation Shell Sekiyu Osaka Hatsubaisho K.K.

TS Aromatics Ltd.

Certain 20%- to 50%-owned companies, such as Kyoudo Gas K.K.,

are excluded from equity-method affiliates because their influence is im-

material to the consolidated financial statements.

(3) VALUATION METHOD FOR MAJOR ASSETSa) Securities

Securities with market value are stated at market value. Net unrealized

gains or losses on these securities are reported net of tax as a component

of net assets. Cost of securities sold is calculated primarily by the moving

average method.

Securities with no market value are stated at historical cost, based on

the moving average method.

b) Derivatives and hedging activities

Derivatives are used in the management of foreign currency risk, com-

modity price risk, and interest rate risk.

Derivative financial instruments and foreign currency transactions are

classified and accounted for as follows: (1) all derivatives are recognized

as either assets or liabilities and measured at fair value, and gains or

losses on derivative transactions are recognized in the consolidated state-

ment of income and (2) for derivatives used for hedging purposes, if such

derivatives qualify for hedge accounting because of high correlation and

effectiveness between the hedging instruments and the hedged items,

gains or losses on derivatives are deferred until maturity of the hedged

transactions.

The foreign currency forward contracts employed to hedge foreign

exchange exposures are measured at fair value and the unrealized

gains/losses are recognized in income. Forward contracts applied for

forecasted (or committed) transactions are also measured at fair value but

the unrealized gains/losses are deferred until the underlying transactions

are completed.

The commodity futures (or forward) contracts employed to hedge

commodity price exposures are measured at fair value and the unrealized

gains/losses are recognized in income. Future (or forward) contracts

qualifying and designated as hedges are also measured at fair value

but the unrealized gains/losses are deferred until the hedged transac-

tion occurs.

The interest rate swaps which qualify for hedge accounting and meet

specific matching criteria are not remeasured at market value but the dif-

ferential paid or received under the swap agreements are recognized

and included in interest expense or income.

c) Inventories

Inventories are stated at the lower of cost, determined by the weighted

average method, or net selling value for the Company and subsidiaries.

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(4) DEPRECIATION AND AMORTIZATION OF MAJOR ASSETSa) Property, plant and equipment

(Excluding lease assets)

The straight-line method has been adopted. The same standard as stipu-

lated in the Corporate Tax Law is applied to the useful economic lives and

the residual values. The main refining facilities at the Yokkaichi Refinery of

Showa Yokkaichi Sekiyu Co., Ltd., are depreciated with estimated useful

economic lives of 20 years.

b) Intangible assets (Excluding lease assets)

The straight-line method has been adopted. Software for in-house use is

amortized based on the straight-line method over the expected useful

economic life of 5 years.

c) Lease assets

Lease assets are depreciated using the straight-line method over the lease

term with a residual value of zero.

Financial lease transactions that are deemed to not transfer owner-

ship of the leased property to the lessee whose transaction date is before

December 31, 2008 are accounted for as operating lease transactions.

(5) BASIS OF PROVISIONSa) Allowance for doubtful accounts

For doubtful debts, provisions are calculated individually based on the

estimated uncollectible amounts. For other debts, provisions are calculat-

ed based on the actual ratio of the past doubtful debt losses.

b) Provision for employees’ bonuses

Accrued bonuses for the current fiscal year are provided based on the

estimated bonuses to be paid in the following year.

c) Provision for directors’ bonuses

For directors’ bonuses, provisions are calculated based on the estimated

bonuses to be paid in the following year.

d) Provision for employees’ retirement benefits

Accrued retirement benefits are provided based on the estimated PBO

and pension assets as at the current fiscal year-end. Actuarial differences

are amortized evenly within the following 10–14 years, which is the av-

erage remaining service years of employees. The past service liabilities

are amortized evenly within 10–14 years, which was the average re-

maining service years of employees when it arises. Differences due to

changes in the accounting standards are amortized evenly over the fol-

lowing 15 years, which was the average number of remaining service

years of employees at that time.

e) Provision for special repairs

Estimated accrued expenses on inspections and maintenance on refining

machinery and oil tanks are provided. Periodical inspections on oil tanks

are required under the Fire Service Act.

(6) CONSUMPTION TAXConsumption tax is imposed at the flat rate of 5% on all domestic con-

sumption of goods and services (with certain exemptions). The consump-

tion tax withheld upon sale and consumption tax paid by the Companies

on their purchases of goods and services is not included in revenue and

cost or expense items, respectively, in the accompanying consolidated

statements of income.

(7) AMORTIZATION OF GOODWILLGoodwill is amortized evenly over a period not exceeding 20 years,

which is determined in consideration of the reasons it was recorded.

Goodwill is expensed in the year it arises when it is immaterial.

(8) APPROPRIATION OF RETAINED EARNINGSUnder the Companies Act of Japan, the appropriation of retained earn-

ings on the current fiscal year is determined by resolution of the shareholders’

meeting held after the fiscal year-end. Therefore, the appropriation

of the retained earnings for the current fiscal year is not reflected in these

financial statements.

(9) CASH AND CASH EQUIVALENTSCash and cash equivalents in the consolidated statements of cash flows

consists of cash on hand, deposits readily convertible into cash, and

short-term investments with low risk of price fluctuations and with a matu-

rity of 3 months or less at the time of acquisition.

(10) RECLASSIFICATIONCertain comparative accounts in the consolidated financial statements for

the year ended December 31, 2011 have been classified to conform to

the 2012 presentation.

3. NEW ACCOUNTING PRONOUNCEMENTS

(Accounting Standard for Retirement Benefits)

On May 17, 2012, the Accounting Standards Board of Japan (the

“ASBJ”) issued ASBJ Statement No. 26, “Accounting Standard for Retire-

ment Benefits,” and ASBJ Guidance No. 25, “Guidance on Accounting

Standard for Retirement Benefits,” which replaced the Accounting Stand-

ard for Retirement Benefits that had been issued by the Business Account-

ing Council in 1998 with effective date of April 1, 2000 and the other

related practical guidances, being followed by partial amendments from

time to time through 2009.

“Under the revised accounting standard, actuarial gains and losses and

past service costs shall be recognized within net assets in the consolidated

balance sheets, after adjusting for tax effects, and the funding deficit or sur-

plus shall be recognized as a liability or asset.

The Companies expect to apply the revised accounting standard from

the end of the fiscal year ending December 31, 2014. However, the amend-

ment of the calculation method for present value of defined benefit obliga-

tions and current service cost will be adopted from the beginning of the fiscal

year ending December 31, 2015.”

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4. ADDITIONAL INFORMATION

(Accounting changes and error corrections)

In December 2009, the ASBJ issued ASBJ Statement No. 24, “Account-

ing Standard for Accounting Changes and Error Corrections,” and ASBJ

Guidance No. 24, “Guidance on Accounting Standard for Accounting

Changes and Error Corrections.” This accounting standard and the

guidance are applicable to accounting changes and corrections of prior-

period errors which are made from the beginning of the fiscal year that

begins on or after January 1, 2012.

(Application of hedge accounting)

Until the previous fiscal year, gains and losses with respect to forward

exchange contracts for hedging of forecasted transactions denominated

in foreign currencies and commodity futures contracts for hedging of ex-

port of oil products had been recognized by estimating the fair value of

the contract. However, the Companies have adopted hedge accounting

and have applied deferral hedge accounting for the contracts which meet

the criteria of hedge accounting from the current fiscal year.

The Companies have adopted hedge accounting because the

Companies reviewed the risk management system regarding financial

instruments and set the environment for the adoption of hedge account-

ing. This application was made in order to present the Companies’ finan-

cial position and financial performance more properly, by appropriately

reflecting in financial statements its initiatives to manage the risk of ex-

change rate and price variation of commodities.

(Directors’ retirement benefits)

Certain consolidated subsidiaries had been provided with payments for

the mandatory retirement benefits to directors as a reserve based on

internal rules. However, in accordance with the abolishment of the

executive retirement benefit system, a resolution was passed at the

annual shareholders’ meeting of each certain consolidated subsidiaries

concerning the previous fiscal year to approve final payments to incum-

bent directors for the retirement benefits that had accrued in their

respective terms of office.

As a result, the provision for directors’ retirement benefits was fully

reversed in the current fiscal year and the amount of ¥347 million for

outstanding final payments of retirement benefits has been included in

“Other” in the noncurrent liabilities section.

5. SECURITIES

(1) INVESTMENT SECURITIESYen Million

2012 2011

Securities ¥ 8,202 ¥ 8,343Security investments in non-consolidated subsidiaries and affiliates 29,482 30,358

¥37,684 ¥38,701

(2) SECURITIES WITH MARKET VALUEYen Million

2012

Historical Market value Unrealized gain (loss)

Securities with unrealized gains: Equity securities ¥1,113 ¥2,423 ¥1,309Securities with unrealized losses: Equity securities 2,786 2,284 (502)

Yen Million

2011

Historical Market value Unrealized gain (loss)

Securities with unrealized gains: Equity securities ¥1,166 ¥2,233 ¥1,067Securities with unrealized losses: Equity securities 2,737 2,614 (122)

(3) SECURITIES SOLDYen Million

2012 2011

Proceeds from sales of securities during the year ¥4 ¥8Realized gains 1 7Realized losses 0 0

(4) SECURITIES WITH NO MARKET VALUEYen Million

2012 2011

Unquoted securities Equity securities ¥3,494 ¥3,494

¥3,494 ¥3,494

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6. INVESTMENT AND RENTAL PROPERTY

The Company and certain subsidiaries own some rental properties, such as office buildings and commercial facilities including land in Tokyo and other

areas. The net of rental income and operating expenses for those rental properties for the years ended December 31, 2012 and 2011 were ¥1,279

million and ¥1,871 million, and the net gains (loss) on sales and disposal of those properties for the years ended December 31, 2012 and 2011 were

¥1,129 million and ¥7,934 million, respectively. An impairment loss of ¥3 million was recorded for the year ended December 31, 2011.

The carrying amounts, changes in such balances, and fair values of such properties are as follows.Yen Million

Carrying amount Fair valueDecember 31, 2011 Increase (Decrease) December 31, 2012 December 31, 2012

¥24,524 ¥212 ¥24,736 ¥69,829

Yen MillionCarrying amount Fair value

December 31, 2010 Increase (Decrease) December 31, 2011 December 31, 2011

¥31,505 ¥(6,981) ¥24,524 ¥73,455

Notes: 1. The carrying amount recognized in the balance sheet is net of accumulated depreciation and accumulated impairment losses, if any. 2. The increase during the fiscal year ended December 31, 2011 primarily represents the properties becoming idle of ¥1,066 million, and the decrease primarily represents sales and dis-

posals of ¥7,556 million and depreciation of ¥488 million. 3. The increase during the fiscal year ended December 31, 2012 primarily represents the properties becoming idle of ¥2,469 million, and the decrease primarily represents sales and dis-

posals of ¥1,942 million and depreciation of ¥315 million. 4. The fair value of properties is measured by the Company based mainly on real-estate appraisal standards.

7. SHORT-TERM AND LONG-TERM DEBTS

(1) SHORT-TERM DEBTSYen Million

2012 2011

Short-term loans payable ¥63,236 ¥45,675Commercial paper 26,000 52,000Short-term lease obligations 1,369 1,126

¥90,606 ¥98,801

Note: The weighted average interest rates on short-term debt outstanding at the year-end were as follows;%

2012 2011

Short-term loans payable 0.14 0.15Commercial paper 0.11 0.12

(2) LONG-TERM DEBTSYen Million

2012 2011

Loans from banks, other financial institutions, etc., due through 2022 ¥141,491 ¥145,687Long-term lease obligations 2,517 2,6861.66 percent unsecured straight bond due in 2013 15,000 15,0000.52 percent unsecured straight bond due in 2014 10,000 10,0000.97 percent unsecured straight bond due in 2017 10,000 10,000

¥179,009 ¥183,374Less: Long-term bond due within one year 15,000 —Less: Long-term loan due within one year 2,697 12,665

¥161,312 ¥170,709

Note: The weighted average interest rates on long-term debt (excluding the one due in 1 year) from banks outstanding as of December 31, 2012 and 2011 were 1.02% and 1.08%, respectively.

Annual maturities of bondsYen Million

2012

Within one year ¥15,000More than one year and less than two years 10,000More than two years and less than three years —More than three years and less than four years —More than four years and less than five years 10,000More than five years —

¥35,000

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Annual maturities of long-term debts (Excluding bonds)Yen Million

2012

Within one year ¥ 2,697More than one year and less than two years 27,704More than two years and less than three years 53,225More than three years and less than four years 998More than four years and less than five years 8,756More than five years 50,627

¥144,009

(3) COMMITMENT-LINE CONTRACTSThe Company maintains a revolving credit contract available up to ¥150 billion with a banking syndicate and an overdraft contract up to ¥10 billion

with Mizuho Corporate Bank Ltd.

There was no balance as at December 31, 2012 under these contracts.

8. INCOME TAXES

(1) SIGNIFICANT COMPONENTS OF DEFERRED TAX ASSETS AND DEFERRED TAX LIABILITIESYen Million

2012 2011

Deferred tax assets: Provision for employees’ retirement benefits ¥ 27,059 ¥ 27,722 Impairment loss 17,777 19,125 Loss on liquidation of business 3,420 4,262 Loss on valuation of investment securities 1,029 1,148 Allowance for doubtful accounts 477 450 Net loss carried forward 24,012 17,864 Other 11,957 12,143 Sub-total 85,735 82,716 Valuation allowance (47,566) (42,941) Total deferred tax assets ¥ 38,168 ¥ 39,774 Deferred tax liabilities: Reserve for advanced depreciation on property, plant and equipment transaction ¥ (9,146) ¥ (8,812) Valuation difference on available-for-sale securities (437) (360) Other (3,895) (4,014) Total deferred tax liabilities (13,479) (13,187) Net deferred tax assets (liabilities) ¥ 24,688 ¥ 26,587

(2) RECONCILIATION BETWEEN THE EFFECTIVE STATUTORY TAX RATE AND THE ACTUAL TAX RATE%

2012 2011

Effective statutory tax rate 40.7 40.7(Adjustments)Entertainment expense and others that are not deductible permanently 4.5 1.5Dividends income and others that are not taxable permanently (4.4) (0.2)Changes in valuation allowance 38.8 13.4Inhabitant tax on per capita basis 1.2 0.3Differences arising from changes in tax rates — 3.7Other (0.8) (1.9)Actual tax rate 80.0 57.5

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(3) ADJUSTMENT OF DEFERRED TAX ASSETS AND DEFERRED TAX LIABILITIES DUE TO CHANGES IN THE EFFECTIVE STATUTORY TAX RATE

The ”Act for Partial Revision of the Income Tax Act, etc. for the Purpose of

Creating a Taxation System Responding to Changes in Economic and

Social Structures” (Act No. 114 of 2011) and the ”Act on Special Meas-

ures for Securing Financial Resources Necessary to Implement Measures

for Reconstruction from the Great East Japan Earthquake” (Act No. 117

of 2011) were issued on December 2, 2011 and the income tax rate

is to be changed accordingly with effect from business terms beginning

on April 1, 2012 and onward.

In accordance with the change, the effective statutory tax rates

for the Companies to calculate the amounts of deferred tax assets and

deferred tax liabilities have been applied as follows depending on the

reversal timing of each temporary difference.Timing of reversal Tax rate

December 31, 2012 and before 40.7%January 1, 2013 through December 31, 2015 38.0%January 1, 2016 onward 35.6%

Due to the change, the net deferred tax assets decreased by ¥2,024

million and income taxes–deferred charge for the year ended December

31, 2011 increased by ¥2,074 million.

9. PROVISION FOR EMPLOYEES’ RETIREMENT BENEFITS

The Companies operate various kinds of retirement benefit plans, such as a contributory pension plan, a defined-benefit corporate pension, and a severance

payment plan.

(1) PROVISION FOR EMPLOYEES’ RETIREMENT BENEFITSYen Million

2012 2011

Retirement benefit obligations ¥(102,846) ¥(104,979)Pension assets 18,625 17,280 Unfunded retirement benefit obligations (84,221) (87,699)Unrecognized actuarial differences 10,539 12,757 Unrecognized past service cost (reduction in obligations) (Note 2) (1,037) (745)Unrecognized transition differences due to accounting changes 263 381 Sub-total (74,455) (75,305)Prepaid pension expenses (37) (30)Provision for employees’ retirement benefits ¥ (74,493) ¥ (75,335)

Notes: 1. The discount rate determined using the yield of bonds at the closing date of the current financial year. 2. A past service obligation (decrease in obligations) arose because the parent company and a consolidated subsidiary changed their plan. 3. The Company’s retirement benefit scheme includes two consolidated subsidiaries. In addition, due to a change of scope of consolidation, one subsidiary consolidated in the prior year was not

consolidated in the current year. 4. Except for the Company and three of the consolidated subsidiaries, the simple method is used for calculating retirement benefit obligations. 5. In-house pension schemes are mainly those in which employees retiring at retirement age or voluntarily at above the age of 55 contribute 50% of their retirement benefits to their company,

which then pays it out over 180 months or until the death of the pensioners. 6. The Company has introduced a retirement benefit system in which employees choose from a scheme for advance cash payment of retirement allowance and pension (full payment of retire-

ment allowance and pension equivalent amount included in salary), and a lump-sum retirement benefit scheme; the benefit obligations of employees choosing the lump-sum scheme are also included.

7. An employee pension trust has been set.

(2) THE NET PERIODIC PENSION EXPENSE RELATED TO THE RETIREMENT BENEFITSYen Million

2012 2011

Service cost (Note 1) ¥2,112 ¥2,048 Interest cost 1,979 2,370 Expected return on pension assets (361) (290)Amortization of unrecognized actuarial differences 1,965 1,485 Amortization of unrecognized past service costs (110) (76)Amortization of unrecognized transition differences due to accounting changes 117 117 Other (Note 2) 264 214

¥5,967 ¥5,869

Notes: 1. The retirement benefit costs of consolidated subsidiaries that use a simple method are included in “Service cost.” 2. This amount mainly represents payments for defined contribution pension plans.

(3) ASSUMPTIONS USED IN CALCULATION OF THE ABOVE INFORMATIONAs of December 31, 2012 As of December 31, 2011

Allocation method for retirement benefit expenses Periodical straight line Periodical straight lineDiscount rate 2.0% 2.0%Expected rate of return 1.0% 0.0%Period for amortization of past service cost 10–14 years 10–14 yearsPeriod for amortization of actuarial differences 10–14 years 10–14 yearsPeriod for amortization of transition differences due to accounting changes 15 years 15 years

Note: The calculation of the discount rate is based on yield rates at the closing date of the fiscal year.

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10. ASSET RETIREMENT OBLIGATIONS

(1) OVERVIEW OF ASSET RETIREMENT OBLIGATIONSThe Companies estimate obligations of restoration under the lease agreements of real estate in connection with land for Service station facilities

and offices.

(2) CALCULATION METHOD OF ASSET RETIREMENT OBLIGATIONSThe Companies estimate used periods between 10 and 50 years and discounts rates ranging from 1.085 to 2.391%.

(3) CHANGES IN THE TOTAL AMOUNT OF ASSET RETIREMENT OBLIGATIONSYen Million

2012 2011

Balance at beginning of year (Note) ¥3,455 ¥3,372Additional provisions associated with the acquisition of property, plant and equipment 158 70Reconciliation associated with passage of time 56 55Reduction associated with settlement of asset retirement obligations (84) (43)Balance at end of year ¥3,586 ¥3,455

Note: The beginning balance for the year ended December 31, 2011 represents the balance after adopting the “Accounting Standard for Asset Retirement Obligations” (ASBJ Statement No. 18) and “Guidance on Accounting standard for Asset Retirement Obligations” (ASBJ Guidance No. 21 issued on March 31, 2008) which are effective for the year ended December 31, 2011.

11. FINACIAL INSTRUMENTS AND RELATED DISCLOSURES

(1) GROUP POLICY FOR FINANCIAL INSTRUMENTSThe Companies, based on their capital investment plans, raise necessary

funds through bank loans, issues of corporate bonds, and other sources.

In addition, to obtain short-term working capital, the Companies raise

funds through bank loans, issues of commercial paper (CP), and other

sources. The Companies use derivatives to reduce the risk of fluctuations

in commodity prices, foreign exchange rates, and interest rates. Deriva-

tives are not used for speculative purposes.

(2) NATURE AND EXTENT OF RISKS ARISING FROM FINAN-CIAL INSTRUMENTS

Receivables, such as trade notes and trade accounts, are exposed to

customer credit risk. Investment securities are mainly equity instruments of

customers and suppliers of the Companies.

Payment terms of payables, such as trade notes and trade accounts,

are less than three months. Moreover, payables in foreign currencies

are exposed to the market risk of fluctuation in foreign currency

exchange rates.

Maturities of bank loans, commercial paper, and bonds, which are

for the purpose of capital investment and working capital, are less than

seven years after the balance sheet date. Moreover, variable interest rate

debt is exposed to market risks from changes in variable interest rates.

In addition to foreign currency forward contracts and interest-rate

swaps, derivatives mainly include options, which are used to hedge

foreign exchange risk associated with receivables and payables in for-

eign currencies, and swaps, which are used to hedge market price fluc-

tuations risk associated with crude oil and petrochemical products.

(3) RISK MANAGEMENT FOR FINANCIAL INSTRUMENTSCredit risk management

Credit risk is the risk of economic loss arising from a counterparty’s failure

to repay or service debt according to the contractual terms.

The Companies manage their credit risk from receivables by monitor-

ing of payment terms and balances of each customer and recognizing

credit standing of major customers to identify the default risk of customers

at an early stage.

Market risk management (foreign exchange risk and

interest rate risk)

Foreign currency trade payables are exposed to market risk resulting from

fluctuations in foreign currency exchange rates. Such foreign exchange

risk is hedged principally by foreign currency forward contracts.

Interest-rate swaps are used to manage exposure to market risks from

changes in interest rates of loan payables. Investment securities are man-

aged by monitoring market values and financial positions of issuers on a

regular basis. To manage the risk of derivatives, the Companies have

prepared a set of internal rules and implemented them in line with only

real demand.

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(4) FAIR VALUES OF FINANCIAL INSTRUMENTSFair values of financial instruments are based on the quoted price in active markets. If the quoted price is not available, other rational valuation techniques

are used. Also, please see Note 12 for details of fair value for derivatives.

(a) Fair value of financial instrumentsYen Million

December 31, 2012 Carrying amount Fair value Unrealized gain (loss)

Cash and deposits ¥ 18,175 ¥ 18,175 ¥ —Notes and accounts receivable–trade 377,552 377,552 —Investment securities 4,707 4,707 —Total ¥400,435 ¥400,435 ¥ —Notes and accounts payable–trade ¥336,884 ¥336,884 ¥ —Accounts payable–other 172,522 172,522 —Short-term loans payable (Note 1) 63,236 63,236 —Commercial paper 26,000 26,000 —Bonds payable (Note 2) 35,000 35,346 346 Long-term loans payable (Note 1) 141,491 144,059 2,568 Total ¥775,134 ¥778,049 ¥2,914 Derivatives (Note 3) ¥ 1,597 ¥ 1,597 ¥ —

Notes: 1. The current portion of Long-term loans payable is included in Long-term loans payable. 2. The current portion of Bonds payable is included in Bonds payable. 3. Net debts and credits arising from derivative transactions are presented in each net value, and a value of a net debt after totaling of credit and debt is shown in parentheses.

Yen MillionDecember 31, 2011 Carrying amount Fair value Unrealized gain (loss)

Cash and deposits ¥ 15,562 ¥ 15,562 ¥ —Notes and accounts receivable–trade 325,622 325,622 —Investment securities 4,848 4,848 —Total ¥346,033 ¥346,033 ¥ —Notes and accounts payable–trade ¥294,276 ¥294,276 ¥ —Accounts payable–other 177,452 177,452 —Short-term loans payable (Note 1) 45,675 45,675 —Commercial paper 52,000 52,000 —Bonds payable 35,000 35,418 418 Long-term loans payable (Note 1) 145,687 147,719 2,031 Total ¥750,091 ¥752,540 ¥2,449 Derivatives (Note 2) ¥ 364 ¥ 364 ¥ —

Notes: 1. The current portion of Long-term loans payable is included in Long-term loans payable. 2. Net debts and credits arising from derivative transactions are presented in each net value, and a value of a net debt after totaling of credit and debt is shown in parentheses.

ASSETS

Cash and deposits and Notes and accounts

receivable–trade

The carrying values of these items approximate fair value because of their

short maturities.

Investment securities

The fair values of investment securities are measured at the quoted market

price of the stock exchange for the equity instruments. The information of

the fair value for the investment securities by classification is included in

Note 5.

LIABILITIES

Notes and accounts payable–trade, Accounts payable–

other, Short-term loans payable, and Commercial paper

The carrying values of these items approximate fair value because of their

short maturities.

Bonds payable

The fair values of bonds payable are calculated by the total amount of

principal and interest at discounted interest rates based on the expected

rate of new issuance.

Long-term loans payable

The fair values of long-term loans payable are calculated by the total

amount of principal and interest at discounted interest rates based on the

expected rate of new debts.

DERIVATIVES

The information of the fair value for derivatives is included in Note 12.

(b) Financial instruments whose fair value cannot be reliably determined Yen Million

2012 2011

Investments in equity instruments that do not have a quoted market price in an active market ¥32,976 ¥33,852

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(5) MATURITY ANALYSIS FOR FINANCIAL ASSETS Yen Million

December 31, 2012 Due in one year or lessDue after one year through five years

Due after five years through ten years Due after ten years

Cash and deposits ¥ 18,175 ¥ — ¥— ¥—Notes and accounts receivable–trade 376,675 876 — —Total ¥394,851 ¥876 ¥— ¥—

Yen Million

December 31, 2011 Due in one year or lessDue after one year through five years

Due after five years through ten years Due after ten years

Cash and deposits ¥ 15,562 ¥— ¥— ¥—Notes and accounts receivable–trade 325,622 — — —Total ¥341,184 ¥— ¥— ¥—

Please see Note 7 for annual maturities of long-term debt and obligations under leases, respectively.

12. DERIVATIVES

(1) CONDITIONS OF TRANSACTIONSIn the normal course of business, the Companies use derivatives to manage their exposures to market risks in compliance with their internal policies. The Companies do not use derivatives for speculative pur-poses. These instruments include foreign exchange contracts, foreign currency options, interest rate swaps, futures, forward

contracts, and options of crude oil, oil products, and tanker freight. All such derivatives involve risks, including the credit risk of nonperformance by counterparties. In order to minimize the credit risk of nonperformance by counterparties, the Companies enter into derivative contracts with major financial institutions and trading companies that have a high credit rating.

(2) CURRENT VALUE OF DERIVATIVESDerivative transactions to which hedge accounting is not applied as of December 31, 2012 and 2011

Yen MillionDecember 31, 2012

Notional amountNotional amount

due after one year Fair value Unrealized gain (loss)

Foreign currency forward contracts To buy (US$) ¥69,234 ¥ — ¥1,575 ¥1,575 To sell (US$) 19,476 — (259) (259)

¥1,315 ¥1,315 Commodity-related transactions—Crude oil futures contracts To sell ¥ 839 ¥ — ¥ (29) ¥ (29)Commodity-related transactions—Oil products futures contracts To buy ¥ 1,614 ¥ — ¥ 140 ¥ 140 To sell 1,603 — (111) (111)Commodity-related transactions—Crude oil forward contracts To buy ¥ 35 ¥ — ¥ 73 ¥ 73 Commodity-related transactions—Oil products forward contracts To buy ¥ 124 ¥ — ¥ 1 ¥ 1 To sell 127 — 2 2

¥ 75 ¥ 75

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Yen Million

December 31, 2011

Notional amountNotional amount

due after one year Fair value Unrealized gain (loss)

Foreign currency forward contracts To buy (US$) ¥50,532 ¥ — ¥ (25) ¥ (25) To buy (€) 15,069 — (129) (129) To sell (US$) 8,070 — (2) (2) To sell (€) 4,044 — 16 16

¥ (141) ¥(141)Commodity-related transactions—Crude oil futures contracts To buy ¥ 447 ¥ — ¥ 13 ¥ 13 To sell 2,299 — (40) (40)Commodity-related transactions—Oil products futures contracts To buy ¥ 981 ¥ — ¥ 46 ¥ 46 To sell 703 — (29) (29)Commodity-related transactions—Crude oil forward contracts To buy ¥10,872 ¥35 ¥ 75 ¥ 75 To sell 15,767 — 296 296 Commodity-related transactions—Oil products forward contracts To buy ¥ 2,002 ¥ — ¥ 7 ¥ 7 To sell 8,169 — 136 136

¥ 506 ¥ 506

Derivative transactions to which hedge accounting is applied as of December 31, 2012Yen Million

December 31, 2012 Hedge accounting method Hedged item Notional amountNotional amount due

after one year Fair value

Foreign currency forward contracts To buy (US$) Deferral hedge

accounting Foreign forecasted transactions

¥ 589 ¥ — ¥ 16

¥ 16Interest rate swap (fixed rate payment, floating rate receipt)

Special hedge accounting treatment

Interest of Long-term loans payable

¥15,000 ¥15,000 ¥ (92)

¥ (92)Commodity-related transactions— Crude oil futures contracts To buy Deferral hedge

accounting Crude oil ¥ 80 ¥ — ¥ 6

Commodity-related transactions— Crude oil forward contracts To buy Deferral hedge

accounting Crude oil ¥ 972 ¥ — ¥196

To sell Deferral hedge accounting

Crude oil 1,230 — 6

Commodity-related transactions— Oil products forward contracts To buy Deferral hedge

accounting Oil products ¥ 928 ¥ — ¥ (3)

To sell Deferral hedge accounting

Oil products 2,380 — (15)

¥190

13. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Major elements of selling, general and administrative expenses for the years ended December 31, 2012 and 2011Yen Million

2012 2011

Transportation ¥ 38,787 ¥ 37,521Salaries 35,536 35,990Rents 6,225 6,013Depreciation 7,294 7,274Research and development expenses 5,840 5,041Other 39,735 36,949

¥133,419 ¥128,790

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14. IMPAIRMENT LOSS

As a minimum unit for generating cash flows, service stations were as-

sessed for impairment individually, and other property, plant and equip-

ment were grouped by segments of management accounting. Assets

used for rent and idle assets were assessed individually.

Recoverable value was assessed by comparing the estimated net

selling price and value in use. The net selling price was mainly adopted

for idle assets and value in use for other assets.

In the case of material assets, such net selling price is determined by

real-estate appraisal standards.

To calculate value in use, the future cash flows were discounted at

3.5% (4.5% in 2011).

The impairment loss was recorded at the amount by which the carry-

ing amount of each asset group exceeded its recoverable value. For the

year ended December 31, 2012, the Companies recognized an impair-

ment loss of ¥978 million on 47 groups (¥11,423 million on 61 groups

in 2011) of impaired property, plant and equipment, which was ac-

counted for as an extraordinary loss. Impairment loss recorded primarily

related to the significant decrease in the market value of the Companies’

land as well as to the overall deterioration of their business environment.

Impaired asset groups consisted of the following:

Yen Million

2012Land Others Total

Service stations (17 groups) ¥ 21 ¥121 ¥143 Idle assets (30 groups) 357 476 834

¥978

Yen Million

2011

Land Machinery

and equipment Others Total

Service stations (23 groups) ¥386 ¥ — ¥ 207 ¥ 593Plant (1 group) — 4,677 3,904 8,581Idle assets (37 groups) 225 — 2,021 2,247

¥11,423

15. COLLATERAL ASSETS

(1) COLLATERAL ASSETSYen Million

2012

Cash and deposits ¥ 3,568Notes and accounts receivable–trade 1,445Raw materials and supplies 76Buildings and structures 13,721Tanks 4,596Machinery, equipment and vehicles 52,398Land 21,583Other 0

¥97,391

(2) SECURED DEBTSYen Million

2012

Long-term loans payable ¥ 5,404Short-term loans payable 1,301Accounts payable–other 55,468

¥62,174

16. CONTINGENT LIABILITIES

The Companies had the following contingent liabilities as of December 31, 2012 and 2011.Yen Million

2012 2011

Guarantees for: Non-consolidated subsidiaries, affiliates, and other companies ¥2,175 ¥3,495 Employees (housing loan) 649 748

¥2,824 ¥4,243

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The Company is subject to legal proceedings claims and liabilities which arise in the ordinary course of business. In the opinion of management,

the amount of the ultimate liability with respect to those actions will not materially affect the Companies’ financial position or results of operations and

cash flows.

17. COMPREHENSIVE INCOME

The components of other comprehensive income for the year ended December 31, 2012 were as follows:Yen Million

2012

Unrealized gain (loss) on available-for-sale securities Gains (losses) arising during the year ¥(146) Reclassification adjustments to profit or loss 9 Amount before income tax effect (137) Income tax effect (77) Total ¥(214)Deferred gain (loss) on derivatives under hedge accounting Gains (losses) arising during the year ¥(127) Reclassification adjustments to profit or loss 329 Amount before income tax effect 201 Income tax effect (76) Total ¥ 125 Share of other comprehensive income in affiliates Gains (losses) arising during the year ¥ (29) Reclassification adjustments to profit or loss 14 Total ¥ (14)Total other comprehensive income ¥(104)

18. RELATED PARTY TRANSACTIONS

When transactions of the Company with its related parties are more than 10% of the consolidated sales proceeds, or 10% of the total amount of the

consolidated cost of sales and selling, general and administrative expenses, they are disclosed.

The Company discloses material balances and transactions with related parties when such balances and transactions represent more than 1% of the

consolidated total assets.

(1) RELATED PARTIES–CORPORATIONSFor the year ended December 31, 2012

Capital (Million)

Voting right share owing (Share owned)

Yen MillionName Transactions Closing balances

Saudi Arabian Oil Co., Ltd. ¥ — (Indirect 15.0%) Purchases of crude oil and oil products

¥788,706 Accounts payable (trade) ¥59,209

Seibu Oil Co., Ltd. ¥8,000 Direct 38.0% Purchase of oil products 448,261 Accounts payable (trade) 48,000Advanced purchase of crude oil

— Accounts receivable (trade) 32,260

Marubeni Energy Corporation ¥2,350 Direct 33.4% Sale of oil products 157,205 Accounts receivable (trade) 18,232Shell Chemicals Japan Ltd. ¥ 250 NA Sales of oil products and

petrochemicals126,100 Accounts receivable (trade) 17,676

Shell Eastern Trading (Pte) Ltd. US$714 NA Purchases of crude oil and oil products

199,277 Accounts payable (trade) 15,324

For the year ended December 31, 2011

Capital (Million)

Voting right share owing (Share owned)

Yen MillionName Transactions Closing balances

Saudi Arabian Oil Co., Ltd. ¥ — (Indirect 15.0%) Purchases of crude oil and oil products

¥805,205 Accounts payable (trade) ¥37,437

Seibu Oil Co., Ltd. ¥8,000 Direct 38.0% Purchase of oil products 462,652 Accounts payable (trade) 46,804Advanced purchase of crude oil

— Accounts receivable (trade) 19,622

Marubeni Energy Corporation ¥2,350 Direct 33.4% Sale of oil products 130,716 Accounts receivable (trade) 14,443Shell Chemicals Japan Ltd. ¥ 250 NA Sales of oil products and

petrochemicals322,705 Accounts receivable (trade) 9,662

Shell Eastern Trading (Pte) Ltd. US$714 NA Purchases of crude oil and oil products

241,876 Accounts payable (trade) 23,435

Notes: 1. The prices of crude oil and oil products are determined by negotiations in the consideration of market price. 2. Consumption tax is not included.

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(3) INFORMATION ABOUT SALES, PROFIT (LOSS), ASSETS, LIABILITIES, AND OTHER ITEMS IS AS FOLLOWS.For the year ended December 31, 2012

Yen MillionReportable segment

Oil businessEnergy solution

business Sub-total Other Total Adjustments Consolidated

Sales Sales to customers ¥2,539,754 ¥ 78,262 ¥2,618,016 ¥11,245 ¥2,629,261 ¥ — ¥2,629,261 Inter-segment sales and transfers 9,284 7,451 16,735 4,328 21,064 ¥(21,064) ¥ — Total ¥2,549,038 ¥ 85,713 ¥2,634,752 ¥15,574 ¥2,650,326 ¥(21,064) ¥2,629,261 Segment profit (loss) ¥ 28,128 ¥ (15,435) ¥ 12,693 ¥ 2,031 ¥ 14,724 (27) 14,697 Segment assets ¥1,053,639 ¥156,166 ¥1,209,806 ¥35,523 ¥1,245,329 ¥(12,135) ¥1,233,193 Other: Depreciation and amortization ¥ 26,649 ¥ 16,412 ¥ 43,062 ¥ 557 ¥ 43,620 ¥ — ¥ 43,620 Amortization of goodwill and

negative goodwill 212 (28) 183 — 183 — 183 Equity in losses of affiliates (974) 49 (924) — (924) — (924) Impairment loss 978 — 978 — 978 — 978 Goodwill at December 31, 2012 (228) (86) (314) — (314) — (314) Increase in property, plant and

equipment and intangible assets 18,325 4,635 22,961 294 23,256 — 23,256

Notes: 1. The segment “Other” refers to the total of other business segments that are not included in the reportable segments, including real estate, construction works, and sale and lease of auto accessories, etc.

2. The adjustments of segment profit ¥(27) million mainly represents elimination of inter-segment transactions. 3. The adjustments of segment assets ¥(12,135) million mainly represents elimination of inter-segment receivables. 4. Segment profit is adjusted with operating income in the consolidated statements of income.

19. SEGMENT INFORMATION

(1) OVERVIEW OF REPORTABLE SEGMENTSThe Companies’ reportable segments are those for which separately

financial information is available and the Board of Directors carries out

periodic review to allocate management resources and evaluate business

performance.

The Companies are mainly engaged in the manufacture and sale

of energy-related products including oil products, solar cells, and electric-

ity. The Company and its subsidiaries, serving as independent manage-

ment units of each business, create comprehensive strategies and

implement business activities about its products and services.

The Companies activities are composed of two reportable segments,

“Oil business” and “Energy solution business,” each of which is involved

in the sale of products and services. The businesses which are not in-

cluded in reportable segments are shown in “Other.”

The “Oil business” manufactures and sells gasoline, naphtha, kero-

sene, diesel oil, fuel oil, lubricants, LP gas, asphalt, and petrochemical

products. The “Energy solution business” incorporates the manufacture

and sale of solar cells modules and wholesale supplies of electricity.

(2) METHODS OF MEASUREMENT FOR THE AMOUNTS OF SALES, PROFIT (LOSS), ASSETS, LIABILITIES, AND OTHER ITEMS FOR EACH REPORTABLE SEGMENT

The accounting policies of each operating segment are consistent with

those disclosed in Note 2, “SUMMARY OF SIGNIFICANT ACCOUNT-

ING POLICIES.”

Segment profit is stated on an operating income basis. Inter-segment

sales and transfers are determined based on the prevailing market prices.

(2) RELATED PARTIES–INDIVIDUALSThere are no material transactions and balances of the Companies with related individuals, including shareholders and directors, representing more than

¥10 million for the years ended December 31, 2012 and 2011.

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For the year ended December 31, 2011Yen Million

Reportable segment

Oil businessEnergy solution

business Sub-total Other Total Adjustments Consolidated

Sales Sales to customers ¥2,695,278 ¥ 65,799 ¥2,761,078 ¥10,339 ¥2,771,418 ¥ — ¥2,771,418 Inter-segment sales and transfers 2,640 4,956 7,596 3,865 11,462 (11,462) — Total ¥2,697,918 ¥ 70,756 ¥2,768,674 ¥14,205 ¥2,782,880 ¥(11,462) ¥2,771,418 Segment profit (loss) ¥ 87,267 ¥ (28,895) ¥ 58,371 ¥ 2,056 ¥ 60,427 ¥ (138) ¥ 60,288 Segment assets ¥1,029,751 ¥156,915 ¥1,186,666 ¥35,283 ¥1,221,950 ¥(13,507) ¥1,208,442 Other: Depreciation and amortization ¥ 27,754 ¥ 14,939 ¥ 42,693 ¥ 636 ¥ 43,329 ¥ — ¥ 43,329 Amortization of goodwill and

negative goodwill 371 (28) 342 — 342 — 342 Equity in earnings of affiliates 1,870 (66) 1,804 — 1,804 — 1,804 Impairment loss 2,841 8,581 11,423 — 11,423 — 11,423 Goodwill at December 31, 2011 (136) (115) (251) — (251) — (251) Increase in property, plant and

equipment and intangible assets 14,465 27,272 41,738 177 41,915 — 41,915

Notes: 1. The segment “Other” refers to the total of other business segments that are not included in the reportable segments, including real estate, construction works, and sale and lease of auto accessories, etc.

2. The adjustments of segment profit ¥(138) million mainly represents elimination of inter-segment transactions. 3. The adjustments of segment assets ¥(13,507) million mainly represents elimination of inter-segment receivables. 4. Segment profit is adjusted with operating income in the consolidated statements of income.

(4) RELATED INFORMATIONa) Information for each product and service

Disclosure of this information is not presented since similar information is included in segment information.

b) Geographic segment information

1) Sales

Disclosure of this information is not presented since domestic sales make up more than 90% of consolidated sales.

2) Property, plant and equipment

Disclosure of this information is not presented since property, plant and equipment located in Japan makes up more than 90% of consolidated net

book value.

c) Information by major customer


Disclosure on this information is not presented since there were no customers that accounted for more than 10% of consolidated sales.


Information by major customer for the year ended December 31, 2011 is as follows.Yen Million

Name Sales Segment

Shell Chemicals Japan Ltd. ¥322,720 Oil business

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NETWORK(As of April 1, 2013)

Solar FrontierFirst Miyazaki PlantSecond Miyazaki PlantKunitomi Plant

Kyushu Branch

Yamaguchi Refinery ofSeibu Oil Co., Ltd.

Keihin Refinery of Toa Oil Co., Ltd.

Head OfficeMetropolitan BranchKanto BranchSolar Frontier K.K. Head Office

Hokkaido Branch

Chugoku Branch

Kinki Branch

Central Research LaboratoryAtsugi Research Center

Ishioka Training Center

Yokkaichi Refinery of Showa Yokkaichi Sekiyu Co., Ltd.

Chubu Branch

Niigata Petroleum Import Terminal

Tohoku Branch

Internal Audit DivisionPetro Chemical Business Promotion TeamTransformation Team

Oil Business Center• Commercial Sales Division• Lubricants & Bitumen Division• Supply Division• Research & Development Division• Crude Oil & Marine Division• International Sales Division• New Business Promotion Division• Manufacturing Division• Marketing Planning Division• Oil Products Division• Sales Division• Home Solution Division• Retail Sales Division• Retail EPOCH Project Team• Distribution & Operations Division

Energy Solution Business Center• Power Business Division• Solar Frontier K.K.

Group Functions• Overseas Intellectual Property Strategy Department• Health, Safety, Security and Environment (HSSE) Division• Integrated Corporate Planning Division• Integrated Finance & Control Division• Public Affairs Division• Credit & Financial Risk Management Team• IT Planning Department• Integrated Human Resources Division• General Affairs Division• Internal Control Promotion Division• Secretariat Department• Procurement Team• Integrated Legal Division

Head Office

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Solar Frontier Alcobar Office(Saudi Arabia)

Solar Frontier Americas(United States)

Saudi Aramco(Saudi Arabia)

Solar Frontier Europe(Germany)

Royal Dutch Shell plc(Netherlands)

Abu Dhabi Representative Office(UAE)

* Photographs: Provided by Royal Dutch Shell plc and Saudi Aramco

Refineries and import terminals

Offices, depots, LPG terminals, and asphalt terminals

Head Office, branches, R&D center, and other business locations*

*

Ishioka Training Center

Central Research Laboratory

Niigata PetroleumImport Terminal

Branches

Lubricants Blending Plants

Depots Asphalt Terminals

Solar Module Plants andResearch Centers

Group Refineries

LPG Terminals

• Hokkaido Branch• Tohoku Branch• Metropolitan Branch• Kanto Branch• Chubu Branch• Kinki Branch• Chugoku Branch• Kyushu Branch

• Yokohama

• Kobe

• Kushiro Nishiko

• Shiogama • Sado

• Hiroshima • Karatsu

• Yokohama

• Takamatsu • Mie

• Atsugi Research Center• First Miyazaki Plant• Second Miyazaki Plant• Kunitomi Plant

• Yokkaichi Refinery of Showa Yokkaichi Sekiyu Co., Ltd.

• Keihin Refinery of Toa Oil Co., Ltd.• Yamaguchi Refinery of Seibu Oil Co., Ltd.

• Shimizu • Hekinan

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MAJOR SUBSIDIARIES AND AFFILIATES(As of December 31, 2012)

Company name Major businesses

Consolidated subsidiaries (31 companies)

Showa Yokkaichi Sekiyu Co., Ltd. Oil refiningToa Oil Co., Ltd. Oil refiningShowa Shell Sempaku K.K. Domestic and international shipping operationsHeiwa Kisen Kaisha, Ltd. Depots operation

Shipping brokerageShoseki Engineering & Construction Co., Ltd. Design and construction of mainly oil-related industrial facilities and

service stationsNippon Grease Co., Ltd. Grease and lubricant salesSolar Frontier K.K. Development, manufacture, and sales of solar modules and systemsShoseki Kako Co., Ltd. Manufacture, sales, and installation of waterproofing materials

Manufacture and sales of oil products and bitumen paving materialsK.K. Rising Sun Automobile parts sales

Equipment lease Insurance agent

On-Site Power Co., Ltd. Dispersed power provisionWakamatsu Gas K.K. Sales of oil products

City gas businessGenex Co., Ltd. Power productionLeef Energy K.K. Oil products salesK.K. Sun Road Oil products salesJonen Co. Oil products salesK.K. Shinyo Sekiyu Oil products salesChuo Shell Sekiyu Hanbai K.K. Oil products salesTokyo Shell Pack K.K. Oil products salesNakagawa Oil Co., Ltd Oil products salesPetro Star Kansai Co., Ltd. Oil products salesNissho Koyu K.K. Oil products salesNagase Oil Ltd. Oil products salesEnessance Holdings Co., Ltd. Sales of liquefied gas

Construction related to high pressure gas and oil Sales of residential and office automation equipment

8 other companies

Equity-method affiliates (13 companies)

Seibu Oil Co., Ltd. Oil refiningJapan Oil Network Co., Ltd. StoringNiigata Joint Oil Stockpiling Co., Ltd. StockpilingDia Shoseki Co., Ltd. Oil products salesShell Sekiyu Osaka Hatsubaisho K.K. Oil products salesCentral Sekiyu Gas Co., Ltd. Oil products salesMieseki Shoji K.K. Oil products salesShell Tokuhatsu K.K. Oil products salesJoyo Shell Sekiyu Hanbai K.K. Oil products salesMarubeni Energy Corporation Oil products salesToyotsu Petrotex Corporation Oil products salesTS Aromatics Ltd. Sales of petrochemical productsOhgishima Power Co., Ltd. Power production

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INVESTOR INFORMATION(As of December 31, 2012)

Trading Volume

Stock Price Range Stock price (left) TOPIX (right)

(Yen)

900

750

600

450

300

1,200

1,000

800

600

(Thousands of shares)

100,000

75,000

50,000

25,000

0

2011 2012Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec.Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec.Jan.


(Yen)

900

750

600

450

300

1,200

1,000

800

600

(Thousands of shares)

100,000

75,000

50,000

25,000

0



Major ShareholdersNumber of shares held

(Thousands)Percentage of total common

shares outstanding

The Shell Petroleum Co., Ltd. 125,261.2 33.24%Aramco Overseas Company B.V. 56,380.0 14.96The Master Trust Bank of Japan, Ltd. (Trust Account) 14,210.2 3.77Japan Trustee Services Bank, Ltd. (Trust Account) 13,712.0 3.64The Anglo-Saxon Petroleum Co., Ltd. 6,784.0 1.80 Kawasaki Kisen Kaisha, Ltd. 3,503.7 0.93Trust & Custody Services Bank, Ltd. (Securities Investment Trust Account) 3,032.7 0.80 Japan Trustee Services Bank, Ltd. (Trust Account 4) 2,365.0 0.63Deutsche Securities Inc. 2,016.7 0.54 SSBT OD 05 OMNIBUS ACCOUNT—TREATY CLIENTS 2,010.3 0.53Total 229,275.9 60.84

Date of Establishment: January 1,1985Authorized Number of Shares: 440,000,000 sharesNumber of Shares Issued: 376,850,400 sharesPaid-in Capital: ¥34,197,585,900Number of Employees: 946Total Number of Service Stations: 3,633Number of Shareholders: 63,793Securities Listing: Tokyo Stock ExchangeTicker Code: 5002Transfer Agent: Sumitomo Mitsui Trust Bank, Limited

2-8-4, Izumi, Suginami-ku, Tokyo 168-0063, JapanIndependent Auditors: PricewaterhouseCoopers AarataGeneral Shareholders’ Meeting: March


orporate Data

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ctivities

Showa Shell Sekiyu K.K.Daiba Frontier Bldg., 2-3-2, Daiba, Minato-ku,

Tokyo 135-8074, Japan

Tel: +81-3-5531-5591

http://www.showa-shell.co.jp/english/

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

This corporate report was printed using vegetable oil ink and a waterless printing process.

July 2013Printed in Japan

Corporate Report Year ended December 31, 2012] Powering ......Powering A New Stage of Growth...

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Transcript of Corporate Report Year ended December 31, 2012] Powering ......Powering A New Stage of Growth...