NI Turning Opportunities PP 2 Into Growth 7 · ity shortfalls for paraxylene and propylene, etc....

Turning Opportunities

Into Growth

NIPPO

NO

ILCO

RPORATIO

NAnnual Report 2007

Annual Report 2007Year Ended March 31, 2007

Founded in 1888, Nippon Oil has been a leading company in the Japanese oil industry for morethan a century. We have the largest oil refining capacity and the top share of fuel sales in Japan.

The OpportunitiesNippon Oil—At a Glance

Market Sector Market Environment Market Data

Exploration &Production (E&P)

Refining andMarketing

Petrochemicals

Gas, Power andRenewables

� Historic surge in crude oil prices

� Fierce competition for natural resources with

the increasing participation of such rising eco-

nomic powers as China and India

� Japanese domestic markets: Oil still main pri-

mary energy source but demand declining

� Asian markets: Demand growing from coun-

tries centered on China

� Demand growing in Asian markets centered

on China

� Despite growth in production capacity in

Asia and the Middle East, continued capac-

ity shortfalls for paraxylene and propylene,

etc.

� Acceleration trend of electric power market

deregulation

� Rising expectations regarding the potential

of next-generation energy systems for coun-

tering global warming

04CY

80

60

40

20

005CY 06CY

Crude Oil Prices (WTI)($/Barrel)

00CY 05CY 10CY0

10

20

30

Projected Demand for Paraxylene in Asia(Millions of tons)

05CY 10CY 20CY0

3

6

9

12

Japanese Government Installation Targets of Stationary Fuel Cells(Million kW)

05CY 10CY0

10

20

30

Projected Demand forOil in Asia(Million BD)

05FY 10FY0

100

200

300

Projected Demand forPetroleum Products in Japan(Million kl)

See Pages 24-25

See Pages 26-31

See Pages 26-29

See Pages 32-35

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

Source: Ministry of Economy, Trade and Industry

A Cautionary Note on Forward-Looking StatementsThe financial forecasts, management targets, and any other estimates and projections of the Company presented in this report are based on information available to management as of the date set forth within.

Please note that actual results may vary significantly from projected forecasts due to various uncertain factors, and, as such, readers should take care when making investment decisions based solely on the forecasts herein.The factors affecting actual results include but are not limited to economic conditions, crude oil prices, demand for and market conditions of oil-related products, and exchange rate and interest rate trends.

* ”FY 2006“ refers to the fiscal year ended March 31, 2007, and other fiscal years are referred to in a corresponding manner.

Annual Report 2007 NIPPON OIL CORPORATION 1

Nippon Oil Nippon Oil Data

� Investment decisions focused on profitability

� Optimal risk-return balance combining

investment in exploration and acquisition of

production assets

� Take a long-term view to expand business

through ongoing improvement of technology

and expertise, centered on our core regions

• Marketing = Shifting Emphasis to Efficiency,Productivity and High Added Value

• Refining = Response to declining domesticdemand for petroleum products

� Growing commissioned Refining operation & Exports� Expanding Electric Power Operations� Full-conversion Strategy� Global Niche strategy for high-performance Chemical Products� Advancing CRI strategy

�Chemical Refinery Integration (CRI) Project

�• Take opportunities of surge demand for

petrochemicals in Asian market� Leveraging Japan’s largest refining capacity to

increase production of petrochemicals� Commenced commercial operation of OCT

installation to boost output of propylene� Manufacturing alliance with Mitsubishi Gas

Chemical Company for paraxylene

0

40

80

120

160

02CY 04CY 06CY

Oil/Gas Production Volume(Thousand BOED)

100

80

60

40

20

002FY 06FY

Refining Capacity UtilizationRate of Nippon Oil Group Refineries(%)

02FY 06FY0

500

1,000

1,500

2,000

2,500

0

500

1,000

1,500

02FY 04FY 06FY

Production Capacity for Paraxylene(Thousands of tons)

Installation of Fuel Cells(Units)

High-Value-AddedDr. Drive Facilities(Number of service stations)

0

200

100

300

400

04FY 05FY 06FY

• Institution of an integrated energy systemstructure to provide wide range energy cus-tomers need� Natural Gas & LNG� Electric power by leveraging the advantage of using

associated gas from refining process or infrastruc-ture of refineries

� Promoting the world's first kerosene- and LPG-powered residential-use fuel cells

NIPPON OIL CORPORATION Annual Report 20072

Fiscal 2001 Fiscal 2004

¥151 billion

¥54 billion

1st MEDIUM-TERM PLANPeriod of realizing the benefitsof the merger

2nd MEDIUM-TERM PLANPeriod of gaining footholds for newbusiness and creating strong positions

3rd MEDIUM-TERM PLANPeriod for building the foundationfor future development

Domestic demand for petroleum products

Overseas demand for petroleum andpetrochemical products

Dealing with environmental issues

Take policies of the2nd medium-term planfurther and develop� Increase earnings steadily

The Nippon Oil Group is aiming for ongoing growth until

fiscal 2010.

Through the first and second medium-term consolidated

management plans, we fundamentally improved our profit

structure. The third medium-term consolidated manage-

ment plan represents a period of building a solid founda-

tion for a future surge. As part of this, we are promoting

growth strategies aimed at establishing an integrated

energy company structure. The fourth medium-term

consolidated management plan will bring major leaps

forward as we achieve ongoing growth.

The Shape of the Nippon Oil Group in Fiscal 2010


Fiscal 2007 Fiscal 2010

¥190 billion

4th MEDIUM-TERM PLANPeriod for making major leaps forward

Changes in composition of demand (Ratio of heavy fuel oil C decreases, ratio of light oil rises)Demand will decline, although petroleum will continue to be the main source of energy for the long term.

Stricter environmental regulationsFirst commitment period under the Kyoto Protocol (’08 to ’12)

Growth in Asia (especially China and India)—— Demand outstrips supplyEmergence of an enormous market in Asia

Toward a sustainablegrowth path as anintegrated energycompany

Consolidate positionas an integrated energy company�Make preparations forsteady progress in imple-menting growth strategy

Ordinary income,excluding inventory valuation factors


Contents

PERFORMANCE & STRATEGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5Major Achievements & Topics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6A Message From the Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8Interview With the President . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10Special Feature: Nippon Oil’s Strategy in Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

REVIEW OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24Exploration & Production (E&P) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24Refining and Petrochemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30Gas, Power and Renewables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32Overseas Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36Constructions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37Research & Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

MANAGEMENT SYSTEM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40CSR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

FINANCIAL SECTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49Industry Trends and Nippon Oil’s Position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50Management’s Discussion and Analysis of Operations . . . . . . . . . . . . . . . . . . . . . . . . 56Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62Consolidated Statements of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64Consolidated Statements of Changes in Net Assets . . . . . . . . . . . . . . . . . . . . . . . . . . 65Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79

CORPORATE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80Principal Nippon Oil Group Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80Overseas Bases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81Organization Chart . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82Investor Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83



Major Achievements & Topics

Exploration & Production (E&P)■ Start of commercial production at oil field onshore Papua New Guinea (March 2006)■ Conclusion of financing agreement for Tangguh LNG project (August 2006)■ Acquisition of new exploration blocks in U.K. North Sea (February 2007)■ K2 acquisition of an oil and gas interest in the U.S. from Anadarko Petroleum Corporation (May 2007)■ Moved to development stage at Phuong Dong oil field offshore Vietnam (May 2007)

Refining and Petrochemicals■ Commenced commercial operation of Aroma Free (AF) solvent installation (June 2006)■ Completed construction of lubricants and grease manufacturing facility at Yokohama refinery (July 2006)■ Commenced commercial operation of Olefin Conversion Technology (OCT) installation boost output of propylene via

CRI (September 2006)■ Announced plan to save energy and enhance competitiveness at the Mizushima complex (December 2006)

Gas, Power and Renewables■ Launch of ESCO service in Aomori (March 2006)■ Completion of the Mizushima LNG base (April 2006)■ Commenced supply of natural gas to JR East (June 2006)■ Completion of the Hachinohe LNG base (March 2007)■ Launch of B.O.O. service to Fujifilm’s Yoshida-Minami factory (April 2007)■ Installation of residential-use fuel cells in Tokyo Disneyland and public utilities including a fire station in Nagoya (2006)

Overseas Operations■ Developed new blocks at Bulga coal mine in Australia (August 2006)■ Commenced operation of Nippon Oil (Guangzhou) Lubricants Corporation lubricating oil plant (September 2006)■ Commenced operation of lubricant oil and grease plant in the United States (October 2006)■ Formed strategic business and capital alliance with SK Corporation of Korea (January 2007)

Research & Development■ Established ENEOS Hydrogen Trust Fund (March 2006)■ Established Nippon GTL Technology Research Association (October 2006)

PERFORM

ANCE & STRATEGY


2001 2002 2003 2004

Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥4,076,890 ¥3,949,571 ¥4,187,392 ¥4,279,751Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,691,142 3,555,907 3,785,291 3,928,505Selling, general and administrative expenses . . . . . . . . . . . . . . . . 315,668 318,432 305,514 295,328Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,079 75,231 96,586 55,918Ordinary income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62,929 71,023 90,796 57,089 (excluding inventory valuation factors) . . . . . . . . . . . . . . . . . . . . — 54,400 42,700 81,300Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,787 24,006 32,281 (133,526)Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 898,083 924,140 929,987 821,202Total net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — —Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,971,252 3,444,742 3,350,237 3,265,503Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,875,218 1,419,282 1,329,230 1,395,336Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,807,176 1,411,434 1,388,397 1,433,424Working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68,042 7,848 (59,167) (38,088)Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69,200 122,500 148,500 136,900Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . 123,367 113,461 99,358 107,045R&D expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,218 10,449 10,037 9,685Net interest-bearing debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 925,900 830,800 940,200 837,800

Amounts per share:Net income (loss) per share . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.28 16.11 21.03 (88.76)Shareholders’ equity per share . . . . . . . . . . . . . . . . . . . . . . . . 611.29 610.43 615.89 544.04Cash dividends per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.00 7.00 7.00 7.00

Ratio:ROA (Return on assets) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.77 0.65 0.95 (4.04)ROE (Return on equity) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4 2.6 3.5 (15.2)

(excluding inventory valuation factors) . . . . . . . . . . . . . . . . . — — 0.3 (13.6)Net debt-equity ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103 90 101 102

Financial Highlights (Years Ended March 31)

2003 2004 2005 2006 20070

50,000

100,000

150,000

200,000

250,000

Capital Expenditures and Depreciationand Amortization(Millions of yen)

2003 2004 2005 2006 20070

50,000

100,000

150,000

200,000

250,000

300,000

350,000

Ordinary Income (Excluding Inventory ValuationFactors) and Ordinary Income(Millions of yen)

■ Ordinary income (excluding inventory valuation factors)■ Ordinary income

■ Capital expenditures ■ Depreciation and amortization


Thousands ofMillions of yen U.S. dollars

2005 2006 2007 2007

¥4,924,163 ¥6,117,988 ¥6,624,256 $56,137,7634,437,411 5,521,192 6,176,656 52,344,542

285,281 292,866 287,915 2,439,958201,470 303,930 159,684 1,353,254212,435 309,088 186,611 1,581,449151,700 142,700 195,800 1,659,322131,519 166,510 70,221 595,093953,240 1,130,328 — —

— 1,259,280 1,331,981 11,287,9753,514,352 4,215,611 4,385,533 37,165,5341,569,328 2,128,558 2,262,528 19,173,9661,536,810 1,933,592 2,072,145 17,560,551

32,518 194,966 190,383 1,613,415153,000 189,800 204,800 1,735,593110,031 135,133 131,872 1,117,55911,440 10,103 12,632 107,051

820,700 997,900 1,024,700 8,683,898

Yen U.S. dollars

86.72 114.08 48.12 0.41631.77 775.62 829.64 7.0310.00 12.00 12.00 0.10

%

3.88 4.30 1.6314.8 16.0 5.910.7 6.6 6.4

86 88 84

¥5,954,390

¥407,893¥58,456

¥203,516

Net Sales(Millions of yen)

2003

15

10

5

0

–5

–10

0.3

–13.6

10.7

6.6 6.4

–152004 2005 2006 2007

Return on Equity(Excluding Inventory Valuation Factors)(%)

¥29,341

¥113,811

¥10,083¥6,448

Operating Income(Millions of yen)

■ Refining and marketing ■ Oil and natural gas E&P■ Construction ■ Other

Total¥6,624,256

Total¥159,684

2003 2004 2005 2006 20070

200,000

400,000

600,000

800,000

1,000,000

1,200,000

Net Interest-bearing Debt

(Millions of yen)

2003 2004 2005 2006 20070

200

400

600

800

1,000

Shareholders’ Equity Per Share

(Yen)

PERFORM

ANCE & STRATEGY


Long-term Vision

The Nippon Oil Group is aiming to achieve its basic strategy

of becoming an integrated energy company by the end of

fiscal 2010, ending March 31, 2011. Working to realize these

goals, we formulated our third medium-term consolidated

management plan, which positions the three-year period from

fiscal 2005 to fiscal 2007 as a time when we build a solid

foundation for our business. We are executing a range of ini-

tiatives to achieve the aims of the plan.

The Group’s operating environment is undergoing signifi-

cant change, including increasingly fierce international com-

petition for resources and declining demand for petroleum

products in Japan. Seeing this change as an opportunity, we

are aiming to build a business model capable of sustaining

growth while further enhancing corporate value.

Fiscal 2006 Results

In the fiscal year under review, the second year of the third

medium-term consolidated management plan, the Group

posted consolidated net sales of ¥6,624.3 billion, an increase

of 8.3% on the previous fiscal year. Consolidated ordinary

income fell ¥122.5 billion to ¥186.6 billion. This mainly

reflected the negative impact of the inventory valuation fac-

tor, which had significantly boosted ordinary income in the

previous fiscal year. Inventory valuation using the gross aver-

age method affects the cost of goods sold due to fluctuations

in crude oil prices. Excluding this factor, consolidated ordi-

nary income actually increased ¥53.1 billion year on year, to

¥195.8 billion. This was achieved because higher income from

the E&P and petrochemicals businesses, areas we are focus-

ing on in particular as a pillar of our growth strategy, more

than offset lower sales volumes for petroleum products caused

Based on its philosophy, “Creating the energy

future and promoting prosperity and harmony

with nature,” the Nippon Oil Group will make

sustained growth possible by becoming an

integrated energy company.

A Message From the Management

Making Sustained Growth Possible


by a record warm winter and the growing shift to different

types of fuels by end-users. ROE was down 10.1 percentage

points at 5.9%, or 0.2 percentage points lower at 6.4%

excluding the inventory valuation factor.

As part of the third medium-term consolidated manage-

ment plan, we reviewed the past level of dividends and set a

target for the annual dividend of ¥12 per share. Accordingly,

the dividend applicable to the fiscal year under review is

unchanged from the previous fiscal year at ¥12.

Toward Sustained Growth

In April 2006, we updated our philosophy, comprising the

Group philosophy, six values we respect and standards of

conduct. As a result, we created the new Group philoso-

phy: “Creating the energy future and promoting prosperity

and harmony with nature.” This emphasizes the concepts

of responsibility for the future of energy and achieving har-

mony with the global environment. Diligently applying this

Fumiaki Watari

Representative Director, Chairman of the Board

Shinji Nishio

Representive Director, President

philosophy in practice to steadily fulfill our responsibilities

to society will play a significant role in boosting the Group’s

corporate value.

In the upcoming final year of the third medium-term

management plan, and through the fourth medium-term

management plan that starts the following fiscal year, we

will work to achieve sustained growth by becoming an inte-

grated energy company.

Fumiaki Watari Shinji Nishio

PERFORM

ANCE & STRATEGY


Q1: Review of the fiscal year just ended

Q2: Outlook for refining business

Q3: Response to declining demand for petroleumproducts in Japan

Q4: Ongoing CRI initiatives

Q5: Developments regarding production volumes

Q6: Alliances and global strategy

Q7: Progress toward achieving targets of the thirdmedium-term plan

Q8: Balance between employee andshareholder needs

Q9: Key points for next medium-term plan

Interview With the President

Please review the fiscal year just ended.I can summarize by saying that it was a year in which there were signs of ourstrategies paying off handsomely, although some major issues did emerge.With the third medium-term consolidated management plan, the Nippon Oil Group is aiming to real-

ize consolidated ordinary income of ¥190 billion, excluding inventory valuation factors, in fiscal 2007,

ending March 31, 2008. During the fiscal year under review, which marks the halfway point to this goal,

we recorded ordinary income of ¥186.6 billion, down ¥122.5 billion year on year. However, if inventory

valuation factors are excluded, ordinary income totaled ¥195.8 billion, up ¥53.1 billion year on year. I

believe this indicates that income levels are at healthy levels as we approach the March 2008 target.

In 1998, the year immediately before the merger of Nippon Oil and Mitsubishi Oil, the combination

of the two companies’ results amounted to an ordinary loss of ¥2.4 billion. Subsequently, in the period

from fiscal 1999 to fiscal 2003, ordinary income exclusive of inventory valuation factors remained at low

levels in the range of ¥33.3 billion to ¥62.9 billion. This period was one in which we had to show patience,

as we set about laying the foundations to realize the benefits of the merger and taking the first steps

toward growth. Specifically, we carried out brand and system integration in a short space of time, with no

major disruption, and also made rapid progress in combining our separate corporate cultures. For these

Setting the Stage for a New Phase of Growth

Q1

Shinji Nishio Representative Director, President


reasons, this integration is still cited in Japan as an exemplary merger. By fiscal 2003, we had completely

succeeded in establishing systems and a culture to strictly manage return on investments. This was made

possible through achieving a sound balance sheet by fully disposing of legacy negative assets, recognizing

an impairment loss of approximately ¥170 billion in the process. We also built a firm foothold for our

growth strategies by shifting management resources—personnel, assets and funds—into our E&P, Petro-

chemicals and new business such as LNG and fuel cells. From fiscal 2004 onwards, the benefits of long-

term initiatives and the complete establishment of post-merger internal systems, including those to manage

return on investment, began to feed through to the bottom line. During this period, ordinary income

exclusive of inventory valuation factors has been in the ¥142.7 billion to ¥195.8 billion range. While we still

do not believe this is adequate, we see it as a base from which to move on to the next level in responding

to the expectations of all our shareholders.

The fiscal year under review brought major changes in the external operating environment, includ-

ing high crude oil prices and a sharp drop in demand for petroleum products in Japan. The fact that we

achieved a 37% year-on-year increase in ordinary income in real terms in such an environment is due

to the significant contribution to earnings made by the E&P and Petrochemicals businesses. I believe

this is the result of the current management plan focusing on expanding the E&P business and boost-

ing petrochemical production capacity by upgrading our CRI (Chemical Refinery Integration) initiative.

It is also a welcome validation of the plan currently under way.

Such results contrasted with our Refining business, which performed far from adequately. As a

company that operates in an extremely changeable environment, we aim for constant, stable growth

by building a business portfolio that allows other businesses to compensate when a particular business

performs badly. During the year under review, in some ways we can say that this approach was a

success, as we maintained a level of profitability on an overall basis. However, we are by no means

satisfied with this situation. Such low earnings from our core Refining and Marketing businesses, which

are significant elements of the Nippon Oil Group in terms of both assets and sales, is something that

we take very seriously. The extent to which we leverage the benefits and potential of having the top

market share in Japan to improve these businesses will be a major issue in the coming fiscal year. We

are committed to tackling and resolving this issue.

The Refining business faced the challenge of high crude oil prices in the fiscal year under review, and it seems thatsome issues still remain in terms of reducing and passing on costs. What is your outlook for this business?

Higher costs from safety measures implemented ahead of schedule will recedesomewhat. Also, we are seeking our customers’ understanding on price risesfor petroleum products as a result of rising crude oil prices.Major issues during the fiscal year ended March 31, 2007 were continuing problems at refineries and the

costs incurred by them, or by maintenance efforts aimed at preventing such problems in advance. In addition

to these safety measures, we actively brought forward as much other planned spending, including that related

to asbestos countermeasures and soil remediation. This led to an increase in costs. Since the influence of

these factors will disappear from fiscal 2007 onwards, costs will begin to return to normal levels.

Another issue we faced during the year under review was the difficulty in fully reflecting the increased

cost of petroleum products, brought about by the high price of crude oil, in market prices. Everyone

Ordinary Income (Excluding InventoryValuation Factors) and Ordinary Income(Billions of yen)

02FY

400

300

200

100

003FY 04FY 05FY 06FY

Operating Income (FY2006)

Refining andMarketing29.3

Oil and Natural Gas E&P 113.8

Construction10.1

Other 6.5

Q2

■ Ordinary income (excluding inventory valuation factors)■ Ordinary income

(Billions of yen)

PERFORM

ANCE & STRATEGY


needs petroleum products, as they are essential to modern lifestyles. We thus see the stable provision

of petroleum products as an important mission to society, and one which we have continuously striven

to fulfill. Customers, though, have to play a part by bearing some of the required costs. However, we

acknowledge the idea that increases in the price of crude oil, that is to say an increase in the input cost

to our downstream operations, is something that we should absorb through our own efforts. Already,

during the past eight years we have achieved around ¥210 billion in cost reductions, reflecting a large

portion of this in the prices of our petroleum products. Of course, cost reduction is a constant theme

for any company, and we do not intend to pull back from such activities. Therefore, for our part, we

must obviously continue to robustly pursue cost cutting. However, with the current high crude oil prices,

it will become necessary to ask our customers to bear some of the burden, even though we are able to

absorb some of these costs through our own efforts. Although crude oil prices may remain high mov-

ing forward, we will work to enhance earnings in our downstream operations by reflecting changing

costs in our product prices, with the understanding of our customers.

As you mentioned, demand for petroleum products dropped sharply in Japan during the fiscal year under review.Can you tell us about your predictions for future developments and how you plan to respond?

We expect demand in Japan to continue to decline, but we are already pursu-ing countermeasures.During the fiscal year under review, demand for petroleum products in Japan fell by 5.2% compared to

the previous year. Although most of the decline in demand for heating fuel was attributable to a record

warm winter, the drop in demand for industrial fuels, gasoline, kerosene and similar fuels was due to the

large impact of end-users switching to different fuels. This trend is being driven by social changes, includ-

ing the spread of hybrid cars and other fuel-efficient vehicles, and the shift to all-electric homes. The

Japanese Government is predicting an annual drop in demand of 1.8% over the next five years, and we at

Nippon Oil feel that fuel-use patterns are currently at a turning point. We believe such developments are

inevitable amid diversification of energy sources driven by a variety of considerations including environ-

mental issues. That is not to say, however, that we are simply sitting idly by while demand for our petro-

leum products decreases. In fact, we are already implementing a range of responses.

First is the institution of an integrated energy system structure to provide energy in a range of

forms other than oil, according to the needs of our customers. However, being an integrated energy

company involves more than simply indiscriminately entering a range of non-oil energy businesses.

Rather, it means expanding our presence in fields peripheral to oil, after thoroughly researching the

fields in which we can leverage the expertise, technology and infrastructure developed through the oil

business, as well as our customer base, to establish Nippon Oil in a competitive position. For example,

in the electric and gas power businesses, we are not competing head-on with dedicated utilities com-

panies. Instead, we are pursuing a niche strategy, limiting ourselves to fields where we can put our

strengths to use. In fuel cells, drawing on the technology and distribution network that we developed in

the oil business, we are aiming to use ongoing innovation to create new markets where Nippon Oil can

capture a leading position.

I would like to introduce some of our concrete initiatives in this area. In the natural gas and LNG

business, during fiscal 2006, we began operating two LNG terminals, using idle land at refineries and

Q3


disused oil terminal sites. The terminals act as domestic bases for supplying gas companies and ordi-

nary households. In the electric power business, we expect to acquire generating capacity of roughly

1.8 million kW in fiscal 2008. This will be achieved using electric power generation facilities that make

use of residues generated during the refining process, and a natural gas power plant in Kawasaki that

is under construction in a joint project with Tokyo Gas Co., Ltd., which is scheduled to start operating

in 2008. We are also a pioneer in the field of fuel cells, said to be the ultimate energy system, having

developed the world’s first kerosene- and LPG-powered residential-use fuel cell systems. Although the

business is still in its infancy, based on business alliances with Japan Energy Corporation and Cosmo

Oil Co., Ltd., we are promoting future compatibility with devices of both companies as well as cost

reductions, thus promoting the early adoption of fuel cells powered by oil fuel. We are committed to

implementing these initiatives to realize our Group philosophy, “Your Choice of Energy,” as we move

toward becoming an integrated energy company providing the types of energy required by our cus-

tomers, and to become the leader in the Japanese energy industry. (See the Gas, Power and Renewables

section on page 32 for details.)

Also, despite the fact that demand will decline in Japan, oil is still expected to account for 40% of

primary energy demand in 2030, a forecast echoed by the Government’s national energy strategy.

Transport, in particular, is expected to remain heavily reliant on oil for fuels such as gasoline and jet

fuel. We therefore see a continuing need to fulfill our mission of supplying oil in the form of fuel.

Additionally, if Asia as a whole is considered, demand is actually expected to increase. To respond

flexibly to such overseas demand, we have preempted competitors in improving export facilities at

refineries and boosting our export capacity to 200,000 BD. We aim to develop our presence as an oil

company in Asia by realizing internationally competitive refineries through active efforts to reduce costs

and improve efficiency.

It seems that CRI contributed significantly to earnings in the fiscal year under review. Will this continue from fiscal2008 onwards?

I believe that acting earlier than competitors in upgrading our CRIinitiative has been the most successful strategy of the third medium-termmanagement plan.Both petroleum and petrochemical products are produced by refining crude oil. Accordingly, companies

with oil refining facilities have a distinct advantage over dedicated petrochemical product manufacturers

when it comes to manufacturing base petrochemical products. Nippon Oil has the significant added

advantages of existing expertise and high market share. Specifically, our refining capability is unrivaled in

Japan, we have the advanced technologies and facilities to make high-value-added petrochemical prod-

ucts from middle and heavy distillates, and we have a long history of manufacturing and marketing petro-

chemical products. For example, in paraxylene, one of our mainstay products, we are the world’s second

largest supplier, behind only Exxon Mobil. Additionally, we can realize beneficial synergies with our petro-

leum products business by channeling raw materials into petrochemicals production to alleviate the

problem of excess stocks of petroleum products.

We have identified propylene, paraxylene and benzene as strategic products for CRI. This is

because demand conditions for these three base petrochemical products, and their derivatives, are

Q4

■ Nippon oil sales volumes (right scale)Paraxylene (ACP*1) (left scale)Dubai crude oil (left scale)

Source: IEA

*1: ACP: Asian Contract Price

PERFORM

ANCE & STRATEGY

05CY

In Asia

10CY0

5

10

15

20

25

30

Projected Demand for Oil(Million BD)

02FY 03FY 05FY04FY 06FY0

300

600

900

1,200

0

300

600

900

1,200

Paraxylene and Dubai Crude Oil Prices(Dollars/ton) (Thousands of tons)


expected to be tight due to growth and expansion in Asian markets, particularly China. The third

medium-term management plan calls for Nippon Oil to boost its annual production capacity for

propylene and paraxylene to 0.8 million tons and 1.4 million tons, respectively. The Olefin Conver-

sion Technology (OCT) installation at our Kawasaki Operations Center, completed last year, and the

paraxylene manufacturing alliance with Mitsubishi Gas Chemical Company have brought this capac-

ity in range. From fiscal 2007, these various initiatives will make contributions throughout the full

fiscal year, and we will maximize income by further optimizing the production of petroleum prod-

ucts and petrochemical products. (See the Refining and Petrochemicals section on page 26 for details.)

High crude oil prices are boosting income in the E&P business, but production volumes are not increasing. How doyou see things developing?

We do not intend to recklessly pursue production volume to the extent that weoverlook profitability.In the fiscal year under review, ordinary income in the E&P business exceeded ¥100 billion for the first

time, reaching ¥113.8 billion. This performance was helped by crude oil prices reaching record highs

during the period. Since commencing overseas upstream operations in 1968, we have built up technolo-

gies and expertise centered on the four core regions of Southeast Asia, Oceania, the U.K. North Sea and

the U.S. Gulf of Mexico. Believing that this business is the key to the Company’s growth, we have devel-

oped it from a long-term perspective, investing both funds and human resources. These efforts have

borne fruit, and production volumes have grown steadily over the last few years, reaching 153,000 BD in

2006 compared to 66,000 BD in 2003.

One of the pressing issues we face is boosting production and replenishing and expanding reserves.

Looking at the fundamentals, achieving the initial targets of the third medium-term consolidated manage-

ment plan seems challenging. Specifically, our decision to focus on profitability amid an environment of

rising asset valuations caused by high crude oil prices and fierce competition for resources has made it

difficult for us to purchase assets in production. I place greater emphasis on profitability than on simply

increasing production volumes and reserves. We operate our business with funds entrusted to us by

shareholders and this means we cannot neglect profitability for the sake of increasing assets in our upstream

operations. We are interested in long-term expansion of the business rather than achieving short-term

numerical targets. Accordingly, we do not intend to achieve the target by lowering our investment standard.

Rather, we will increase the numbers by taking a long-term view. This will involve concentrating invest-

ment in regions and projects where we can use our expertise, with the aim of minimizing risk and thus

capturing projects with an attractive risk-return ratio. Continuously enhancing our technologies and exper-

tise will also be a factor.

An example of this approach is our May 2007 acquisition of a large-scale oil field already in pro-

duction in the U.S. Gulf of Mexico. We see this oil field as highly economical, as we expect to increase

production through further exploration and development. We have also made the decision to move to

the production stage at the Phuong Dong oil field, located close to the Rang Dong field in Vietnam

where we are currently in production. Since the production, storage and shipping facilities of the Rang

Dong field can be used, this is an economical project with low investment requirements.

Q5


Moving forward, our basic approach for this business will be to expand over the long-term by

balancing risk and growth through a combination of asset acquisition, a low-risk activity, and relatively

higher risk exploration activities. To achieve this balance, we will take into account risks and the prices of

production assets at the relevant time. However with the prices of production assets expected to remain

at high levels, we are considering a slight shift in favor of exploration in the fourth medium-term consoli-

dated management plan. We plan to move forward to create an exploration investment portfolio with a

balanced risk profile. This will be achieved by balancing low-risk projects with high upside potential of

peripheral areas of our oil fields in production, mainly in the four core regions where we have extensive

expertise, with high-risk, high-return projects such as deep-water exploration, which offers the possibility

of yielding large-scale reserves. (See the Exploration & Production section on page 24 for details.)

In addition to your alliance with Japan Energy Corporation designed to augment refining competitiveness in theAsia region, you have formed a tie-up with SK Corporation of Korea and concluded a memorandum of understand-ing on long-term cooperation with China National Petroleum Company (CNPC). How do these alliances fit in withyour strategy to expand the business globally?

We consider the oversupply problems in Japan and our Asia strategy as one.Our alliance with Japan Energy is wide-ranging, but the most promising element of it is the integrated

operation of our adjacent refineries in the Mizushima complex. The aim is to combine the respective

strengths of the two refineries: the comprehensive petrochemical production facilities and export-focused

shipping facilities of the Nippon Oil Group, and the extensive heavy oil cracking facilities of Japan

Energy. In this way, we are aiming to develop a refinery that is competitive on an international scale to

a level that would be impossible by either company acting alone.

The tie-up with SK Corporation and long-term cooperation with CNPC are aimed at creating a

strategy for the Asia market as a whole in conjunction with the top oil companies in their respective

countries. Currently, various teams are carrying out studies, but we are confident that these alliances

will produce real results. (See the Strategy in Asia section on page 18 for details.)

As I have already mentioned, demand for petroleum products in Japan is declining. Failure to

respond to this will result in oversupply, and this is recognized as a problem throughout the industry.

At Nippon Oil, we are examining strategies to help us prevail in such an environment based on every

possible scenario.

Fiscal 2007 marks the final year of the third medium-term consolidated management plan. Can you tell us aboutthe progress made so far and your forecast for achieving your targets?

Target for ordinary incomeOrdinary income for fiscal 2008 is expected to exceed the ¥190 billion target, excluding inventory valu-

ation factors. We are also making efforts to achieve the 10% target for ROE.

Cutting costs and improving efficiencyWe are aiming to capture ¥17 billion from cost reductions and improved efficiency. In the last two

years, costs have increased by ¥6.9 billion. However this was partly attributable to changes in the operating

Q6

Q7

PERFORM

ANCE & STRATEGY

02CY 03CY 05CY04CY 06CY0

20

40

60

80

0

40

80

120

160

Nippon Oil Group’s Production Volume/Crude Oil Price(Thousand BOED) ($/Barrel)


environment including the high price of crude oil and equipment and materials. Another cause was

costs associated with improving safety measures at refineries and environmental activities. In fiscal

2007, we are projecting a reverse of these costs and coupled with a range of rationalization and effi-

ciency improvement measures, including enhanced distribution efficiency, we expect to meet our tar-

get for cost reductions and improvements in efficiency.

Capital expendituresThe medium-term management plan initially called for capital expenditures of ¥500 billion over the term

of the plan, focused on growth areas. This reflected the need to earmark the majority of cash flows as a

foundation for realizing our growth strategy. However, we now expect capital expenditures over the term

to amount to ¥686 billion, due to factors including a need to build up investment aimed at strengthening

our growth strategies, such as the E&P business and petrochemical business. Specifically, we plan to use the

increase for a higher number of investment opportunities on which we expect a return than was envisaged

in the original plan. These potential investment targets have been selected based on stringent assessments.

Interest-bearing debtIt will be difficult to reduce the level of interest-bearing debt below the plan’s initial target of ¥900 billion

by March 31, 2008. This is mainly because of the impact of increased working capital caused by high

crude oil prices. However, we expect to slightly exceed the initial target of 70% for the ratio of interest-

bearing debt to equity.

As the President, how do you balance the needs of shareholders and employees, both two important stakeholder groups?We strive to meet the expectations of shareholders while also taking goodcare of our employees.Since we operate our business using funds entrusted to us by shareholders, we have a responsi-

bility to use this investment to boost income and provide returns. To achieve increased income, it

is of course essential to respect employees, business partners and customers, and comply with

laws and regulations. It is, however, also essential to conduct business activities in a fair and

honest manner and diligently fulfill our corporate social responsibility (CSR) through environ-

mental and safety initiatives.

Nippon Oil has taken the initiative in responding to the changing environment by pursuing growth.

The attitude of our employees is the driving force behind this. This attitude, which allows employees to

cope with change, stems from the corporate culture created following the 1999 merger of Nippon Oil

and Mitsubishi Oil, which combined the best aspects of our respective corporate cultures. The Com-

pany was ranked in the top 20 in the Best Companies to Work For survey conducted by the Great Place

to Work® Institute Japan in 2006. Also, a survey of the level of awareness of CSR and corporate ethics

among our corporate officers and employees found that trust in the Company, employee motivation,

and sense of involvement in CSR were all at high levels. This kind of ethical attitude and motivation is

something we must maintain and enhance by continuing to nurture our employees. However, this is

not any indication of the relative priority given to employees, nor does it mean that all our efforts are

for the benefit of employees alone.

Q8

Strategic investment464

Refining and marketing 162

Other 60

Total686

Breakdown of Capital Expenditures in ThirdMedium-term Management Plan (05FY-07FY)(Billions of yen)


Moving forward, in an operating environment characterized by dramatic change and intensify-

ing competition, continued growth of the Company will only be possible if we win the trust of cus-

tomers by helping to enrich their lifestyles through the ethical attitudes and high levels of CSR

awareness of our employees. It is this growth that will enhance corporate value, and ultimately re-

turn profits to our shareholders.

Finally, what do you consider the key points for the next medium-term consolidated management plan?Our operating environment has changed significantly since we formulated the last medium-term man-

agement plan. However, the changes that we face going forward will be even more dramatic, with

decreasing demand for oil in Japan, rising demand for oil and petrochemicals in Asia, higher crude oil

prices, fierce competition for natural resources, and ever more severe environmental problems.

Our fourth medium-term consolidated management plan will start in fiscal 2008. It will focus on

successfully responding to the changes in our operating environment. Nippon Oil is currently faced

with significant risks, but also significant opportunities. The main challenge of the next medium-term

management plan will be the extent to which these risks can be properly managed and the degree to

which we can tap into business opportunities through shrewd use of our resources, all with an eye on

the changing operating environment. In preparation for this, we are currently focusing our expertise on

business strategy, investment strategy, shareholder returns and other aspects of capital strategy, and

our internal systems.

Despite the significant changes in operating environment, our basic strategy of becoming an inte-

grated energy company will still form the basis of the fourth medium-term plan. With the decline in

demand for petroleum products in Japan, I believe that steadily working on this basic strategy will be

more important than ever in growing the Company and increasing corporate value. The application of

initiatives based on this basic strategy throughout the period of the first three medium-term consoli-

dated management plans has created a foundation for our future. Moving forward, we will continue to

bolster this base while reaping the benefits of business and improvement initiatives we have imple-

mented to date.

Q9

PERFORM

ANCE & STRATEGY


Special Feature

Nippon Oil’s Strategy in Asia

Nippon Oil aims to be an integrated energy company. This strategy is not limited to Japan, but isessential for us to realize sustainable growth in Asia. We are steadily progressing our strategyfor Asia, centered on our Exploration & Production, Refining, and Lubricants businesses.

Exploration & Production (E&P)We consider Southeast Asia to be the mostimportant of the core regions of our E&Pbusiness. We produce oil and natural gasas an operator at fields in Vietnam and Ma-laysia, and aim to use our expertise in thisregion to expand our business.

RefiningWe expect huge growth in demand forpetroleum products and petrochemicalproducts. We will firmly seize growth op-portunities in Asia through initiatives suchas our commissioned refining operationsfor China Oil , the boost ing of ourparaxylene production capacity and theconstruction of propylene facilities focusedon exports.

Commissioned Refining for China Oil(Thousand BD)

2005 200620040

10

20,

30

40

Oil and Natural Gas in Southeast Asia(Thousand BOED)

0

30

60

90

120

2005 20062004



LubricantsIn 2007, we will strengthen our overseassales of lubricants using our network ofbases that we spread across Asia withthe construction of a two-base manufac-turing network serving northern andsouthern China.

Exploration & Production (E&P) LubricantsVietnamMalaysiaMyanmarIndonesia

RefiningCommissioned refining operations for and long-term col-laboration with China OilComprehensive business alliance with SK CorporationIncreased export capacity of petroleum productsIncreased exports of petrochemical products

Lubricating oil operations in China (includingKaramay refrigeration lubricant)

Ove

rsea

s Bas

esBu

sines

s or P

roje

ct

NOEX (Malaysia) Ltd, Miri OfficeNOEX (Malaysia) Ltd, Kuala Lumpur OfficeJapan Vietnam Petroleum Co., Ltd

Vietnam office (Vung Tau)

Nippon Oil Corporation, Beijing OfficeNippon Oil Corporation, Jakarta OfficeNippon Oil (Thailand) Ltd.Taiwan Nisseki Co., Ltd.Nippon Oil (Shanghai) CorporationTianjin Nisseki Lubricants & Grease Co., Ltd.Nippon Oil (Guangzhou) Lubricants CorporationNippon Oil Malaysia Sdn. Bhd.

Nippon Oil’s Businesses in Asia

Lubricant Sales in Asia(Thousand kl)

2005 200620040

40

80

120

160

PERFORM

ANCE & STRATEGY



The Nippon Oil Group’s E&P businesses in Southeast Asia comprise crude oil and natural gas

production in Vietnam, Malaysia and Myanmar. We are also involved in work to develop gas

fields and construct an LNG plant as part of the Tangguh project in Indonesia in preparation

for the 2008 launch of our new LNG business, encompassing the production of gas and

production and marketing of LNG.

VietnamThis is one of the Company’s main projects, and since the 1992 acquisition of interests in this

project, we have moved into exploration, development and production as an operator.

Cumulative production volume in the Rang Dong oil field exceeded 135 million barrels. The

oil field itself is unique in that it consists of a reservoir in a fracture within the granite bed-

rock. The Nippon Oil Group’s fracture analysis technology is highly regarded worldwide. Other

features of our operations at this oil field include the use of solar and wind power to provide

some of the power used at our offshore production facilities. Also, a project whereby associ-

ated gas generated during production is effectively used by piping it to power plants in Viet-

nam was recognized as a Clean Development Mechanism (CDM) Project under the Kyoto

protocol in February 2006. This has reduced annual emissions of greenhouse gases by annual

average 680,000 tons and demonstrates the environmentally friendly aspect of this project.

In addition to the analysis and environmental technologies introduced above, the Group

aims to use its horizontal drilling and other technologies to further increase production volumes

and enable stable operations.

MalaysiaOur Malaysian project comprises an LNG business featuring an integrated operating system cover-

ing upstream through to downstream operations. Since acquiring an interest in the SK-10 block in

1987 we have moved into exploration, development and production as an operator. In 1989, we

also acquired an interest in the SK-8 block. The natural gas produced from these blocks, located

offshore Sarawak, Malaysia, is sent via pipeline to the liquefaction plant of Malaysia LNG Tiga Sdn

Bhd, in which Nippon Oil has a 10% interest, to be processed into LNG and sold. The plant pro-

duced 6.9 million tons of LNG in fiscal 2006. The condensate produced in association with natural

gas is also sold.

MyanmarProduction of natural gas began in May 2000 in gas fields discovered in December 1992. The gas

is sold via pipeline to PTT, Thailand’s state oil company. The condensate associated with natural gas

production is also sold, as with the project in Malaysia.

IndonesiaThe Nippon Oil Group became involved in the Tangguh project at the exploration stage, earlier than

most of its partners. This is our second LNG project after the Tiga project in Malaysia, and we are

developing gas fields and constructing an LNG plant with a capacity of approximately 7.6 million

tons per year in preparation to begin LNG production at the end of 2008.

Exploration & Production (E&P)

Production Facility Oil Storage Barge

Reservoir

Reservoir

Sandstone

Granite Bedrock

Overview of Rang Dong Oil Field

Oil Storage Barge


Project Company

Shareholdings (Equity Interest)

Status

Interest Held

Partners (Interest Held)

Production Volume (Entitlement Basis)

Nippon Oil Exploration (Myanmar), Limited

Nippon Oil Exploration (50%)Japanese Government (50%)

Exploration/Development/Production

19.3%

*Petronas Carigali (40%)MOGE (20.5%)PTTEP (19.3%)

10,000 BOED

Blocks M-12/13/14

Gas FieldGas PipelineInterest held by Nisseki Myanmar Oil Development Co., Ltd.

M14

M12

Yadana

Yangon

Bangkok

Ratachaburi

M13

Myanmar

Thailand

Yetagun

Vietnam

Ho Chi Minh

Vung Tau

Su Tu Den Ruby

Phuong Dong

Rang Dong

Te Gioc Trang

Ca Ngu Vang

Bach HoRong

Oil FieldGas FieldOil PipelineGas PipelineInterest held by Japan Vietnam Petroleum Company, Ltd.Interest held by Nippon Oil

Dai Hung

15-2

05-1b

05-1c

Project Company


Status

Interest Held



*Japan Vietnam Petroleum Company, Ltd.

Nippon Oil Exploration Group (97.1%)Mitsubishi Corporation (2.9%)


46.50%

PVEP (17.5%)ConocoPhillips Company (36.0%)

18,000 BOED

15-2 Block

05-1b/c BlockProject Company

Status

Interest Held


Nippon Oil Exploration Limited

Exploration

35%

*Idemitsu Oil and Gas Co., Ltd. (35%)INPEX Holdings Inc. (30%)

*Denotes operator

Project Company


Status

Interest Held


Nippon Oil Exploration (Malaysia), Limited

Nippon Oil Exploration Group (78.73%)INPEX Holdings Inc. (15%)Mitsubishi Corporation (6.27%)


75%

32,000 BOED

Heran Gas Field etc. (SK-10)

Partners (Interest Held) Petronas Carigali Sdn. Bhd. (25%)

Project Company


Status

Interest Held


Nippon Oil Exploration (Sarawak), Limited

Nippon Oil Exploration Group (76.5%)INPEX Holdings Inc. (15%)Mitsubishi Corporation (8.5%)


37.50%

44,000 BOED

Serai Gas Field etc. (SK-8)

Partners (Interest Held) *Shell (37.5%)Petronas Carigali Sdn. Bhd. (25%)

*Denotes operator

Malaysia

Brunei

Helang

Layang

CilipadiBijan

Selasih

SaderiSeraiJintan

M1

M3F12

F6

E11

B11

F13

Bintulu

Miri

Oil FieldGas FieldOil PipelineGas PipelineInterest held by Nisseki Malaysia Oil Development Co., Ltd.Interest held by Nisseki Sarawak Oil Development Co., Ltd.

Project Company


Status

Interest Held


Gross Production Volume

Nippon Oil Exploration (Berau), Limited

Nippon Oil Exploration (51%)JOGMEC (49%)

Development

12.2%

*BP (37.2%)CNOOC (17.0%)MI Berau B.V. (16.3%)KG Berau Petroleum Ltd./

KG Wiriagar Petroleum Ltd. (10.0%)LNG Japan (7.3%)

LNG: 7.6 million tons per year (planned)

Berau, Wiriagar and Muturi Blocks

Interest Held


17.1%

*BP (48.0%)MI Berau B.V. (22.9%)KG Berau Petroleum Ltd. (12.0%)

Berau Block

Mogoi DeepWiriagar Deep

Vorwata

Roabiba

Ofaweri

WosUbadari

Wiriagar Muturi

Berau

Gas FieldInterest held by Nisseki Berau Oil Development Co., Ltd.Berau, Wiriagar and Muturi blocks

*Denotes operator

Vietnam Malaysia

Indonesia Myanmar

PERFORM

ANCE & STRATEGY



Refining

Expanding Business Opportunities in AsiaIn contrast to the expected decline in demand for petroleum products in Japan, demand in

China and other Asian countries is projected to increase. In particular, a certain level of growth

in Asia is expected for heavy fuel oil, while demand is anticipated to drop significantly in Japan.

In such circumstances, we have increased loading capacity at refineries for export prod-

ucts to 200,000 BD, and plan to increase this further to 230,000 BD during fiscal 2007.

We have also agreed to increase the volume of commissioned refining for China National

United Oil Corporation (China Oil) to 50,000 BD from April 2007. This project utilizes our

refining capacity, which is the largest in Japan, and offers the same benefits as secure ongo-

ing exports. Accordingly, the project is mutually beneficial to both companies.

Alliances to Enhance Our International CompetitivenessWe are increasing exports of petroleum products, but competition in the international market remains

fierce. Enhancing the competitiveness of our refineries is therefore a key issue. The Nippon Oil Group

has a track record of making use of outside consultants to perform comparative evaluations of refinery

competitiveness and devising strategies aimed at creating a highly competitive refining group in the

Asia region.

In June 2006, we concluded a comprehensive business alliance with Japan Energy Corporation.

The agreement aims to enhance the competitiveness of a full range of areas, including upstream

operations, refining, distribution and fuel cells, but the main focus is on integrating operations at

both companies’ Mizushima refineries. The ultimate aim is to develop refineries which are highly

competitive internationally.

Nippon Oil has also agreed to enter into a strategic business and capital alliance with SK

Corporation of Korea. Working in tandem, the companies will pursue growth strategies includ-

ing enhancing the competitiveness of our refining and petrochemicals operations in Asia, and

expanding overseas business.

In April 2007, we also concluded a memorandum of understanding regarding long-term

collaboration with China National Petroleum Corporation (CNPC), the parent company of

China Oil with which we have maintained a good relationship through commissioned refin-

ing operations. Under this agreement, the companies aim to further enhance their current

positive relationship through joint activities and cooperation in a wide range of fields cover-

ing upstream and downstream operations, and including new energy and energy-saving activi-

ties. Moving forward, the companies will grow together leveraging their respective competitive

advantages.

CRI StrategyOur Chemical Refinery Integration (CRI) strategy aims to bolster the Company’s propylene and

paraxylene operations for the rapidly growing Asian market by leveraging our strengths in refining

operations. For propylene, we constructed an Olefin Conversion Technology (OCT) installation

focused on exports at our Kawasaki Operations Center. This facility, which includes a refrigeration

tank and loading facilities for large vessels, commenced full-scale operation in September 2006.

We will also respond to future growth in paraxylene demand from Asia by working to raise

paraxylene production capacity to 1.4 million tons through the CCR-PLAT reformer installation at

the Sendai refinery and a business alliance with Mitsubishi Gas Chemical.

Long-term Collaboration

Strategic Business and Capital Alliance

Alliances With Asian Oil Companies

Signing ceremony for long-term collaboration with CNPC


Lubricants

Two-base Lubricant Manufacturing Network Serving Northern andSouthern ChinaIn September 2006, Nippon Oil commenced full-scale operation of a lubricant plant in

Guangzhou, China, with an annual capacity of 27,000kl. There is a growing number of

automakers and other companies expanding their manufacturing activities in Guangzhou and

the surrounding south China region, leading to soaring demand for lubricants.

Nippon Oil is putting its proprietary technologies to work at this new lubricant production

plant in the region, manufacturing and marketing products including auto engine oil that

supports high levels of fuel efficiency, and environmentally friendly lubricating oil for indus-

trial users. The plant also manufactures and markets lubricating oil for ships, taking advan-

tage of its prime location in the Pearl River delta, which is ideally located for sea transport.

This new plant joins the Tianjin Nisseki Lubricants & Grease Co., Ltd. plant, at which pro-

duction capacity was increased in May 2006. As a result, we now have a two-base manufac-

turing network serving the northern and southern regions of China, and the Nippon Oil Group

has boosted its annual production capacity for lubricants in China to 82,000kl.

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

facturing and marketing agreement with the CNPC Group. Refrigeration oil is used in com-

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

requires high technical specifications and strict quality management. The CNPC Group has

made use of our advanced base-oil manufacturing and commercialization technologies to

produce refrigeration oil at its local refineries. We anticipate strong sales growth amid surg-

ing demand for refrigerators and air conditioners in the domestic Chinese market.

We are also rolling out our ENEOS-brand high-performance automotive oil in China. This

oil is sold at our service stations in Japan and is well supported by consumers. Going for-

ward, we will substantially strengthen our lubricants business in China as well as expanding

the marketing of ENOS-brand oil.

Nippon Oil Corporation Beijing Office

Nippon Oil Corporation Jakarta OfficeTianjin Nisseki

Nippon Oil (Shanghai)

Nippon Oil (Guangzhou)Taiwan Nisseki

Nippon Oil (Thailand)

Nippon Oil Malaysia

Nippon Oil Bases of Lubricants Business in Asia

31

4

5 6

7

8

1

2

3

4

5

6

7

Representative & Overseas Offices of

Nippon Oil Corporation

Overseas Sales of Lubricating Oil(Thousand kl)

2005 (Actual) 2006 (Actual) 2007 (Forecast)

China 49 66 84

Other Asia 75 85 94

Asia Total 124 151 178

2

8

ENEOS-brand Oil

PERFORM

ANCE & STRATEGY



Positioning of Upstream Operations in the Nippon Oil Group

Oil and gas exploration and production (E&P) activities are an increasingly important part of

the Nippon Oil Group’s growth strategy. In its third management plan (2005–2007) the Group

has the goal of boosting its production to 180,000 BOED in 2007 on an equity basis according

to our investment in the project companies. However, achieving this within the planned time

frame now looks challenging because of difficulties in making effective asset purchases and

investment in exploration blocks. These difficulties are due to changes in the business environ-

ment since the plan was formulated, specifically, fierce competition for resources and rises in

the cost of procured equipment and materials. Despite this, the Nippon Oil Group will empha-

size profitability, as it implements strategies geared toward expanding its business while con-

stantly monitoring changes in the market.

The Nippon Oil Group focuses its management resources on its four core areas of South-

east Asia, the U.K. North Sea region, the U.S. Gulf of Mexico region, and Oceania. Additionally,

the Group is enhancing its exploration activities to further replenish reserves which are essen-

tial for E&P business continuation. We plan to move forward to create an exploration invest-

ment portfolio with a balanced risk profile. This will be achieved by combining asset acquisition

in peripheral areas of our oil fields in production, where we have extensive expertise and new

exploration activities in North Africa and the Middle East and in deep with high potential.

Also, the Nippon Oil Group is actively expanding its operations of natural gas and LNG-

related business (See page 32). We are participating in the Malaysia LNG Tiga Project and Indonesia

Tangguh LNG project, both of which are covering processes from exploration and development

to liquefaction and marketing.

Exploration & Production (E&P)Major Achievements & Topics■ Start of commercial production at oil field onshore Papua New Guinea (March 2006)

■ Conclusion of financing agreement for Tangguh LNG project (August 2006)

■ Acquisition of new exploration blocks in U.K. North Sea (February 2007)

■ K2 acquisition of an oil and gas interest in the U.S. from Anadarko Petroleum Corpora-

tion (May 2007)

■ Moved to development stage at Phuong Dong oil field offshore Vietnam (May 2007)

Review of Operations


04CY 05CY 06CY0

30,000

60,000

90,000

120,000

Exploration & Production Operating Profit(Millions of yen)

K2 oil field

04CY 05CY 06CY0

10

20

30

40

0

30

60

90

120

R/P and RRR(Years) (%)

Activities During Fiscal 2006 and in the Near Future

In the E&P Business, in October 2006, we began construction work to expand facilities at the Rang

Dong oil field in Vietnam, with the aim of increasing crude oil production. We are also preparing

to start production in the Blane oil field in the North Sea during 2007. Meanwhile, work to develop

gas fields and build an LNG plant are proceeding smoothly at the Tangguh LNG project in Indo-

nesia, with supplies of LNG scheduled to start at the end of 2008. Looking at the oil sand busi-

ness in Canada, completion of the Syncrude 21 Stage 3 expansion project boosted capacity to

350,000 BD, of which the Nippon Oil Group is entitled to 17,500 BD.

In Vietnam, we made the decision to move to the development stage at the Phuong Dong

oil field, located close to the Rang Dong oil field where we are engaged in production. This

enables low-cost production at the Phuong Dong field by making use of the production, stor-

age and loading facilities of the Rang Dong field. Production at the Phung Dong field is slated

to commence at the end of September 2008. Initial production volume is expected to be 23,000

BD. We have also decided to move to the development stage at the Saderi gas field in Malaysia.

In addition, the Group was awarded interests in six new exploration blocks in the U.K.

North Sea in a licensing round held by the U.K. government in 2006. The Group is operator in

four of the licenses.

Average production volumes for Group companies during the fiscal year under review

were slightly down year on year at 152,000 BD. This reflected delays to make facilities opera-

tional again in the U.S. Gulf of Mexico region, which suffered hurricane damage in August

2005, as well as difficulty in making effective investments due to intensified competition for

resources and higher prices of procured equipment and materials.

Furthermore, in May 2007, we made a joint bid with Mitsubishi Corporation to purchase a

23.2% stake in the K2 oil field from Anadarko Petroleum Corporation, a major U.S. indepen-

dent oil company, which held a total 65% stake. Of this, Nippon Oil holds an 11.6% stake in

the field. The K2 field is located in deep waters offshore the state of Louisiana and currently

produces 40,000 BD of crude oil and natural gas. Large oil and gas fields are continuing to be

discovered and developed in the area around the K2 field, and further exploration and devel-

opment is expected to yield increased oil reserves in the future. Network

■ Area of production■ Area of development■ Area of exploration■ Office

R/P (reserve-production ratio)=Confirmed and estimatedreserves at end of period/Production volume during period(left scale)RRR (reserve replenishment ratio)=Confirmed and estimatedreserves at end of period plus production volume duringperiod/production volume during period (right scale)

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Refining and PetrochemicalsMajor Achievements & Topics■ Commenced commercial operation of Aroma Free (AF) solvent installation (June 2006)

■ Completed construction of lubricants and grease manufacturing facility at Yokohama

refinery (July 2006)

■ Commenced commercial operation of Olefin Conversion Technology (OCT) installation

boost output of propylene via CRI (September 2006)

■ Announced plan to save energy and enhance competitiveness at the Mizushima com-

plex (December 2006)

Response to Declining Demand for Petroleum Products in Japan

In response to a changing operating environment due to declining demand for petroleum

products in Japan, the Nippon Oil Group is working to thoroughly reduce costs and improve

efficiency while also preempting competitors in engaging in a range of response initiatives.

Growing Commissioned Refining Operations and Exports

In 2006, demand for petroleum products in Japan fell 5.2% year on year. In particular, demand

for gasoline fell by 1.5% and demand for heavy fuel oil A and heavy fuel oil C fell significantly as

the shift to gas and coal progressed. Looking forward, no great change is expected in this trend.

In contrast, we expect demand for petroleum and petrochemical products in the Asian

region, particularly in China and India, to grow along with the region’s economic develop-

ment. Moreover, the progressive implementation of environmental regulations is boosting

demand for low-sulfur (10 to 50ppm) diesel fuel.

In response to these contrasting domestic and overseas situations, the Nippon Oil Group

intends to proactively expand its exports of jet fuel, low-sulfur diesel fuel, heavy fuel oil C, and

other petroleum products in addition to efforts to grow commissioned refining operations.

Accordingly, the Group plans to strengthen its export capacity of each of its refineries. In the

first stage of this project, we invested a total of ¥1.1 billion in fiscal 2006 to increase capacity of

the export facility to 200,000 BD. We plan to increase this further to 230,000 BD during fiscal

2007. These efforts will enable us to respond flexibly to both demand in Japan and exports

based on trends in overseas petroleum product markets.


Furthermore, the Group increased the volume of commissioned crude oil refining opera-

tions on behalf of China National United Oil Corporation (China Oil). Increasing demand for

petroleum products in China has steadily boosted this volume each year since we undertook the

commissioned refining of 20,000 BD in July 2004, increasing to 50,000 BD from April 2007. This

deal is one example of how we export petroleum products. It also benefits both parties by utiliz-

ing Japan’s largest refining capacity to allow both Nippon Oil and China Oil to secure ongoing

supplies of the products they require. We also concluded a memorandum of understanding with

CNPC, China Oil’s parent company, indicating the two companies’ intention to grow together by

fully leveraging their cooperative relationship and respective competitive advantages. (See the

Strategy in Asia section on page 18 for more information.)

Advancing Our CRI Strategy

Nippon Oil is implementing a strategy to use its refinery capacity in fields other than petro-

leum production. Central to these efforts is the Chemical Refinery Integration (CRI) project.

This project leverages the Company’s strength in creating petrochemical products from crude

oil using its refinery facilities. The objective is to operate an optimally efficient production sys-

tem that enables us to respond quickly and flexibly to trends in demand for petroleum and

petrochemical products. The project places particular emphasis on increasing production capacity

for paraxylene and propylene, for which rising sales volume is expected in China and other

Asian countries. During the period of the third management plan, Nippon Oil plans to increase

its annual production capacity for propylene and paraxylene to 0.8 million and 1.4 million

tons, respectively. As part of the CRI strategy, we constructed facilities for propylene produc-

tion using Olefin Conversion Technology (OCT) at the Group’s Kawasaki Operations Center,

with full-scale operation commencing in September 2006. At the Sendai refinery, we are

increasing production of xylene (a base material for paraxylene) and propylene, while also

carrying out construction of a Continuous Catalyst Regenerator (CCR) platformer and propy-

lene splitter, scheduled for completion in August 2007.

Expanding Electric Power Operations

Recently, the balance of demand for petroleum products is shifting, with declining demand for

heavy oil fractions and a greater proportion of demand for light oil fractions such as gasoline and

kerosene. As a result, making effective use of surplus heavy oil fractions is an issue in the industry.

In response to this, Nippon Oil decided to enter the IPP (independent power producer)

field. The Company has a huge refining infrastructure as well as considerable know-how re-

garding the operation of electric power plants.

LEFT:AF solvent installation

RIGHT:OCT installation

Refining Facilities ofthe Nippon Oil Group

Muroran (180)

Sendai (145)

Toyama (60)

Negishi (340)Osaka (115)

Mizushima (250)

Marifu (127)

( )=Refining capacity thousand BD

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Negishi refinery

As this initiative entails electric power generation using heavy oil, which is projected to be

produced in quantities that exceed demand, it has the twin effects of rebalancing demand for

heavy oil and stably providing competitive electric power.

Nippon Oil initiated wholesale independent power producer (IPP) operations in 1998 at

the Osaka refinery. Now, we are operating IPP facilities at five refineries (Osaka, Yokohama,

Negishi, Marifu, and Muroran). These facilities have a total power supply capability of 700,000kW,

making Nippon Oil the third-largest IPP company in Japan.

Full-conversion Strategy

As another strategy to deal with surplus heavy residues, Nippon Oil is implementing utility

integration with petrochemical companies operating in the Mizushima complex. This plan is

slated for completion in the spring of 2009 and involves the construction of a solvent

deasphalting unit. This will allow the processing of heavier grades of crude oil, boost produc-

tion of middle distillates and reduce production of heavy fuel oil C. Additionally, it is planned

to provide the residue extracted from the unit as fuel to the neighboring petrochemical

companies. This plan is aimed at achieving yet higher levels of value-add at the Mizushima

refinery while also contributing to energy-saving efforts and enhanced competitiveness in the

Mizushima complex as a whole.

05FYResults

06FYExpected results

07FYForecast

10FYForecast

0

50

100

150

200

250

■ Heavy fuel oil

■ Middle distillates

■ Naphtha

■ Gasoline Source: Ministry of Economy, Trade and Industry

Forecast Demand for Petroleum Products in Japan(Million kl)


Global Niche Strategy for High-performance Chemical Products

Another principal element of Nippon Oil’s petrochemical operations besides the CRI operations

described previously is the Company’s business manufacturing and marketing high-performance

petrochemical products used in diverse applications. For example, the Company has earned the

top share of the global market for ethylidene norbornene (ENB), a crosslinking agent in synthetic

rubber used to increase the resistance to heat and light (See the Overseas Operations section on

page 36 for more information). The Company also markets such products as high-boiling-point

Super Aromatic Solvent (SAS), applied to a pressure-sensitive paper solvent and synthetic insula-

tion oil, and Xydar, a liquid crystal polymer, which is marketed as a high-performance super

engineering plastic. Created by leveraging the Company’s special technologies and other capa-

bilities, these high-performance functional petrochemicals are generally characterized by high

profit margins and high global market shares, and Nippon Oil targets further expanding the scale

and profitability of functional petrochemicals business in the future as its global niche strategy.

Negishi refinery

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Thoroughly Shifting Emphasis to Efficiency, Productivity and High Added Value

The 1996 relaxation of petroleum product import restrictions halted the trend of growth in the

number of service stations in Japan. Subsequently, intensifying competition began reducing the

number, and the unprofitable facilities were progressively winnowed out by the legalization of

self-service service stations in 1998. Since then, the number has continued decreasing steadily.

Japan currently has approximately 46,000 service stations, of which the Nippon Oil Group oper-

ates about 10,400—the country’s largest service station network. As price-oriented competition

among service stations intensifies, Nippon Oil recognizes that it cannot simply take pride in the

large scale of its marketing network but must implement the following strategies for shifting its

marketing emphasis from quantity to efficiency, productivity and high added value.

The first strategy is to supply highly competitive products. One example is the Group's

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

inside engines to enhance both fuel economy and acceleration. Its improved engine-cleaning

capabilities remove grime from air valves and injectors to prevent deterioration in engine per-

formance. In addition, these capabilities generally clean up engine interiors in ways that reduce

the amount of carbon monoxide, hydrocarbons, and NOx in exhaust gases. Nippon Oil has

been a leader in marketing essentially sulfur-free (10ppm or less) gasoline products, which

lower the levels of harmful substances in exhaust emissions. As awareness of environmental

protection issues among consumers increases, products with these kinds of superior environ-

mentally friendly features are steadily growing in popularity to become more competitive in

the marketplace.

Marketing


ENEOS Service Station

The second strategy is to build a high value-added service station network. Most Japanese

car owners are meticulous about automobile maintenance. Noting this, the Nippon Oil Group

is seeking to increase the competitiveness of its service station network by emphasizing the

creation of high value-added Dr. Drive service stations. Dr. Drive facilities provide ordinary

vehicle-care services—including lubricant oil checks and changes, car washing and waxing, and

tire sales and changing—as well as statutory vehicle inspections (required three years after new

vehicles are purchased and every two years thereafter), car washing by hand and daily vehicle

checkup inspections, and a range of other high quality vehicle-related goods and services.

Aiming to be the starting place for safe and comfortable driving by offering services just as

dependable as those of trusted family doctors, Dr. Drive facilities always feature nationally

qualified mechanics. This allows all drivers, even those not familiar with vehicular mechanics,

to discuss their issues in comfort. Because these characteristics make Dr. Drive facilities con-

siderably more competitive than ordinary service stations, during the first year after ordinary

service stations are converted into Dr. Drive facilities, their average monthly gross profit grows

by approximately ¥200,000. The number of Dr. Drive facilities has risen rapidly since Nippon

Oil began their full-scale creation in fiscal 2000. As of March 31, 2007, the Group had a net-

work of 2,403 Dr. Drive facilities, equivalent to roughly one quarter of the overall service station

network. In January 2007, Nippon Oil used a range of media and its service stations to adver-

tise the benefits of Dr. Drive facilities as the starting place for safe and comfortable driving. We

will continue to improve quality to respond to our customers’ expectations.

The third strategy is to restructure the network of affiliated service station operators that

manage all Nippon Oil service stations. In addition to the strategies described above, Nippon

Oil is seeking to enhance the competitiveness of its service stations by providing those opera-

tors with advice and assistance related to low-cost management. Further, we consider that

some restructuring is necessary based on the business judgment of affiliated service stations,

with the aims of strengthening the management base, improving management and maintain-

ing and strengthening sales channels. We will continue to consider such steps as necessary in

the future.

02FY

3,000

2,000

1,000


Dr. Drive Facilities (Number of service stations)

02FY

50,000

40,000

30,000

20,000

10,000


Number of Service Stations —— All Japan and Nippon Oil

■ All service stations in Japan

■ Nippon Oil service stations

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Natural Gas and LNG

Nippon Oil is actively expanding its business with an integrated operating system covering the

whole of the natural gas business from exploration to marketing. Also, in downstream opera-

tions in Japan, the Group is proceeding with strategic infrastructure projects focused on spe-

cific regions and business partners. Those projects include constructing LNG terminals as starting

points for natural gas supply, and constructing power plants to create new demand. One example

is the use of existing infrastructure to construct a new LNG importing terminal (160,000kl

capacity) on idle land within the Mizushima refinery, which has been supplying gas to nearby

gas companies and industrial users since May 2006. Nippon Oil has also decided to construct

a new 160,000kl tank to cope with expected future increase in demand for LNG. We plan to

commence operation in fiscal 2011. In March 2007, Nippon Oil also completed construction

of a satellite LNG terminal of 4,500kl capacity for domestic marine shipments on a former

transshipment depot site in Hachinohe, Aomori Prefecture. This terminal provides local city

gas companies and industrial users with natural gas and LNG. Furthermore, we have been

supplying natural gas to JR East’s Kawasaki power plant since June 2006.

Electric Power

Deregulation of the Japanese electric power industry has encouraged a growing number of

companies to enter the electric power business from diverse industries. Wholesale power sup-

ply by independent power producers (IPPs) has been allowed since 1995, and the permitted

scope for the retail electric power supply business of power producers and suppliers (PPSs) has

been gradually broadened since 2000. The Company is well positioned to maintain strong

Gas, Power and RenewablesMajor Achievements & Topics■ Launch of ESCO*1 service in Aomori (March 2006)

■ Completion of the Mizushima LNG base (April 2006)

■ Commenced supply of natural gas to JR East (June 2006)

■ Completion of the Hachinohe LNG base (March 2007)

■ Launch of B.O.O.*2 service to Fujifilm’s Yoshida-Minami factory (April 2007)

■ Installation of residential-use fuel cells in Tokyo Disneyland and public utilities including

a fire station in Nagoya (2006)


competitiveness in electric power operations by making good use of its huge refining infrastruc-

ture and by utilizing residue from its refining operations, which is projected to be in surplus, as

fuel for its power generation plants. We plan to earn a stable profit by expanding our electric

power operations to an extent that permits us to make the most of our competitive advantages.

Nippon Oil already has IPP plants at five Group refineries that have a total supply capacity

of 700,000kW, making the Company the third-largest IPP in Japan. In addition to wholesale

IPP operations, the Company has proactively developed its power producer and supplier (PPS)

retail electric power supply business under its third medium-term management plan. Besides

providing power to customers by using the surplus internal generating capacity of the Negishi

refinery and other facilities, since July 2005, the Company has procured power for PPS retail

marketing operations from Frontier Energy Niigata Co., Ltd.—a joint venture created in coop-

eration with Nippon Steel Corp. and Mitsubishi Corp. Furthermore, a joint venture between

Nippon Oil and Tokyo Gas Co., Ltd.—Kawasaki Natural Gas Generation Co., Ltd. has been con-

structing an 800,000kW natural gas-fueled power generation plant that is scheduled to begin

operations in fiscal 2008. A high-efficiency power generation plant fueled with associated gas

is under construction at the Sendai refinery, and the Company is planning retail marketing of

power from that plant from the second half of fiscal 2007. The PPS business in Japan is losing

competitiveness due to the high price of crude oil, leading some companies to withdraw from

the industry. However, the diverse portfolio of fuels used in Nippon Oil’s electric power busi-

ness, comprising natural gas, petroleum coke, associated gas from refineries and residue, enables

us to mitigate the effects of crude oil price rises. Under its policy of environmental protection,

Nippon Oil is also engaged in the wind-power generation business. The Company is operating

a 1,500kW wind turbine at its Akita Oil Depot and plans to increase its wind-power business

in scale.

Total Energy Systems (TES)

Nippon Oil has contributed to increased energy efficiency and reduced energy-related envi-

ronmental impact by developing and marketing petroleum fuel-based cogeneration systems

or supplying electric power from these systems. Making good use of the technologies accu-

mulated in the TES business with a total generating capacity of approximately 350,000kW,

Nippon Oil began providing energy service company (ESCO*1) services for the prefectural

government buildings and the police headquarters in Aomori Prefecture from March 2006

using a highly efficient cogeneration system and comprehensive methods for reducing build-

ings’ energy consumption.

In addition, Nippon Oil was commissioned to provide energy (totaling 55,000 kW) for

three manufacturing facilities operated by Fujifilm Co., Ltd., which has been shifting its fuel to

07FY 08FY(Planned) (Planned)

IPPs 700 700

PPSs 200 960

Cogeneration 165 165

Total 1,065 1,825

Nippon Oil’s Electric Power Supply Capacity(Thousand kW)

LEFT:LNG Ship

RIGHT:Hachinohe satellite LNG terminal

*1 ESCO business involves comprehensive energy con-servation services that aim to conserve energy withoutreducing customer convenience. Remuneration forthese services corresponds to a portion of the custom-ers’ savings achieved due to higher energy efficiency.

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natural gas to reduce CO2 emissions. Commercial operation began at the company’s Yoshida-

Minami factory in April 2007. This is the largest B.O.O.*2 project in Japan through which Nippon

Oil provides total services, from procuring LNG to the installation, running and management

of highly efficient cogeneration systems. We intend to develop and promote a wide variety of

energy business formats tailored to the diverse needs of customers.

The total supply capacity of all of Nippon Oil’s various electric power operations will be

approximately 1,000,000kW as of March 31, 2008. Also the Company will boost this capacity to

approximately 1,800,000kW, comprised of 700,000kW in IPP operations, 960,000kW in PPS

operations, and 165,000kW in TES operations by March 2009. This will be achieved through

such steps as the procurement of power for PPS business from the Sendai refinery and the

Kawasaki-based joint venture with Tokyo Gas.

Fuel Cells

Since 1986, the Nippon Oil Group has undertaken fuel cell R&D programs that leverage its

advanced hydrogen refining and catalyst technologies. As fuel cells are environmentally friendly,

next-generation energy systems with great potential, the Nippon Oil Group is focusing on fuel

cells as a future key business area. In March 2005, we launched the ENEOS ECO LP-1, the

world’s first residential-use fuel cell system that uses liquefied petroleum gas (LPG) as fuel,

and we had installed a total of 369 units as of March 2007. The Group plans to actively install

this efficient, environmentally friendly product with low CO2 emissions and plans to install

over 250 units during fiscal 2007.

In addition, in March 2006, Nippon Oil launched ENEOS ECOBOY, the world’s first resi-

dential-use fuel cell system that uses kerosene. This product offers a high total energy effi-

ciency level of 84% (compared with around 40% energy efficiency for conventional power

generation). Moreover, the fuel cell system’s CO2 emissions per energy unit supplied are 30%-

40% lower than those of thermal power plants. Since the ENEOS ECOBOY system is capable

of operating in temperatures as low as -10°C, together with the above ENEOS ECO LP-1 sys-

tem, we are able to provide fuel cell systems that can be used anywhere in Japan. The Com-

pany installed 76 ENEOS ECOBOY systems during fiscal 2006 and plans to install around 150

in fiscal 2007.

The Japanese Government is implementing a large-scale demonstration project to promote

the development of fuel cell technology by installing fuel cell systems and acquiring data from

real-world operation. Participants are oil and gas companies and they installed 1,257 fuel cells

over a two-year period from 2005 to 2006. We proactively took part in this project and installed

a total of 435 ENEOS ECO LP-1 and ENEOS ECOBOY systems, the highest number of any of the

participating companies at 35% of overall installations.

LEFT:Wind-power

RIGHT:Frontier Energy Niigata

*2 B.O.O. is the acronym for “build, own, operate”, whichdiffers from conventional on-site energy system servicesin that equipment operation and management servicesare also supplied as part of the overall package.


Fuel Cells

The fuel cell business also formed part of the business alliance with Japan Energy Corpo-

ration that we formed in June 2006. Furthermore, we formed a fuel cell business alliance with

Cosmo Oil Co., Ltd. in April 2007. With these alliances, Nippon Oil is aiming to promote early

adoption of petroleum-powered fuel cells through the ability to produce devices compatible

with those of the two alliance partners in the future and achieving a further level of cost reduc-

tions. The strategic business and capital alliance with SK Corporation of Korea also includes

fuel cells as part of its R&D alliance.

The Nippon Oil Group intends to continue its efforts to maintain the leading position in

the fuel cell field.

Plan to Install Residential-use Fuel Cells

LPG systems

Fiscal 2005: 140 units (achieved)


Fiscal 2007: approx. 250 units (planned)

Kerosene systems


Fiscal 2007: approx. 150 units (planned)05FY

500

400

300

200

100

006FY 07FY

(planned)

(units)

■ Kerosene ■ LPG

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With demand for petroleum products in Japan expected to decline, growing demand in China

and other Asian countries presents opportunities for Nippon Oil in commissioned refining and

exports of petroleum products and petrochemical products. Accordingly, we will adopt a flex-

ible approach to exporting with an eye on supply and demand trends and prices in Japanese

and overseas markets. (See the Strategy in Asia section on page 18 for more information.)

We are also expanding sales of lubricants overseas, in line with the overseas expansion of

Japanese automakers. This is one of the pillars of our overseas strategy.

In 1995, Nippon Oil established Tianjin Nisseki Lubricants & Grease Co., Ltd., a China-based

lubricant manufacturing and marketing company in which we have a 40% shareholding. Opera-

tions have expanded steadily, and annual production capacity was boosted by 40%, from 35,000kl

to 55,000kl in May 2006. The Company has also established a Guangzhou-based lubricant-manu-

facturing subsidiary, Nippon Oil (Guangzhou) Lubricants Corporation, which began full-scale

operation of a production plant with a capacity of 27,000kl per year in September 2006. As a

result, with this new company and Tianjin Nisseki Lubricants & Grease, Nippon Oil has created a

two-base, lubricant manufacturing network with a combined capacity of 82,000kl per year that is

well positioned to supply both the southern and northern regions of China.

Nippon Oil has also set up a lubricant manufacturing subsidiary in the U.S. state of Ala-

bama called Nippon Oil Lubricants (America) LLC. In October 2006, this subsidiary commenced

full-scale operation of a lubricant and grease production plant with a capacity of 39,000kl per

year. This is the Group’s first manufacturing base for lubricants in the U.S., where previously,

Nippon Oil marketed products manufactured on a commissioned basis.

Overseas OperationsMajor Achievements & Topics■ Developed new blocks at Bulga coal mine in Australia (August 2006)

■ Commenced operation of Nippon Oil (Guangzhou) Lubricants Corporation lubricating

oil plant (September 2006)

■ Commenced operation of lubricant oil and grease plant in the United States

(October 2006)

■ Formed strategic business and capital alliance with SK Corporation of Korea

(January 2007)

Overseas Lubricants BusinessAsiaChina:

Tianjin Nisseki Lubricants & Grease Co., Ltd.A joint venture in which Nippon Oil has a 40%shareholding

Nippon Oil (Shanghai) CorporationExclusive manufacturing and marketing agreementwith CNPC Group since 2003Nippon Oil (Guangzhou) Lubricants CorporationNippon Oil Corporation, Beijing OfficeTaiwan:

Taiwan Nisseki Co., Ltd.Nippon Oil has a 70% shareholding.Korea:

Technical alliance established with Michang OilIndustry Company since 1986Thailand & Vietnam:

Nippon Oil (Thailand) Ltd.Malaysia:

Nippon Oil Malaysia Sdn. Bhd.India:

Technical alliance with Tide Water Oil Co. (India)Ltd. since 1993Indonesia:

Nippon Oil Corporation, Jakarta Office(Assigned dedicated lubricant sales personnel from 2003.)

EuropeNippon Oil Europe Limited

United StatesNippon Oil (U.S.A.) Limited, Chicago headquartersNippon Oil Lubricants (America) LLCNippon Oil (U.S.A.) Limited, Los Angeles Branch Office


Constructions

Overseas Sales of Lubricants(Thousand kl)

05FY 06FY 07FY(Actual) (Actual) (Planned)

China 49 66 84

Other Asia 75 85 94

Asia Total 124 151 178

U.S. 28 29 31

Europe 7 7 8

Overseas Total 159 187 217

We are also continuing to expand our ENEOS Oil brand overseas. During 2006 we began

sales for the first time in a range of countries and regions including the west coast of North

America, the United Kingdom, Turkey and other countries.

Growth in demand for high-performance lubricants is expected to continue in China and

throughout Asia. Targeting increased demand driven by Japanese automakers expanding into

Europe and the U.S., we plan to increase overseas sales of lubricants by 16% year on year

from 187,000kl in 2006 to 217,000kl in 2007.

In terms of petrochemical products, we also supply ENB (ethylidene norbornene) to the

world market using our annual production capacity of 20,000 tons in both the U.S. and Japan.

This capacity is split evenly in a fifty-fifty joint venture with Sanyo Chemical Industries, Ltd. ENB

is mainly used for automotive rubber products and Nippon Oil has captured over 70% of the

world market due to its unique manufacturing process which allows durable products and a

high level of cost competitiveness. With demand also growing steadily, we commenced com-

mercial operation of a new 20,000 ton per year capacity plant in the U.S. in June 2007. As a

result, the level of the Nippon Oil Group’s total ENB production capacity will rise to 60,000

tons per year, thereby further consolidating the Group’s solid position as the world’s leading

ENB supplier.

Lubricant and grease production plantin the state of Alabama, U.S.A.

The Nippon Oil Group engages in the construction business primarily through NIPPO COR-

PORATION (NIPPO). Construction projects include road-paving as well as building construc-

tion, construction and engineering for oil- and other energy-related facilities, and

environmental protection.

In fiscal 2006, although Japan’s construction sector benefited from a recovery in private-

sector investment, the operating environment remained harsh due to declining public-sector

investment coupled with a continued rise in the cost of raw materials caused by a surge in crude

oil prices. In these conditions, the Nippon Oil Group’s construction units strove to obtain orders

for road-paving, civil engineering, and other construction projects, as well as promote greater

sales of products such as asphalt mixture. As a result of these activities and efforts to improve

profitability through cost-cutting and efficiency-boosting measures, the Group achieved a year-

on-year rise in its operating income in the construction sector. Looking forward, although the

environment in the construction industry remains severe, the Nippon Oil Group will continue to

enhance its competitiveness by working to strengthen its technological capabilities and operating

activities while also steadily proceeding with cost reductions and efficiency improvements.

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Research & Development

1. Petroleum Products

(1) Initiatives related to biomass fuel

Biomass fuel is important from the standpoint of securing an alternative source of liquid fuel

to existing oil, and in terms of preventing global warming by reducing CO2. In biomass fuel for

gasoline engines, we aim to acquire the capability to supply approximately 360,000kl of

bioethanol per year (roughly 210,000kl crude oil equivalent) by fiscal 2010, in the form of

ETBE (Ethyl Tertiary Butyl Ether). This will be achieved in collaboration with the other companies

in the Petroleum Association of Japan. Since April 2007, we have been preparing plans to begin

trial sales of biogasoline containing bioETBE to verify issues associated with its full-scale intro-

duction. Currently, agricultural produce such as maize is the main raw material for bioethanol.

There are problems, however, in that supplies are limited and there is a possibility that using

agricultural produce to make fuel could push food prices higher. Accordingly, aiming to secure

large-volume supplies of biofuel while allaying these fears, the Nippon Oil Group is develop-

ing manufacturing technology that uses cellulose biomass resources, for which there is no

competition with food applications. Achieving this goal will mean developing integrated manu-

facturing technologies covering all processes from the cultivation of plants to ethanol produc-

tion itself, so we are actively targeting technologies only available from universities and other

research organizations, including technology related to cultivation of plant resources, cellulose

saccharification, and fermentation.

In biomass fuel for diesel engines, we have teamed up with Toyota Motor Corporation to

develop bio hydrofined diesel (BHD) mainly made from vegetable oil and fat. Compared to

existing FAME (fatty acid methyl ester) biodiesel, which is subject to concerns over oxidative

Major Achievements & Topics■ Established ENEOS Hydrogen Trust Fund (March 2006)

■ Established Nippon GTL Technology Research Association (October 2006)

R&D Expenditures(Millions of yen)

04FY

15,000

10,000

5,000

005FY 06FY


Central Technical Research Laboratory

stability and other quality issues, the BHD under development is expected to be of a quality at

least equivalent to that of ordinary diesel. As part of a joint project to commercialize this fuel

with the Tokyo Metropolitan Government, Toyota and Hino Motors Ltd., we are planning to

conduct test runs using this fuel in Tokyo city buses from fiscal 2007.

(2) Effective use of sulfur

In fiscal 2006, we began sales of a new product called Recosul that uses technology we devel-

oped to effectively utilize the sulfur byproduct of oil refining. Recosul is a material for construc-

tion and civil engineering produced by mixing modified sulfur with industrial byproducts such

as steel slag and coal ash or marine byproducts such as scallop shells. It has superior acid

resistance and strength characteristics and is resistant to salt damage.

(3) Initiatives related to GTL

GTL (gas to liquids) technology synthesizes liquid fuel from natural gas. This process results in

clean fuel and a promising high-performance base oil for lubricants. On October 25, 2006, we

set up the Nippon GTL Technology Research Association together with INPEX CORPORATION,

Japan Petroleum Exploration Co., Ltd., Cosmo Oil Co., Ltd., NIPPON STEEL ENGINEERING Co.,

Ltd., and CHIYODA CORPORATION. The association has launched a GTL technology demon-

stration test project. The groundbreaking technology under research is the first in the world to

use unprocessed natural gas containing CO2 as an input.

2. Petrochemical Products

(1) Effective use of C4 fraction

Aiming to effectively use the C4 and C5 fractions that are a byproduct of oil refining and the

manufacture of petrochemical products, we have perfected technology to dimerize the C4 frac-

tion into isooctane using a catalyst developed in house. Full-scale production using this technol-

ogy began in September 2006. In addition to using the resulting isooctane as an octane booster

for gasoline, we are also considering its application as a highly pure isononanoic acid.

(2) Technology to convert heavy oil fractions into petrochemical products

We are researching technology that converts heavy oil, for which surpluses in the refining

process are forecast, into petrochemical products. We call this “Bottom to Chemical” technol-

ogy. One example of this technology is our own HS-FCC (High Severity Fluid Catalytic Crack-

ing). We are planning the construction and operation of a demonstration facility using this

technology. The ultimate aim is to establish commercial technology to produce high yields of

propylene from heavy oil. We are also engaged in development aimed at commercializing our

unique Z-Forming process, which produces aromatics from light naphtha and LPG.

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CSR

1. The Group’s Basic CSR PolicyHaving articulated the Group Philosophy shown to the left, the Com-

pany has drafted the Nippon Oil Corporation Group CSR Rules to clearly

define the Group’s basic CSR policy. This policy calls for every individual

employee to work sincerely to act in accordance with the “Group Phi-

losophy” and “Six Values We Respect” to ensure that the Group depend-

ably carries out its responsibilities to society and is able to earn the trust

of its stakeholders.

The Nippon Oil Group has identified and is strategically promoting

the CSR activities detailed below.

(1) CSR vital to all business activities and the source of our

competitiveness

In the course of fulfilling their assigned tasks, instill the message that

each employee can contribute to wider society through the proper

execution of the duties they perform daily.

(2) Broad spectrum of measures to enhance corporate value

Engage in investment activities, and pursue a host of measures (explain-

able to stakeholders) for yielding returns.

(3) Build win-win relationships with stakeholders

Build relationships of trust through communication with all people with

whom the Company has contact, including shareholders, employees,

clients, business partners, and local communities.

Group Philosophy

Your Choice of EnergyCreating the energy future and promoting prosperity and harmonywith nature

Six Values We Respect

EthicsNew ideasEnvironmental harmonyRelationshipsGlobal approachesYou

Six CSR Committees FY2006 ThemesCompliance Committee 1. Confirming legal compliance

of operations2. Augmenting educational and

training programs thatpromote awareness offundamental legal issues

Human Rights Committee 1. Promoting greatercommunication

2. Promoting healthy work styles

Information Security Committee Thorough protection ofinformation on individuals andother confidential information

Corporate Citizenship Committee Social contribution activitiesfollowing major disasters

Environment & Safety Committee 1. Developing environmentalprotection programs superiorto those of other industries

2. Rebuilding safety culture andpractices

Quality Assurance Committee 1. Executing thorough measuresto prevent complaints andproblems related to qualityassurance processes

2. Building quality assurancesystems focused on itemsprocured from outside

3. Increasing the quality ofservices provided

Nippon Oil Corporation General Meeting of Shareholders

Board of Directors

Executive Committee

CSR Department

Board of Corporate Auditors

Audits Audits

Reporting of internal audits and recommendations

CSR promotion instructions

Instructions Reports

CSR planning and execution

Divisions Branches Refineries Group Companies

CSR Activities Execution

Promotion of CSR Activities

CSR-centered internal audits

Nippon Oil Group CSR Meeting(Members include senior executives of

Nippon Oil Corporation and the president of each principal Group company)

Quality Assurance Committee

Compliance Committee

Human Rights Committee

Information Security Committee

Corporate Citizenship Committee

Environment & Safety Committee

The Nippon Oil Group CSR Promotion System


2. CSR Promotion SystemGuided by its basic CSR policy, Nippon Oil is strengthening its system

for the strategic and Groupwide promotion of CSR management. The

Group defined its six focus areas for CSR, namely “Compliance,” “Human

Rights,” “Information Security,” “Corporate Citizenship,” “Environment

& Safety,” and “Quality Assurance.” This was followed by establishment

of the Nippon Oil Group CSR Meeting, led by the president of Nippon

Oil Corporation and attended by the presidents of the Group’s principal

companies, to comprehensively supervise all CSR activities. Six special-

ized committees were also established below the CSR Meeting, result-

ing in a system for deliberation and decision-making regarding the

direction of Group CSR activities. In fiscal 2006, the Nippon Oil Group

CSR Meeting convened twice to discuss matters related to changes in

the standards of conduct and the CSR monitoring.

3. CSR Activities During Fiscal 2006CSR Monitoring

Summary and Objectives

We conduct surveys to gauge the awareness of CSR and business ethics

among executives and employees of the Nippon Oil Group. We have a

fair and neutral independent research organization collect and analyze

individual survey forms and anonymity is maintained, which allows us

to ascertain the true opinions and feelings of Group members.

The survey covers the extent to which our Group philosophy has per-

meated the organization and the extent to which it is put into practice, as

well as the state of communication at actual workplaces. The results are

analyzed and used to help promote CSR. The survey itself also constitutes

an e-learning training program on CSR and business ethics.

Analyzing the state of awareness by different attributes (affiliation,

position, and years of service) helps in the promotion of discussions at

individual organizations and worksites and in the formulation and

execution of specific improvement measures.

Results of the 2006 CSR Monitoring (Assessment & Issues)

We administered our second CSR Monitoring in November 2006. We

maintained the same high level as last year with regard to trust in the

company, employee motivation, and sense of participation (response

rate of 88%), which are all basic elements of CSR. However, we identi-

fied problems with respect to permeation and practice of our Group

philosophy, awareness of the internal reporting system, and risk identi-

fication at the worksite level.

We have made it possible for each worksite to analyze and respond

to issues by posting the details of the survey on the Group intranet.

Business Ethics Training

Case Method Training

We conduct training on business ethics designed to improve the ethical

decision-making of each and every executive and employee. As of April

2007, some 4,600 executives and employees of the Nippon Oil Group

have gone through the training.

We created an original training program with the help and coopera-

tion of Associate Professor Joji Nakaya of the community service depart-

ment at the Graduate School, Tohoku University of Community Service

and Science. Professor Nakaya is a leading proponent of management

ethics education using the case method.

The program seeks to facilitate ethically proper decisions by having

the people faced with making decisions envision beforehand how indi-

vidual day-to-day actions affect stakeholders.

The program centers on group discussions, so it also provides office

members an opportunity to have frank conversations about these issues.

Training Program Results and Future Initiatives

People that have gone through the program have commented that they

learned the importance of doing one’s job while being aware of stake-

holders and how they keenly realized that forthright discussion in the

workplace is essential to preserving the health of an organization. Oth-

ers indicated that it would be desirable to hold regular ethics training

sessions and conduct training in a cross-division, cross-office format. In

response, we are planning to continue to conduct effective training pro-

grams in this area in fiscal 2007 and beyond.

MAN

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ENT SYSTEM


4. Environmental Activities“Environmental harmony” is a key element of the Nippon Oil Group

Philosophy. Accordingly, the Group is developing systems that will enable

the more effective promotion of environmental management.

Principal Theme Objectives FY2006 Achievements and Assessments FY2007 Objectives

Expand the scope of ISO 14001 certificationEstablishment ofenvironmentalmanagement systems

Expand the scope of certification at NipponOil branches and Group companies

•All Nippon Oil branches and the head offices of eightGroup companies*1 acquired certification

•Three dealerships obtained ISO14001 certificationafter taking the Nippon Oil certification course fordealerships and sales companies

Principal Objectives and Achievements under the Medium-term

Environmental Management Plan (FY2005 to FY2007)

The Nippon Oil Group has established a medium-term environmental

management plan (FY2005 to FY2007) to implement in tandem with its

third medium-term consolidated management plan. The goal of the plan

is making steady progress toward reducing greenhouse gases and the

overall environmental impact of our operations.

Complete certification for the head offices of 18 Groupcompanies

Expand sales of environmentally friendly products and services, and develop and popularize new energyEnvironmentally friendlyproducts and services

Promote sales of ENEOS NEW VIGO

Sales of residential-use LPG-powered fuelcell systems

Sales of residential-use kerosene-poweredfuel cell systems

Promote initiatives in the area of biomassfuels

Promoted sales of ENEOS NEW VIGO

Sales of residential-use LPG-powered fuel cell systems(installed 229 units)

Sales of residential-use kerosene-powered fuel cellsystems (installed 76 units)

•Prepared to begin trial sales of biogasolineformulated with bioETBE*2

•Conducted joint development of second-generationbiodiesel*3

Expand sales of ENEOS NEW VIGO

Sales of residential-use LPG-powered fuel cell systems(install 250 units)

Sales of residential-use kerosene-powered fuel cell systems(install 146 units)

Begin trial sales of biogasoline formulated with bioETBEConfirm the environmental performance of second-generation biodiesel

Assessments → �: Objective achieved �: Objective partially achieved ×: Objective not achieved

1. Global warming prevention measuresActivities to reduceenvironmental impact

Reduce specific energy consumption atrefineries

Verification for issuance of certifiedemission reductions for the Rang Dongoil field associated gas recovery andutilization CPM

Reduced 17.3% compared with FY1990 level

Conducted verification

Continue to reduce by an average of 1% per year (Goal toreduce 20% from FY1990 level by FY2010)

Issue of certified emission reductions

Completion of surveys of operatingproperties belonging to the Nippon OilGroup and conduct countermeasures

Work to make low cost soil remediationtechnology*4 practically viable

Completed surveys of operating properties belongingto the Nippon Oil Group (1,117 properties surveyed;countermeasures for 60)

Conducted verification

Conduct countermeasures based on surveys and prevailingconditions

Continue to develop the technology and run verification

3. Measures to reduce waste

Achieve zero emissions at all NPRCrefineries

•Achieved zero emissions at all NPRC refineries•Achieved zero emissions at the Nippon Oil Group*5

(waste disposal ratio of 0.9%)

Promote initiatives to achieve a waste disposal ratio of lessthan 0.5% for the Nippon Oil Group

Reduce consumption of electric power andpaper, and waste volume disposed

Reduced electric power consumption by 4%, paperconsumption by 22%, and waste volume disposed by15%

Reduce electric power consumption by 10%, paperconsumption by 30%, and waste volume disposed to zero

1. Green procurementOther environmentalactivities

Improve green purchasing ratio Green purchasing ratio increased to 99.8% Increase green procurement ratio to 100%

2. Environmental contribution activities

Donations to the National LandAfforestation Promotion Organization

Cumulative donations reached approximately¥90 million

Cumulative donations to reach approximately ¥110 million

*1 Nippon Petroleum Refining Co., Ltd., Nippon Oil Exploration Limited, Nippon Oil Real Estate Co., Ltd., Nippon Oil Trading Corporation, Nippon Oil Research Institute Co., Ltd., Nippon Oil InformationTechnology Corporation, Shibushi Oil Storage Co., Ltd., Kamigoto Oil Storage Co., Ltd.

*2 An abbreviation of ethyl tertiary butyl ether, a substance that is created by synthesizing plant-based bioethanol with isobutene from petroleum-based gas.*3 A form of diesel made by decomposing and refining a variety of fatty oils by applying hydrogenation technology originating in oil refining.*4 Purification technology for soil and groundwater that does not require excavation (conventional methods involve excavating the contaminated soil)*5 Sixteen of the Nippon Oil Group’s 18 principal companies (excludes Nippon Oil Exploration Limited and NIPPO CORPORATION)

2. Soil contamination surveys and countermeasures

4. Reduction of environmental impact in offices

�

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�

�

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5. Ensuring SafetyBasic Approach

We strive to ensure safe operations. In every process—from exploration

and development to distribution and sales—we make every effort to pre-

vent accidents and disasters before they occur and respond appropri-

ately if such an event occurs.

Nippon Petroleum Refining Co., Ltd. (NPRC) is working to create a

culture in which workers give ultimate priority to safety. The company

reviewed its overall safety management operations with a goal of elimi-

nating labor accidents and injuries and in January 2006 established teams

dedicated to promoting safety at its head office and refineries. Specifi-

cally, we are working to enhance safety activities and safety training not

only at operations and construction units that manage actual worksites

but also for employees of partner companies.

In April 2006 NPRC established the Refinery Project Office to insti-

tute thorough measures designed to prevent accidents at its facilities.

The office is involved in preventing accidents at refineries.

Disaster Prevention Equipment

At refineries, plants, storage terminals, oil depots and gas terminals, we

are instituting measures to prepare for the event of an accident or disas-

ter. These include setting up various disaster prevention facilities.

Countermeasures Against Oil Spills

Storage tanks are surrounded by multiple walls to prevent oil from flow-

ing outside the site in the event oil leaks from a tank. Offshore, there are

oil fences in place and oil recovery vessels at the ready to respond rap-

idly should an oil spill occur.

Countermeasures Against Fire

In readiness for a major fire, we have in place large trucks equipped

with elevated chemical cannons, foam transport vehicles, and foam can-

nons with exceptional fire fighting performance, as well as an array of

large fire extinguishers and equipment for spraying extinguishing foam

and water. For accidents and disasters that happen offshore, disaster-

response vessels with fire fighting capability are kept at the ready.

Mutual Assistance at Refineries and Other Sites

In readiness for a scenario in which a disaster occurs at a refinery or

other site due to a major earthquake and controlling the situation proves

exceedingly difficult to handle by a single site, we have established a

system related to response operations and emergency measures so that

organized assistance can be provided by other members of the Group.

The system seeks to facilitate rapid response to disasters.

Main Initiatives in Fiscal 2006

Comprehensive Disaster Prevention Drills

To be ready for the event of an accident or disaster, we run comprehen-

sive disaster prevention drills on a regular basis. The drills are led by an

internal body established specifically for disaster prevention and are

conducted to help ensure disaster prevention activities are prompt and

precisely targeted. We also conduct a number of other training exer-

cises, including joint disaster prevention drills with local fire departments

and the disaster prevention units of nearby companies.

Incidence of Labor Accidents

Data on labor accidents at the Group’s refineries are shown in the tables

below. In fiscal 2006, there was an increase in injuries that caused lost

workdays, so frequency*1 and severity*2 both worsened.

Number of Labor Accidents (NPRC)Injury with lost workdays Injury without lost workdays

FY2004 1 9

FY2005 2 6

FY2006 5 6

Ratios Indicating Frequency and Severity of Accidents (NPRC)Frequency Severity

FY2004 0.21 0.001

FY2005 0.42 0.008

FY2006 1.00 0.016

Supplementary Information: Frequency and Severity RatiosAll Industries Chemical Industry Petroleum Industry

Frequency Severity Frequency Severity Frequency Severity

FY2004 1.85 0.12 0.88 0.06 0.20 0.005

FY2005 1.95 0.12 0.90 0.07 0.61 0.010Source: Ministry of Health, Labor and Welfare, Labor Accident Survey. For petroleum refining, statistics are

from the Labor Survey issued by the Petroleum Association of Japan.

*1 This ratio indicates the frequency rate of lost work-time injuries and illnesses as a result of labor accidentsfor every one million hours worked.

*2 This ratio indicates the seriousness of labor accidents that occur.

Initiatives for the Future

In fiscal 2007, we will strive to entrench a culture that puts ultimate pri-

ority on safety and eliminate labor accidents. Specific initiatives will be

as follows.

1. Enhance safety activities aimed at preventative safety

2. Enhance safety management training

3. Enhance our system for providing safety-related instructions to part-

ner companies

We will establish priorities for each division—refineries and plants,

stockpiling bases, oil depots, gas terminals, and distribution (tanker trucks,

tanker ships, and regular trucks)—and work to faithfully carry them out.

MAN

AGEM

ENT SYSTEM


Corporate Governance

Board of Directors

Fumiaki Watari Shinji Nishio

Representative Director,Chairman of the Board

Representative Director,President

Representative Directors, Executive Vice Presidents

Naokazu TsudaMarketing, Lubricants, EnergySolution & Chemicals

Makoto SataniInternational Business & Supply

Directors, Senior Vice Presidents

Ikutoshi MatsumuraExecutive Director of the Fuel Cell &Merchandise Business DivisionExecutive Director of the Research &Development Division

Masahito NakamuraExecutive Director of the SupplyDivisionExecutive Director of the Fuel RetailSales Division

Kan UenoExecutive Director of the ChemicalsDivision

Seiichi IsshikiExecutive Director of the CorporateManagement Division II

DirectorsMakoto KuramochiRepresentative and General Managerof the Beijing Office

Akira KitamuraGeneral Manager of the Secretariat

Hideo TabuchiGeneral Manager of the CorporateSocial Responsibility Department

Michio IkedaGeneral Manager of the CorporatePlanning & Management Department

Hiroshi OnoPresident and Representative Directorof Nippon Petroleum RefiningCompany, Limited

Teruo OmoriPresident and Representative Directorof Nippon Oil Exploration Limited

Toshikazu KobayashiEngineering, Technology &Environment

Executive OfficersHideaki Kobashi

Yukihiro Tabata

Jun Matsuzawa

Hajime Okazaki

Yoshiki Hirayama

Seijiro Yamazaki

Haruo Nakano

Shunsaku Miyake

Wataru Mawatari

Nobuyuki Tanahashi

Masahiro Yoshida

Michiyasu Kobayashi

Ichiro Kurata

Hirokazu Matsuo

Akira Omachi

Toru Tanaka

Yasuji Araki

Kazuyuki Tanaka

Shiro Kikkawa

Junichi Kawada

Nagayasu Matsuzawa

Yuichi Kanemaru

Shigeo HiraiExecutive Director of the CorporateManagement Division I

Yasushi KimuraExecutive Director of the EnergySolution Division

Yasuo KaminoExecutive Director of the Lubricants &Specialties Business Division

Junichi KohashiExecutive Director of the Environment,Safety & Quality Management DivisionExecutive Director of the ManufacturingTechnology & Engineering Division

Naoaki TsuchiyaExecutive Director of the OverseasBusiness Division


Nippon Oil Corporation recognizes that maintaining a consistent record

of ensuring that all its business activities and other corporate activities

are fair, transparent, and accountable is an extremely important means

of maximizing corporate value for the Nippon Oil Group as a whole.

Based on this thinking, the Group is working to further expand and

strengthen its corporate governance systems.

Basic Approach to Corporate GovernanceAmid an increasingly severe competitive environment for energy

companies, the Group has a strong need to upgrade its management

strategy development capabilities and establish a system for “rapid and

dynamic decision-making and operational execution” that is responsive

to changes in the business environment. At the same time, the Group

believes it must further augment its efforts to ensure the “transparency

and soundness of management” to respond to the trust and confidence

of all its stakeholders.

To respond to the changes in its operating environment just

described, Nippon Oil has established corporate governance systems with

the following features.

(1) The term of directors is one year, and directors must be approved

by the regular general meeting of shareholders each year.

(2) The presidents of principal Group companies are made members of

Nippon Oil Corporation’s Board of Directors, and management

strategy is debated and decided on a Groupwide basis.

(3) To effectively monitor and supervise management and ensure that it

is sound and transparent, the Company has selected the Board of

Corporate Auditors system, and the majority of members of that

board are outside auditors with specialized expertise.

(4) Nippon Oil is strengthening its Groupwide CSR promotion systems

centered on the Group CSR Meeting.

In April 2006, Nippon Oil established its Internal Control Project

Office, which is advancing with the rechecking and confirmation of the

appropriateness of financial reporting and the effectiveness of all the

Group’s internal control systems.

1. Operational Execution Systems

In Nippon Oil Corporation, the president is responsible for operational

execution decisions regarding items other than those that are defined

by laws, regulations, Nippon Oil Corporation’s Articles of Incorporation,

and Nippon Oil Corporation’s Board of Directors’ regulations as being

items that are to be determined by the Board of Directors. Before mak-

ing operational execution decisions, the president presents related issues

for consideration and discussion by the Executive Committee, which is

comprised of the president, executive vice presidents, senior vice presi-

dents, and other selected directors, and has the role of assisting the presi-

dent with respect to operational execution decisions. Important

operational execution decisions are reported to the Board of Directors,

while reports on the Executive Committee’s consideration and consulta-

tion processes and results are made to the Board of Corporate Auditors.

Auditors

Standing Corporate AuditorsSeiji Sakamoto

Hiroshi Maru

Corporate AuditorsMasao Fujii

Setsuo Umezawa

Koji Furukawa

From left: Koji Furukawa, Hiroshi Maru, Masao Fujii, Seiji Sakamoto, Setsuo Umezawa

MAN

AGEM

ENT SYSTEM

2. Directors

When nominating candidates for director, the Group assesses each nomi-

nee from a variety of angles, examining their occupational experience,

personality, insight, and other attributes. A list of those candidates

expected to contribute to Group management, who are deemed capable

of handling the responsibilities of director and able to meet the expecta-

tions of Group shareholders, is submitted to the Board of Directors for

further consideration. The final nominees who emerge are then put forth

as candidates for election at the regular general meeting of shareholders.

Under the leadership of the chairman of the Board, the Board of

Directors debates and decides items that are defined by laws, regula-

tions, Nippon Oil Corporation’s Articles of Incorporation, and Nippon

Oil Corporation’s Board of Directors’ regulations as being items that are

to be determined by the Board of Directors. In addition, the Board of

Directors conducts interviews regarding reporting items and monitors

and supervises the president’s operational execution measures and the

performance of duties by each director. With respect to operational ex-

ecution at Nippon Oil Group companies, the presidents of principal Group

companies are added as members of the Board of Directors with the

goal of strengthening Group management. This arrangement enables

debate and decisions regarding important business plans and other

matters at principal Group companies to be conducted by or directly

reported to the Board of Directors. Similarly, regular meetings attended

by Nippon Oil Corporation representative directors and senior vice presi-

dents, as well as by the presidents of the Group’s principal companies,

are held with the aim of maximizing the Group’s corporate value.

3. Auditors

Nippon Oil has adopted the Board of Corporate Auditors system. The

corporate auditors, including outside auditors, attend Board of Directors’

meetings, and pose questions and offer opinions as necessary to clarify

points related to the deliberation, adoption and reporting of board deci-

sions and the formulation of reports. Corporate auditors are also respon-

sible for auditing the performance of directors to ensure that activities

are not in violation of regulations, laws, or the Articles of Incorporation.

In nominating candidates for corporate auditor, Nippon Oil considers

the nominee’s ability to fulfill the duties expected of auditors, the posses-

sion of specialized expertise, a wealth of experience and an outstanding

Election and removal of directors

Audits

Audits

General Meeting of Shareholders

Board of Directors (Chaired by board chairman)

Independent Auditors

Group Companies

Election and removal of directors

Appointment

Election and removal

Monitoring and supervision

Financial audits

Financial audits

Reports

Exchanges of opinion

Interviews (Business execution divisions) and information exchange (Auditors)

Dispatch of officers/personnel

Approvals

Exchanges of opinion

Deliberation of proposed investments

Reports

Election and removal

Operational Execution

Executive Committee

Executive Vice Presidents

Senior Vice Presidents

Executive Officers = Executive Directors of DivisionsBody to assist decision-making

by the president

Director Appointed by the President

Reporting directly to the president

Representative Director, President

Internal Audit (CSR Department)

Board of Corporate Auditors

Executive Officers= Elected from among deputy directors of divisions and general managers of departments/laboratories/offices/Directors selected by the president

Diagram of Operational Execution, Audit, and Supervision

Organizational configuration: Company with Board ofCorporate Auditors System

Head of Board of Directors: Chairman (except whenserving concurrently aspresident)

Number of directors: 20

Elected outside directors: None

Number of corporate auditors: 5

Number of outside auditors: 3


performance record. Beyond these basic credentials, however, candidates

must also embody the highest ethical standards and have a reputation for

impartiality, fairness, and honesty. Following consideration by the Board

of Directors and approval of the Board of Corporate Auditors, nominees

who are deemed to exemplify these qualities are put forth as candidates

for election at the regular general meeting of shareholders.

Pursuant to regulations established by the Board of Corporate

Auditors and corporate auditing standards, the corporate auditors and

the Board of Corporate Auditors have systems in place for conducting

comprehensive audits as prescribed by law. In addition to the exami-

nation of records relating to financial accounts and important meet-

ings, the auditors receive reports from directors and employees of the

Company and representative directors and officers of subsidiaries

regarding the performance of their duties. These and similar actions

comprise the audits of directors’ performance conducted by the cor-

porate auditors on an ongoing, day-to-day basis. The progress and

results of audits in the areas for which each corporate auditor is

responsible are reported by the auditors at regular meetings of the

Board of Corporate Auditors, which in principle are held twice monthly.

The sharing of results of overall audit activities also takes place at these

meetings. As needed, corporate auditors also receive reports from

directors, investigate decision-related documents, and examine records

related to financial accounts and important meetings. Furthermore, the

corporate auditors work to increase the effectiveness of audits by

receiving audit reports and other reports from the financial auditor and

the CSR Department, which is an internal audit department.

4. Reason for Selecting the Board of Corporate Auditors’ System

Nippon Oil Corporation’s Board of Directors is comprised of directors

thoroughly familiar with the Group’s operations, and they work to main-

tain and increase the efficiency and responsiveness of management. On

the other hand, Nippon Oil believes that augmenting its systems for the

performance of audits by corporate auditors, which have been given

greater authority by successive revisions of Japan’s Company Law, is a

desirable means of maintaining and strengthening management sound-

ness, and it has therefore established its Board of Corporate Auditors.

5. Outside Auditors

Three of the five members of the Company's Board of Corporate

Auditors, listed below, are full-fledged “outside auditors” unaffiliated

with the Company.

Outside auditors use their wealth of experience and knowledge to

pose questions and express opinions at Board of Directors' meetings

regarding agenda items. In fiscal 2006 these included basic policies for

establishing an internal control system, the acquisition of interests in E&P

projects, and the filing of lawsuits. Outside auditors also work together

with standing corporate auditors to further improve sound management

of the Company. To this end, the outside auditors and standing corpo-

rate auditors regularly exchange views with representative directors on

issues including protective measures against so-called hostile takeovers

and corporate governance.

Board ofBoard of CorporateDirectors’ Auditors’meeting meeting

attendance attendanceName record record Work history Reason for election Concurrent posts

Masao Fujii 11/13 19/19 Former judge in Japan’s Supreme Court Professor, Kyoto Sangyo UniversityOutside director, Marubeni Corporation

Setsuo Umezawa 13/13 18/19 Former head of Japan’s National TaxAgency and former chairman ofthe Fair Trade Commission of Japan

Koji Furukawa 13/13 14/19 Former director and vice president of Outside director, Lawson, Inc.Mitsubishi Corporation and chief Outside director, Astellas Pharma Inc.compliance officer of that company Director, Japan Post Corporation

Chairman and CEO, Japan Post Bank Co., Ltd.

Following successive judicial appointments, worked asa justice on Japan’s Supreme Court; Nippon OilCorporation believes that his lengthy experience andexpertise will enable him to monitor and supervisemanagement from an objective and fair viewpoint

Successive appointments to the National Tax Agencyand Fair Trade Commission; Nippon Oil Corporationbelieves that his lengthy experience and expertise willenable him to monitor and supervise managementfrom an objective and fair viewpoint

Career history includes responsibility for compliance ata private-sector firm; Nippon Oil Corporation believesthat his lengthy experience and expertise will enablehim to monitor and supervise management from anobjective and fair viewpoint

MAN

AGEM

ENT SYSTEM



6. Creation of Specialized Support Staff for Auditors

To augment the auditing capabilities of all the corporate auditors,

including the outside auditors, Nippon Oil has established its Secretariat

of Corporate Auditors, which has a three-person staff that is completely

and clearly independent of the Group’s business execution departments

as well as of the Group’s command systems, including the personnel

evaluation system. The Secretariat also serves in the same support

capacity for the independent financial auditor.

7. Compensation of Directors and Corporate Auditors

The compensation of each director and corporate auditor is determined,

based on consideration of the Company’s performance as well as of the

role and contribution of each director and corporate auditor, within the

scope of the total remuneration figure authorized by the General Meet-

ing of Shareholders, in accordance with internal regulations created by a

vote of the Board of Directors in the case of directors and in accordance

with internal regulations created by a vote of the Board of Corporate

Auditors in the case of auditors.

In accordance with resolutions by the Board of Directors and the

Board of Corporate Auditors in May 2005, Nippon Oil has abolished its

system of retirement allowances for directors and corporate auditors.

This decision was made to link compensation for directors and corpo-

rate auditors more closely to their term of service and to the Company’s

business performance.

Remuneration amountNumber of recipients (¥ million)

Directors 20 851

Corporate auditors 5 104

(Outside auditors) (3) (30)

1. The total remuneration includes total bonuses of ¥202 million paid to directorsand of ¥23 million paid to corporate auditors.

2. Employee salaries and bonuses of ¥54 million paid to five employee-directors areexcluded from the total remuneration.

8. Independent Auditor

Nippon Oil has selected Ernst & Young ShinNihon as the independent

auditor to perform audits of its financial accounts. In fiscal 2007, these

audits were carried out by three certified public accountants (CPAs)

employed by Ernst & Young ShinNihon—Atsuhiro Umezawa, Kazuhiko

Umemura, and Takao Kamitani. These personnel were assisted in their

audits by a 21-member staff that included 12 CPAs and 9 CPA assistants.

Total compensation paid to the independent auditor of the Company

is as follows.

Compensation based on work covered by article 2-1 of the certified

public accountant law ¥59 million

Compensation based on work other than that mentioned above

¥147 million

9. Establishment of Internal Control System

As part of its CSR-oriented management, Nippon Oil is putting in place

a system to assure proper operations, and has implemented an internal

control system. The Company strives to further strengthen the system

through reviews in response to changes in internal and external circum-

stances and the operating environment.


Financial Section

Industry Trends and Nippon Oil’s Position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50Management’s Discussion and Analysis of Operations . . . . . . . . . . . . . . . . . . . . . . . . . 56Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62Consolidated Statements of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64Consolidated Statements of Changes in Net Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 65Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79

FINAN

CIAL SECTION


1 3

MARKET DATA FOR PETROLEUM AND PETROCHEMICAL PRODUCTS

97CY

150

100

5000CY 03CY 06CY

Asia Pacific World

(%) (%)Japan China World

STRUCTURE OF ENERGY CONSUMPTION (CY2006) RATE OF INCREASE IN OIL CONSUMPTION (CY)

■ Oil ■ Coal ■ Natural gas ■ Nuclear power■ Hydroelectric power

Industry Trends and Nippon Oil’s Position

GLOBAL OIL CONSUMPTION TRENDS BY REGION AND CHANGE IN CONSUMPTION (CY)3Thousand BD

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006North America 22,276 22,674 23,286 23,548 23,571 23,665 24,050 24,898 25,023 24,783Europe & Eurasia 19,738 19,826 19,742 19,564 19,743 19,726 19,905 20,132 20,314 20,482Asia Pacific 20,038 19,602 20,535 21,114 21,263 21,898 22,674 23,905 24,294 24,589Middle East 4,457 4,522 4,599 4,735 4,854 5,047 5,238 5,492 5,712 5,923Africa 2,307 2,388 2,448 2,458 2,473 2,510 2,567 2,645 2,731 2,790South & Central America 4,774 4,914 4,939 4,861 4,924 4,892 4,725 4,826 5,006 5,152World 73,591 73,928 75,549 76,280 76,828 77,737 79,158 81,898 83,080 83,719Change in Consumption (1997=100)Source: BP, Statistical Review of World EnergyNote: BD=Barrels per day

%

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006Europe & Eurasia and North America 100.0 101.2 102.4 102.6 103.1 103.3 104.6 107.2 107.9 107.7Asia Pacific 100.0 97.8 102.5 105.4 106.1 109.3 113.2 119.3 121.2 122.7World 100.0 100.5 102.7 103.7 104.4 105.6 107.6 111.3 112.9 113.8

MAJOR COUNTRIES’ DEPENDENCE ON FOREIGN ENERGY SOURCES AND OIL (CY2004)2%

Dependence on foreign energy sources Dependence on foreign oilJapan 81.9 99.1Italy 83.7 93.3France 50.1 98.3U.K. 3.6 –19.0Germany 60.9 96.5U.S.A. 29.4 64.2Source: International Energy Agency (IEA), Energy Balances

Million tons, crude oil% equivalent basis

HydroelectricOil Coal Natural gas Nuclear power power Total Total volume

Japan 45.2 22.9 14.6 13.2 4.1 100.0 520.3U.S.A. 40.4 24.4 24.4 8.1 2.8 100.0 2,326.4U.K. 36.3 19.3 36.1 7.5 0.8 100.0 226.6Germany 37.6 25.1 23.9 11.5 1.9 100.0 328.6France 35.4 5.0 15.5 38.9 5.3 100.0 262.5China 20.6 70.2 2.9 0.7 5.6 100.0 1,697.7Russia 18.2 16.0 55.2 5.0 5.6 100.0 704.9World 35.8 28.4 23.7 5.8 6.3 100.0 10,878.4*Source: BP, Statistical Review of World Energy*This figure represents world total volume.

STRUCTURE OF ENERGY CONSUMPTION IN MAJOR INDUSTRIALIZED COUNTRIES (CY2006)1



4 6

90FY

100

50

095FY 05FY04FY 10FY

Fore

cast

Addi

tiona

l mea

sure

s

01CY

20,000

15,000

10,000

5,000

002CY 04CY03CY 05CY01CY

30,000

20,000

10,000

002CY 04CY03CY 05CY

(%)

STRUCTURE OF ENERGY SUPPLY IN JAPAN (FY)

■ Oil ■ Hydroelectric and geothermal power ■ Coal■ Nuclear power ■ Natural gas ■ New energy and others

■ Demand ■ Production volume

BALANCE OF SUPPLY AND DEMAND FOR PETROCHEMICAL PRODUCTS IN ASIA (PROPYLENE, PARAXYLENE) (CY)Propylene Paraxylene

STRUCTURE OF DEMAND IN JAPAN BY TYPE OF OIL (CY)CONSUMPTION BY TYPE OF PETROLEUM PRODUCT (CY)

5

Ten thousand BD %

Japan 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2005Gasoline 90 93 95 98 100 102 103 103 105 106 20Kerosene & Jet Fuel 72 70 71 72 71 73 73 73 70 73 14Diesel Oil 129 128 124 125 124 124 121 119 117 115 21Heavy fuel oil 75 72 71 70 65 60 57 66 59 59 11Others 203 202 186 194 189 181 176 181 178 182 34Total 569 565 547 559 549 540 530 542 529 535 100

Ten thousand BDU.S.A.* Europe* Asia*

Gasoline 918 44% 265 17% 390 17%Kerosene & Jet Fuel 171 8% 124 8% 220 9%Diesel Oil 411 20% 610 39% 660 28%Heavy fuel oil 93 4% 182 12% 362 15%Others 484 23% 367 24% 725 31%Total 2,077 100% 1,548 100% 2,357 100%Source: IEA, Oil Market Report* Figures for U.S.A. and Europe are from 2005; Figures for Asia are from 2004.

BALANCE OF SUPPLY AND DEMAND FOR PETROCHEMICAL PRODUCTS IN ASIA*(ETHYLENE, PROPYLENE, BENZENE, PARAXYLENE) (CY)

6

Thousands of tons

2001 2002 2003 2004 2005EthyleneDemand 27,302 28,955 30,764 32,303 33,614Production Volume 26,807 28,516 30,486 31,795 32,852PropyleneDemand 18,846 20,819 22,605 23,396 25,039Production Volume 18,887 20,617 22,313 23,161 24,762

Thousands of tons

2001 2002 2003 2004 2005BenzeneDemand 11,659 12,280 13,338 14,293 15,231Production Volume 11,813 12,135 13,246 14,463 15,402ParaxyleneDemand 10,817 12,156 13,588 14,461 15,611Production Volume 11,274 11,803 13,213 13,524 15,054

Source: Ministry of Economy, Trade and Industry, Current and Future Global Trends in Petrochemical Product Supply and Demand * Asia includes figures for Oceania.

STRUCTURE OF ENERGY SUPPLY IN JAPAN (FY)4%

1990 1995 2004 2005 2010Additional

Forecast measures

Oil 57.1 54.8 48.1 49.0 45.5 44.5Hydroelectric and geothermal power 4.5 3.7 3.8 3.2 3.6 3.9Coal 16.7 16.5 21.4 20.3 18.8 17.8Nuclear power 9.4 11.9 10.5 11.2 14.0 15.4Natural gas 10.2 10.9 13.9 13.8 15.2 14.3New energy and others 2.3 2.2 2.3 2.5 2.6 4.2Total 100.0 100.0 100.0 100.0 100.0 100.0

Million kl, crude oil equivalent basis

Total 521 586 611 614 605 566Source: Ministry of Economy, Trade and Industry (METI), Advisory Committee for Energy

(Thousands of tons) (Thousands of tons)


FINAN

CIAL SECTION


NIPPON OIL OPERATING DATA

1 3

Crude oil (CIF) Regular gasoline

Group refining capacity(Thousand BD)

CRUDE OIL PRICE AND END USER GASOLINE MARKET (FY)

97FY

150

100

0

50

00FY 03FY 06FY

COMPARISON WITH OTHER MAJOR DOMESTIC OIL COMPANIES—II

■ NIPPON OIL ■ Exxon Mobil Group ■ Idemitsu Kosan ■ Cosmo Oil ■ Showa Shell Sekiyu■ Nippon Mining Holdings ■ Others

Paraxylene production capacity(Thousands of tons)

25.2%35.6%

COMPARISON WITH OTHER MAJOR DOMESTIC OIL COMPANIES—I2Millions of yen Yen

Operating Net Net incomeNet sales income income per share

NIPPON OIL 6,624,256 159,684 70,221 48.12Idemitsu Kosan 3,394,738 102,813 41,591 1,268.61Cosmo Oil 3,062,743 69,643 26,536 39.54Showa Shell Sekiyu 2,921,287 74,301 46,249 122.95Nippon Mining Holdings 3,802,447 132,258 106,430 117.98

Millions of yen % Yen

Shareholders’ Net assetsTotal assets Net assets equity ratio per share

NIPPON OIL 4,385,533 1,331,981 27.7 829.64Idemitsu Kosan 2,333,129 561,376 22.8 13,322.56Cosmo Oil 1,579,155 361,612 21.5 506.15Showa Shell Sekiyu 1,195,015 330,956 25.9 822.2Nippon Mining Holdings 2,056,407 701,064 30.3 671.56

Note: Figures represent performance in the fiscal year ended March 31, 2007. In the case of Showa Shell Sekiyu, however, figures represent performance in the fiscal year ended December 31, 2006.

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Crude oil (CIF) price US$/barrel 18.82 12.76 20.92 28.37 23.84 27.40 29.43 38.77 55.81 63.46(Yen/kl) 14,504 10,319 14,518 19,617 18,645 21,034 20,955 26,158 39,736 46,633

Regular gasoline price (Market price) (Yen/l) 101 92 95 103 101 100 101 115 128 136Sources: Ministry of Finance, Trade Statistics and other publicationsNotes: 1. CIF=Cost, insurance, and freight.

2. Figures for regular gasoline prices are including consumption tax from April 2004.

CRUDE OIL PRICE AND END USER GASOLINE MARKET (FY)1

Group refining capacity Thousand BD

NIPPON OIL 1,217Exxon Mobil Group 936Idemitsu Kosan 640Cosmo Oil 635Showa Shell Sekiyu 515Nippon Mining Holdings 415Others 472Total 4,830

Paraxylene production capacity Thousands of tons

NIPPON OIL 1,210Nippon Mining Holdings 530Idemitsu Kosan 479Exxon Mobil Group 453Others 730Total 3,402

*Data as of December 31

Source: The Petroleum Association of Japan’s website pages as well as the association’s publication, Specified Statistics No. 51Note: Figures for Group refining capacity and Group refining capacity share are as of March 31, 2007.

COMPARISON WITH OTHER MAJOR DOMESTIC OIL COMPANIES—II3

REFINING CAPACITY AND CAPACITY UTILIZATION RATE (FY)4Thousand BD

Refining Capacity 2002 2003 2004 2005 2006Industry Total 4,977 4,890 4,770 4,770 4,830NIPPON OIL 1,217 1,272 1,217 1,217 1,217

%

Capacity Utilization Rate 2002 2003 2004 2005 2006Industry Total 81 83 84 87 83NIPPON OIL 84 83 87 88 84

Note: Figures of refining capacity represent levels as of March 31 of each year.

(¥/l)



7 8

(Thousands of tons) (Thousand BOED)

■ Ethylene ■ Propylene ■ Benzene ■ Paraxylene

NIPPON OIL GROUP’S PRODUCTION CAPACITY BY TYPE OF PETROCHEMICAL PRODUCT (FY) NIPPON OIL GROUP’S PRODUCTION VOLUME OF CRUDE OIL AND NATURAL GAS (CY)

02FY

1,500

1,000

500

003FY 05FY04FY 06FY 02CY

180

120

60

003CY 05CY04CY 06CY

■ U.S.A. ■ Canada*1 ■ U.K. ■ Southeast Asia ■ Oceania

SALES BY TYPE OF PETROLEUM PRODUCT (FY)5Million kl

Industry Total 2002 2003 2004 2005 2006Gasoline and naphtha 108.4 108.5 110.5 110.8 110.6Middle distillates*1 104.8 101.3 100.2 98.3 90.5Heavy fuel oil*2 29.5 30.2 26.5 27.0 22.7Total 242.7 240.0 237.2 236.1 223.8

Million kl

NIPPON OIL 2002 2003 2004 2005 2006Gasoline and naphtha 19.9 20.1 21.0 21.1 20.1Middle distillates 25.6 25.2 26.5 25.7 23.1Heavy fuel oil 8.9 8.9 8.0 8.8 7.2Total 54.4 54.3 55.5 55.6 50.4

Notes: All sales volume figures represent domestic sales volumes of petroleum fuels. Figures for sales volumes of Nippon Oil represent the sales of the parent company only, including sales to consoli-dated subsidiaries of each.

*1 Total sales volume for kerosene, diesel fuel, jet fuel, and heavy fuel oil A.*2 Total sales volume for heavy fuel oil C.

NIPPON OIL GROUP’S PRODUCTION CAPACITY BY TYPE OF PETROCHEMICAL PRODUCT (FY)7

Thousands of tons

2002 2003 2004 2005 2006Ethylene 404 404 404 404 404Propylene 610 610 610 710 850

Thousands of tons

2002 2003 2004 2005 2006Benzene 930 1,022 1,127 1,119 1,147Paraxylene 960 960 1,020 1,050 1,210

*Data as of December 31US$/ton

Contract price in Asia of paraxylene 2003 2004 2005 2006 2007

I II III IV I II III IV I II III IV I II III IV I525 570 572 657 723 768 933 890 863 855 947 947 1,007 1,260 1,097 1,047 1,170

NIPPON OIL GROUP’S PRODUCTION VOLUME OF CRUDE OIL AND NATURAL GAS (CY)8Project companies’ entitlement basis, BOED Thousand BOE

Reserves as of2002 2003 2004 2005 2006 December 31, 2006

U.S.A. 6,300 9,000 7,000 9,400 10,200 32,000Canada*1 11,500 10,600 11,900 10,700 12,900 268,000U.K. 15,000 19,600 17,200 16,900 13,700 41,000Southeast Asia 14,900 24,400 73,200 104,100 102,900 454,000Oceania 2,100 2,000 2,000 15,600 12,400 13,000Total 49,800 65,600 111,300 156,700 152,100 808,000*1 Synthetic oil

NUMBER OF NIPPON OIL SERVICE STATIONS (FY)6Service Stations 2002 2003 2004 2005 2006Industry total 50,000 49,000 48,000 47,000 46,000NIPPON OIL 11,694 11,333 11,059 10,807 10,368Company-owned 2,746 2,607 2,518 2,436 2,309Parent share of Company-

owned service stations 23.5% 23.0% 22.8% 22.5% 22.3%

Self-Service Stations 2002 2003 2004 2005 2006Industry total 2,522 3,423 4,103 4,874 —NIPPON OIL 342 520 651 794 1,055Company-owned 178 304 378 455 588Parent share of Company-owned service stations 52.0% 58.5% 58.1% 57.3% 55.7%

Note: These figures are for the parent company only.*Because the Ministry of Economy, Trade and Industry eliminated the distinction between fixed and mobile service stations from 2002 and now presents the total number of registered service

stations operators, the total number of service stations for the industry as a whole is estimated by Nippon Oil Corporation.


FINAN

CIAL SECTION

FINANCIAL DATA (Years ended March 31)

1 5 YEAR DATA FROM STATEMENTS OF INCOMEMillions of yen

2003 2004 2005 2006 2007Net sales 4,187,392 4,279,751 4,924,163 6,117,988 6,624,256Operating income 96,586 55,918 201,470 303,930 159,684Ordinary income 90,796 57,089 212,435 309,088 186,611Income (loss) before income taxes and minority interests 64,203 (149,672) 220,958 298,332 172,205Income taxes 26,341 (7,855) 82,580 120,416 89,329Minority interests in earnings of consolidated subsidiaries 5,580 (8,291) 6,858 11,404 12,654Net income (loss) 32,281 (133,526) 131,519 166,510 70,221

2 5 YEAR DATA FROM BALANCE SHEETSMillions of yen

2003 2004 2005 2006 2007Total current assets 1,329,230 1,395,336 1,569,328 2,128,558 2,262,528

Cash and cash equivalens, TD and short-term investments 130,427 181,855 163,113 239,013 334,853Notes and accounts receivable 592,178 578,850 611,258 773,589 818,679Inventories 479,131 498,857 636,704 951,046 889,827

Total fixed assets 2,020,971 1,870,137 1,945,006 2,090,849 2,122,993Total current liabilities 1,388,397 1,433,424 1,536,810 1,933,592 2,072,145Total long-term liabilities 920,879 909,763 927,431 1,022,738 981,406Minority interests in consolidated subsidiaries 110,973 101,113 96,870 109,238 119,241Total shareholders’ equity 929,987 821,202 953,240 1,130,328 —Total net assets — — — — 1,331,981

Common stock 139,436 139,436 139,437 139,437 139,437Capital surplus 274,829 274,838 274,852 275,015 275,760Retained earnings 513,199 371,471 489,729 599,517 651,294

Total assets 3,350,237 3,265,503 3,514,352 4,215,611 4,385,533

3 PER EMPLOYEEMillions of yen

2003 2004 2005 2006 2007Net sales per employee 296.5 303.2 354.6 452.3 493.6Net income (loss) per employee 2.3 (9.5) 9.5 12.3 5.2Total number of employees 13,882 14,347 13,424 13,628 13,214Note: The figures for net sales per employee and net income (loss) per employee are calculated based on the average number of employees at the beginning and the end of each fiscal year and on net

sales and net income (loss).

4 PER SHAREMillions of shares

2003 2004 2005 2006 2007Number of shares issued 1,514.5 1,514.5 1,514.5 1,464.5 1,464.5Number of potential common shares 86.8 37.3 — — —Number of shares assuming full dilution 1,601.3 1,551.8 1,514.5 1,464.5 1,464.5Percentage of shares owned by foreign investors 17.0% 22.3% 24.6% 29.7% 29.3%

Yen2003 2004 2005 2006 2007

Net income (loss) per share 21.03 (88.76) 86.72 114.08 48.12Diluted net income per share 20.76 — — — —Shareholders’ equity per share 615.89 544.04 631.77 775.62 829.64Stock price at the end of fiscal year 499 596 761 923 956

5 DIVIDENDSYen

2003 2004 2005 2006 2007Cash dividends per share attributable to the period 7 7 10 12 12Consolidated payout ratio 33.3% (7.9)% 11.5% 10.5% 24.9%

1

(Billions of yen)

2003 2004 2005 2006 2007–200

–100

0

100

200

2003 2004 2005 2006 2007–100

–50

0

50

100

150

4

(Yen)

NET INCOME (LOSS)

2003 2004 2005 2006 2007–10

0

10

20

30

40

5

(%)

CONSOLIDATED PAYOUT RATIONET INCOME (LOSS) PER SHARE


6 RATIOS2003 2004 2005 2006 2007

Return on total assets 0.95% (4.04)% 3.88% 4.30% 1.63%Return on equity 3.48% (15.25)% 14.82% 15.98% 5.94%Return on sales 0.77% (3.12)% 2.67% 2.72% 1.06%Trade receivables turnover (times) 7.29 7.31 8.28 8.84 8.32Total assets turnover (times) 1.23 1.29 1.45 1.58 1.54Inventory turnover (times) 9.76 8.75 8.67 7.71 7.20Liquidity (times) 0.69 0.44 0.42 0.39 0.52PER (times) 23.73 — 8.80 8.09 19.87PBR (times) 0.81 1.10 1.20 1.19 1.15

7 CAPITAL EXPENDITURES, DEPRECIATION AND AMORTIZATION AND R&D EXPENDITURESBillions of yen

Capital expenditures 2003 2004 2005 2006 2007Total capital expenditures 148.5 136.9 153.0 189.8 204.8

Refining and marketing 121.7 107.8 85.1 115.1 146.6Petrochemical operations 7.3 10.5 *2 *2 *2

Oil and natural gas E&P *1 *1 54.4 65.1 43.3Construction 13.0 7.4 6.8 4.7 8.9Others 6.5 11.2 6.7 4.9 6.0

Note: Figures include investments and loans.

Billions of yenDepreciation and amortization 2003 2004 2005 2006 2007Total depreciation and amortization 99.4 107.0 110.0 135.1 131.9

Refining and marketing 81.6 87.7 85.1 85.0 81.7Petrochemical operations 6.1 6.8 *2 *2 *2

Oil and natural gas E&P *1 *1 12.6 39.0 39.6Construction 5.2 5.4 5.1 4.8 4.9Others 6.5 7.1 7.2 6.3 5.7

*1 For the fiscal years ended in March 31, 2003, and March 31, 2004, figures for the “E&P of oil and natural gas” segment are included within figures for the “Petroleum fuel and crude oil” segment.*2 For the fiscal years ended March 31, 2005, March 31, 2006, and March 31, 2007 figures for the “Petrochemical operations” segment are included within figures for the “Refining and marketing” segment.

Billions of yenR&D expenditures 2003 2004 2005 2006 2007

10.0 9.7 11.4 10.1 12.6

8 DEBT RATIOSBillions of yen

2003 2004 2005 2006 2007Interest-bearing debt 1,064 946 965 1,213 1,297Funds on hand 124 108 145 215 272Net interest-bearing debt 940 838 821 998 1,025Ratio of interest-bearing debt to equity 114% 115% 101% 107% 107%Ratio of net interest-bearing debt to equity 101% 102% 86% 88% 84%Current ratio 95.74% 97.34% 102.12% 110.25% 109.19%Fixed ratio 217.31% 227.73% 204.04% 184.98% 175.06%Fixed assets/capitalization 103.01% 102.08% 98.35% 91.30% 91.77%Interest coverage (times) 3.91 2.94 11.05 13.61 7.29Notes: 1. Figures for actual interest-bearing debt represent the value of interest-bearing debt calculated from balance sheet items less the balance of CP and the balance of debt associated with deposits

made by overseas financial subsidiaries to secure loans.2. Figures for funds on hand are calculated by excluding the temporary effect stemming from the facts that the final day of the fiscal year was a banking holiday and the payment of fuel taxes was

delayed until the subsequent fiscal year.

9 RATINGSShowa Shell Cosmo Oil Nippon Mining Tonen General NIPPON OIL

R&I A BBB– BBB+ — A+Moody’s — Ba1 — Baa1 A3Note: All figures are as of June 30, 2007.

2003 2004 2005 2006 2007–20

–10

0

10

20

2001 2002 20042003 20050

50

100

150

200

250

6 7

(%) (Billions of yen)

■ Refining and marketing ■ Petrochemical operations■ Oil and natural gas E&P ■ Construction■ Others

RETURN ON EQUITY CAPITAL EXPENDITURES

2001 2002 20042003 20050

50

100

150

200

250

7

(Billions of yen)

■ Refining and marketing ■ Petrochemical operations■ Oil and natural gas E&P ■ Construction■ Others

DEPRECIATION AND AMORTIZATION


FINAN

CIAL SECTION


PERFORMANCE DURING THE YEARConsolidated Financial ResultsOn a consolidated basis, the net sales of the Nippon Oil Group (“the Group”)

in the fiscal year under review increased 8.3% year on year, to ¥6,624.3 billion.

Cost of sales increased 11.9% to ¥6,176.6 because of higher crude oil prices,

and SG&A expenses were down 1.7% at ¥287.9 billion due to lower person-

nel expense and depreciation and amortization. Operating income decreased

by ¥144.2 billion, to ¥159.7 billion. This was due to a negative impact on

earnings of inventory valuation factors, which contributed to sharply higher

earnings in the previous fiscal year. Inventory valuation factors refer to the

effect on the cost of goods sold from the valuation of inventory using the

gross average method to reflect changes in the price of crude oil.

The total sales volume of petroleum products decreased due to a record-

breaking warm winter and fuel conversion. However, excluding inventory valu-

ation factors, operating income rose by ¥31.4 billion from the previous fiscal

year, to ¥168.9 billion, due to improved profits in the oil and natural gas

exploration and production business segment and to improved margins for

petrochemical products.

The Group also recorded non-operating income of ¥26.9 billion, an

increase of ¥21.7 billion, due principally to higher dividend income.

Consolidated ordinary income was down ¥122.5 billion, to ¥186.6 billion.

Excluding inventory valuation factors, consolidated ordinary income was ¥195.8

billion, an increase of ¥53.1 billion from the previous fiscal year.

Due primarily to losses on disposal and sales of fixed assets, other expenses

of ¥14.4 billion were recorded, ¥3.6 billion more than the previous fiscal year.

As a result of the above factors, the Group generated consolidated net

income of ¥70.2 billion, a year-on-year decline of ¥96.3 billion. Net income per

Management’s Discussion and Analysis of Operations

share was ¥48.12, a decrease of ¥65.96 year on year. ROE was 5.9%, or 6.4%

excluding inventory valuation factors.

Refining and MarketingIn the fiscal year under review, due to the tense political situation in certain

Middle Eastern and African oil producing nations and the surging global

demand for oil, the Dubai crude oil price continued its upward march from

the previous fiscal year, passing US$72 a barrel in July 2006 and setting a new

record. Thereafter, the price dropped temporarily heading into winter, but

generally traded in a high range of US$50 to US$60. The average Dubai crude

oil price throughout the fiscal year was US$60.9 a barrel, up approximately

US$7 dollars a barrel from the previous fiscal year.

Foreign exchange rates were affected by higher interest rates in the United

States and Europe, and the average yen-dollar exchange rate for the fiscal

year was ¥117, representing a depreciation of the yen versus the dollar of

around ¥4.

In terms of demand for petroleum products in Japan in the year under

review, the growing adoption of fuel-efficient vehicles led to a year-on-year

decline in domestic demand for gasoline, while a decline in the number of

diesel vehicles in use led to reduced demand for diesel oil. Moreover, demand

for heating oil declined substantially due to a record-breaking warm winter.

Demand for heavy fuel oil A and heavy fuel oil C fell substantially due to the

ongoing shift to gas and coal. As a result, domestic demand for petroleum

products was down across all types of fuel. On the other hand, demand for

petrochemical products was strong, principally for products bound for Asian

countries that recorded continued economic growth.

2003

7,000

2,000

3,000

4,000

4,187 4,280

4,924

6,118

6,624

5,000

6,000

1,000

02004 2005 2006 2007

Cost of sales SG&A expenses Operating income Net sales

2003

200,000

–50,000

0

50,000

100,000

150,000

–100,000

–150,0002004 2005 2006 2007

Net Sales, Cost of Sales, SG&A Expenses, and Operating Income (Years ended March 31) Net Income (Loss) (Years ended March 31)(Billions of yen) (Billions of yen)


In this environment, the Group established the management objectives

of bolstering the profitability in its core businesses—petroleum and petro-

chemicals—and developing new energy-type businesses. The Group worked

to implement the strategies outlined below.

First, in response to the decline in domestic demand for petroleum prod-

ucts and the growth in demand for petrochemical products in other Asian

markets, principally China, we continued to focus on integrating oil refining

and petrochemical operations by advancing chemical refinery integration (CRI).

The CRI initiative draws on the Group’s ability to produce base petrochemical

products—such as xylene, paraxylene, and propylene—from crude oil using

the facilities of refineries. The objective is to operate an optimally efficient

production system that enables us to respond quickly and flexibly to trends in

demand for petroleum products and petrochemical products. As one facet of

this initiative, in respect of the manufacturing of paraxylene which is in strong

demand, the Group strove to increase its paraxylene production capacity with

the April 2006 commencement of joint production at Mizushima Paraxylene

Co., Ltd., a joint venture with Mitsubishi Gas Chemical Company, Inc. Regard-

ing propylene, the September 2006 commencement of full-scale operation

of production facilities that use olefin conversion technology (OCT) to pro-

duce propylene from distillate that had previously been used as in-house fuel

at the Kawasaki Operation Center of Nippon Petrochemicals Company, Limited

resulted in higher production volume. With solid demand expected to con-

tinue going forward for these petrochemical products, our strategy will be to

focus on producing and selling these products. By increasing production

capacity at Mizushima Paraxylene Co., Ltd., and enhancing facilities at the

Sendai refinery, ongoing projects which are scheduled for completion in 2007,

we plan to further increase the Group's production capacity for paraxylene

and propylene.

In addition, to meet demand for petroleum products in Asian markets

recording continued growth, we bolstered the export capacity of our oil refin-

eries to 200,000 BD. Since July 2004, we have conducted commissioned

refining operations on behalf of China National United Oil Corporation (China

Oil). In April 2006, we raised the contracted volume to 40,000 BD, and have

agreed to increase it further to 50,000 BD from April 2007. As a result of these

measures, despite declining demand for petroleum products in the domestic

market, the Group will endeavor to maintain and raise the capacity utilization

rate of its refineries as it aims to generate and increase earnings.

In addition, we continue to aggressively expand our overseas operations.

In Guangzhou, China, we completed a lubricant plant and commenced manu-

facturing in September 2006, and in the U.S. state of Alabama, we completed

and started commercial operation of a production plant for lubricants and

grease in October 2006.

We also made progress in gas, power and renewables business. In LNG,

which is the focus of growing attention as a clean energy source, in April 2006

we started commercial operations at the Mizushima LNG base, which was

built in the Mizushima refinery to act as an LNG supply center. In March 2007,

we opened another LNG base that was built at a former transshipment depot

site in the city of Hachinohe, and we began to serve city gas companies as

well as traditional industrial users.

In addition to the above initiatives, to respond to great changes in the

operating environment such as higher crude oil prices, changes in the struc-

ture of domestic energy demand and the rapid expansion of Asian econo-

mies, and to achieve sustained growth, we have expanded strategic alliances

with both domestic and Asian companies. In addition to the existing alliance

with Idemitsu Kosan Co., Ltd. and Cosmo Oil Co., Ltd., we reached a

5,954.4

203.5407.9 58.5

Refining and marketing Oil and natural gas E&P Construction Other

29.3

113.8

10.16.5

Refining and marketing Oil and natural gas E&P Construction Other

Net Sales Operating Income(Billions of yen) (Billions of yen)

FINAN

CIAL SECTION


comprehensive agreement with Japan Energy Corporation in June 2006 for a

business alliance extending to a wide range of fields. Under this agreement,

the two companies will consider and implement integrated operation of their

respective refineries in Mizushima, the provision of each other’s products and

joint efforts to rationalize distribution. Also, in January 2007, we reached an

agreement with SK Corporation, South Korea’s largest oil company, for a

business alliance in such fields as upstream operations, supply, and petro-

chemicals. Through these alliances and cooperative relationships, we are

determined to expand our business in Asia and strengthen our competitive-

ness further.

In the year under review, net sales of the Refining and Marketing busi-

ness segment rose 8.6% from the previous fiscal year to ¥5,954.4 billion.

Operating income was down ¥167.9 billion, to ¥29.3 billion. This was due to

a negative impact of ¥175.6 billion on earnings of inventory valuation factors,

which contributed to sharply higher earnings in the previous fiscal year. In-

ventory valuation factors refer to the effect on the cost of goods sold from the

valuation of inventory using the gross average method to reflect changes in

the price of crude oil. Although the total sales volume of petroleum products

decreased due to a record-breaking warm winter and fuel conversion, exclud-

ing inventory valuation factors, operating income increased ¥7.7 billion, to

¥38.5 billion, due primarily to improved margins for petrochemical products.

Details are shown in the diagram below.

Exploration and Production of Oil and Natural GasDue to the rise in crude oil prices, profitability improved in the E&P business.

Regarding measures taken by the production business in the fiscal year

under review, commercial production began at the onshore SE Mananda field

in Papua New Guinea and at the Merganser gas field in the UK North Sea. In

terms of new developments, we continued to make preparations for the com-

mencement of production in the Blane oil field in the UK North Sea. At the

same time, construction continues on an LNG plant at the Tangguh LNG

Project in Indonesia toward the commencement of supply from the end of

2008. In new exploration projects, we made preparations for trial drilling in

exploration blocks off the coast of Libya for which we acquired interests in the

previous fiscal year.

Regarding the purchase of producing assets, we looked closely at pros-

pects from a technical and an economic perspective. Although we tried to

purchase several assets we viewed as promising, ultimately we were unsuc-

cessful as a result of our uncompromising emphasis on profitability.

As a result of the above initiatives, the Group’s average production vol-

ume of crude oil and natural gas (share of production in each project, oil

equivalent basis) was 152,000 BD, 2.8% less than the previous fiscal year.

Net sales in the E&P business segment increased by 12.8%, to ¥203.5

billion, and operating income rose ¥21.7 billion, to ¥113.8 billion, mainly due

to higher crude oil prices. Details are shown in the diagram on page 59.

ConstructionAlthough private-sector capital investment increased in the year under review,

public-sector investment was generally weak, and the road-building and

–15.7 +17.0 –13.1–1.6 +3.8

+18.3 –1.029.3

–167.9

2006Operating

income

Inventoryvaluationfactors

Salesvolume

In-housefuel cost

Costreduction

Salesvolume

Profitmargin

Costreduction

Time lag

2007Operating

incomePetroleum Products –189.0 Petrochemicals +21.1

197.2–175.6

Analysis of Changes in Operating Income——Refining and Marketing (Years ended March 31)(Billions of yen)


construction industries continued to face a challenging demand environment.

In this setting, the Group worked to secure construction orders and to bolster

its competitiveness through cost reductions and enhanced efficiency.

Net sales in the Construction business segment rose 8.9% year on year,

to ¥407.9 billion. The segment recorded operating income of ¥10.1 billion, up

¥2.9 billion, year on year due to cost reductions and enhanced efficiency.

Other SegmentsIn the field of petroleum product distribution, the operating environment

remained challenging in the year under review. In this setting, the Group

implemented aggressive marketing activities for a wide array of automobile-

related products, with a special focus on ENEOS brand goods. In our

real-estate operations, we enhanced our management and service systems

and improved existing facilities to increase tenant satisfaction levels.

Consolidated net sales in the Other business segment declined 27.3%,

to ¥58.5 billion, and operating income was down ¥1.8 billion, to ¥4.1 billion.

This result was primarily attributable to the removal of one consolidated sub-

sidiary from the scope of consolidation.

FINANCIAL POSITIONBalance SheetAt the end of the year under review, consolidated total assets were ¥4,385.5

billion, an increase of ¥169.9 billion from the end of the previous fiscal year.

This increase was principally attributable to the effect of the last day of the

fiscal year falling on a Japanese national holiday, which caused the payment

of excise tax payable for the fiscal year to be delayed.

Total liabilities as of March 31, 2007 were ¥3,053.5, an increase of ¥97.2

billion. Interest-bearing debt increased ¥84.5 billion to ¥1,297.1 billion due to

factors including higher operating capital caused by increasing crude oil prices.

Consolidated net assets totaled ¥1,332.0 billion, an increase of ¥72.7 billion

from a year earlier. (The change is measured from the total of minority interests

in consolidated subsidiaries and shareholders’ equity at the end of the

previous fiscal year.) This gain was the result of positive factors such as

consolidated net income exceeding negative factors such as year-end divi-

dends. As a result, the equity ratio was 27.7%. Net assets per share increased

¥54.02 to ¥829.64.

The ratio of net interest-bearing debt to equity was 84%.

Cash FlowsAs of the end of the year under review, cash and cash equivalents (hereinafter

referred to as “cash”) totaled ¥321.8 billion, an increase of ¥107.3 billion. The

cash flow movements and factors influencing them during the year under

review were as follows:

Net cash provided by operating activities amounted to ¥205.9 billion as

positive factors, such as income before income taxes and minority interests

(¥172.2 billion) and non-cash expenses, such as depreciation and amortiza-

tion (¥131.9 billion), exceeded negative factors, such as an increase in work-

ing capital. Also, the effect of the last day of the fiscal year falling on a Japanese

national holiday caused the payment of excise tax payable for the fiscal year

to be delayed.

Net cash used in investing activities amounted to ¥143.5 billion. This was

mainly due to investment in petrochemical product manufacturing equipment.

2006Operating

income

Salesvolume

Salesprice

FX rateand others

2007Operating

income

92.1

–4.3

+20.7 +5.3

113.8

+21.7

Analysis of Changes in Operating Income——Exploration and Production of Oil and Natural Gas (Years ended March 31)(Billions of yen)

FINAN

CIAL SECTION


Net cash provided by financing activities amounted to ¥44.4 billion as positive

factors, such as the borrowing of working capital as a result of rising crude oil prices,

exceeded negative factors, such as dividend payments.

Commitment Line ContractsTo raise working capital efficiently, Nippon Oil has concluded a commitment line

contract with a syndicate of 5 banks with which it has transaction relationships.

This commitment line provides the Company with funding up to ¥150.0 billion

and US$200 million. There were no borrowings under this commitment line

during the fiscal year under review.

Capital Expenditures and Depreciation and AmortizationCapital expenditures for the fiscal year under review was ¥204.8 billion, which

mainly comprised strategic investment in the E&P and Petrochemical

businesses.

Depreciation and amortization expenses were down ¥3.2 billion

at ¥131.9 billion.

Research & Development ActivitiesR&D expenditures for fiscal 2006 were ¥12.6 billion. This primarily comprised

spending on the E&P and marketing businesses.

DIVIDENDSWe consider the return of profits to shareholders to be an important manage-

ment priority. To maintain stable dividend payments while increasing enter-

prise value, we will take into account the need to bolster internal reserves to

provide for investments targeting the realization of our growth strategies. With

consideration for such factors as business performance and balanced fund-

ing, we will work to increase dividends over the medium to long term. More-

over, in the implementation of our capital policy, we will take a flexible approach

to share buybacks.

In accordance with these policies, in April 2005 we purchased and retired

50 million shares of common stock at a total price of ¥38.5 billion. At the

same time, under the third consolidated medium-term management plan,

started in the previous fiscal year, we reevaluated the level of our dividends

and decided to target annual cash dividends of ¥12 per share. We plan

year-end dividends for the fiscal year under review of ¥6 per share. Therefore,

including the interim dividends, dividends applicable to the year will be ¥12

per share, the same as in the previous year.

BUSINESS RISKSThe Group faces a variety of risks that may play an important role in impacting

its financial condition, managerial performance and cash flow. The main risks

are outlined below:

1. Impact of fluctuating currency exchange rates (against the U.S. dollar)

and crude oil prices.

a. Impact on Inventory Assets

The Group mainly utilizes the cost method based on the gross average method

for valuating its inventory assets. With this valuation method, when crude oil

prices (in yen) rise above the unit price of inventory, inventory assets begin

pushing down the cost of goods sold (in this instance, cost of goods sold

increases slower than crude oil prices due to the low price of inventory), thus

making it a positive profitability factor.

2003

160

40

80

120

02004 2005 2006 2007

Ratio of net interest-bearing debt to equityRatio of interest-bearing debt to equity

2003

250

50

100

150

200

02004 2005 2006 2007

Capital expenditures* Depreciation and amortization

Ratio of Interest-Bearing Debt to Equity (Years ended March 31) Capital Expenditures, and Depreciation and Amortization (Years ended March 31)

*Figures include investments and loans.

(%) (Billions of yen)


On the other hand, when crude oil prices (in yen) fall below the unit

price of inventory, the valuation of inventory assets pushes up the cost of

goods sold, thus making it a negative profitability factor.

b. Impact on Exploration and Production of Oil and Natural Gas (E&P)

In the area of E&P, a rise in crude oil prices (in yen) is a positive factor for

profitability because it leads to an increase in revenues. On the other hand, a

drop in crude oil prices (in yen) is a negative factor for profitability because it

leads to a decrease in revenues.

2. Impact of fluctuations in demand and market conditions for petroleum

fuel and petrochemical products

The demand for petroleum products fluctuates depending on climate condi-

tions (such as an unseasonably cool summers or warm winters) and the

economic conditions of the time. Demand for petrochemical products will

fluctuate depending on economic growth and trends in Asian markets as export

dependence on Asia, in particular China, increases. Sales for the Nippon Oil

Group’s products will also be impacted by these fluctuations and as such,

demand trends are determined to be a profitability factor.

In addition, the domestic market for petroleum fuel products will fluctu-

ate as a result of the supply and demand environment for domestic petro-

leum fuel products, local reselling conditions and movements in the overseas

market for petroleum fuel products. Similarly, the market for petrochemical

products will fluctuate depending on raw naphtha prices and market condi-

tions in East Asia. Although the Nippon Oil Group revises sale prices to reflect

these fluctuations, such changes may be considered a profitability factor de-

pending on the market environment.

3. Impact of fluctuating interest rates

An increase in interest rates is considered a negative profitability factor because

it would increase interest expense on loans and other interest-bearing liabili-

ties and consequently worsen the balance of financial expenses. On the other

hand, a fall in interest rates is considered a positive profitability factor because

it would decrease interest expense on loans and other interest-bearing liabili-

ties and consequently improve the balance of financial expenses.

4. Risks arising from overseas businesses

The Group’s procurement, production, exporting and sales activities are car-

ried out not only in Japan, but on a global scale in areas such as North America,

Europe and Asia/Oceania. The Group believes that certain risks as outlined

below exist in its overseas activities.

a. Country risks – Political and economic turmoil in foreign countries and a freez-

ing of currency exchanges, a default on loans and others triggered by them

b. Social turmoil arising from strikes, terrorist activities, war, epidemics, etc.

c. Disasters arising out of an act of god

d. Restrictions arising from new regulations, such as import restrictions and

export trade management rules

The generation of such risks will hinder the Nippon Oil Group’s overseas

business activities and consequently, may lead to worsened financial performance.

5. Impact of trends in public investments and private capital expenditures

The Group’s construction segment relies heavily on contracted paving, civil

engineering, and construction projects. The profitability of this segment there-

fore fluctuates greatly on trends in the public investment and private capital

expenditures (including private residential investments) fields.

6. Impact of stricter environmental regulations

From the standpoint of global environmental protection, new regulations on

quality or the need to blend in biomass fuels may result in cost increases to

the Group’s operations. Costs may be in the form of capital expenditures into

refineries or an increase in variable costs.

7. Risks arising from information systems

Earthquakes, floods and other natural disasters may damage information sys-

tems and cease normal business operations. In a situation such as this, pro-

duction and sales activities of the Group will not only be compromised but it

may have a major negative impact on the business of vendors.

8. Operational risks associated with production facilities

The Group operates production facilities not only in Japan but also on a glo-

bal scale. Natural disasters or unforeseen events at any of these facilities that

leads to a ceasing of production may have a negative impact on the overall

financial performance of the Group.

Please note that although these risks contain items that may be forward-

looking in nature, they are based on information available to the Group at the

end of the fiscal year under review. In addition, the risks above should be not

considered a full list of risks that the Group may face in its operations.

FINAN

CIAL SECTION


Consolidated Balance SheetsNippon Oil Corporation and Consolidated Subsidiaries

Thousands ofU.S. dollars

Millions of yen (Note 2)

March 31, 2007 and 2006 2007 2006 2007

ASSETS

Current assets:Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 321,786 ¥ 214,476 $ 2,727,000Time deposits (Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,327 243 87,517Short-term investments in securities (Note 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,739 24,292 23,212Notes and accounts receivable (Note 6):

Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 818,679 773,589 6,937,958Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106,130 84,307 899,407

Less allowance for doubtful receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,900) (4,223) (24,576)Inventories (Note 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 889,827 951,046 7,540,907Deferred income taxes (Note 9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,662 38,933 429,339Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65,275 45,891 553,178

Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,262,528 2,128,558 19,173,966

Investments and long-term receivables:Investments in unconsolidated subsidiaries and affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,200 151,151 484,746Investments in other securities (Notes 3 and 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 366,569 244,864 3,106,517Long-term receivables (Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,514 17,073 97,576

Total investments and long-term receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 435,283 413,088 3,688,839

Property, plant and equipment (Notes 5 and 6):Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 675,036 680,044 5,720,644Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 800,331 801,328 6,782,466Oil tanks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 261,661 262,742 2,217,466Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,596,089 1,562,759 13,526,178Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62,702 77,081 531,373

3,395,820 3,383,957 28,778,136Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,030,575) (2,013,721) (17,208,263)

Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,365,244 1,370,235 11,569,864

Deferred income taxes (Note 9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,200 20,685 137,288Exploration & development investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180,023 157,068 1,525,619Other assets (Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126,252 125,975 1,069,932

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 4,385,533 ¥ 4,215,611 $ 37,165,534See accompanying notes to consolidated financial statements.




2007 2006 2007

LIABILITIES AND NET ASSETS

Current liabilities:Short-term loans (Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 602,131 ¥ 513,188 $ 5,102,805Current portion of long-term debt (Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92,047 84,509 780,059Notes and accounts payable:

Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 515,930 580,081 4,372,288Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 281,597 235,388 2,386,415

Excise taxes payable (Note 10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 308,005 227,191 2,610,212Accrued income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,507 65,745 385,653Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,395 49,629 393,178Deferred income taxes (Note 9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 765 70 6,483Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179,764 177,788 1,523,424

Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,072,145 1,933,592 17,560,551

Long-term liabilities:Long-term debt (Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 613,481 652,075 5,198,992Accrued retirement benefits (Note 7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84,112 98,849 712,814Reserve for inspection of oil tanks, machinery and equipment, and vessels . . . . . . . . . . . . . . 35,174 34,310 298,085Deferred income taxes (Note 9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177,192 176,772 1,501,627Accrued estimated cost of abandonment of wells . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,276 20,716 282,000Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,167 40,015 323,449

Total long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 981,406 1,022,738 8,317,000

Net assetsShareholders’ equity:

Common stock:Authorized – 2,000,000,000 sharesIssued – 1,464,508,343 shares in 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139,437 139,437 1,181,669

Capital surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 275,760 275,015 2,336,949Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 651,294 599,517 5,519,441Less treasury stock, at cost: 2,742,825 shares in 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,475) (5,929) (20,975)Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,064,016 1,008,039 9,017,085

Valuation and translation adjustments:Unrealized holding gain on securities, net of deferred income taxes . . . . . . . . . . . . . . . . . . . . 121,830 122,456 1,032,458Unrealized holding gain on hedging derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,901 19,713 168,653Translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,991 (167) 59,246

Total valuation and translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148,723 142,001 1,260,364

Minority interests in consolidated subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119,241 109,238 1,010,517

Total net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,331,981 1,259,280 11,287,975Total liabilities and net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥4,385,533 ¥4,215,611 $37,165,534

FINAN

CIAL SECTION


Consolidated Statements of IncomeNippon Oil Corporation and Consolidated Subsidiaries



Years ended March 31, 2007 and 2006 2007 2006 2007

Net sales (Notes 10 and 16) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥6,624,256 ¥6,117,988 $56,137,763Cost of sales (Note 10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,176,656 5,521,192 52,344,542

Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 447,600 596,796 3,793,220Selling, general and administrative expenses (Notes 11 and 12) . . . . . . . . . . . . . . . . . . . . 287,915 292,866 2,439,958

Operating income (Note 16) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159,684 303,930 1,353,254

Non-operating income (expenses):Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (24,789) (23,160) (210,076)Interest and dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,130 11,262 179,068Foreign exchange gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,214 8,426 44,186Asset rental income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,937 10,657 92,686Equity in earnings of unconsolidated subsidiaries and affiliates . . . . . . . . . . . . . . . . . . . . . . . . 3,048 4,929 25,831Gain (loss) on valuation of derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,896 (9,575) 75,390Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,487 2,618 21,076

26,926 5,158 228,186

Ordinary income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186,611 309,088 1,581,449

Other income (expenses):Gain on sales of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,524 8,213 106,136Loss on disposal of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (11,482) (12,462) (97,305)Write-downs of investments in securities and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,085) (3,414) (9,195)Gain on sales of securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 716 1,024 6,068Special allowance for early retirement plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (27) (1,162) (229)Write-downs of real estate for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (111) (81) (941)Loss on impairment of fixed assets (Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,872) (3,868) (58,237)Loss on redemption of bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,363) — (11,551)Restructuring cost for cogeneration business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,456) — (29,288)Loss on cost of elimination of asbestos . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (364) (1,810) (3,085)Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,883) 2,805 (24,432)

(14,405) (10,756) (122,076)

Income before income taxes and minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172,205 298,332 1,459,364Income taxes (Note 9):

Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94,954 117,551 804,695Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,624) 2,865 (47,661)

Income before minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82,875 177,915 702,331Minority interests in earnings of consolidated subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . (12,654) (11,404) (107,237)

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 70,221 ¥ 166,510 $ 595,093

Yen U.S. dollars (Note*)

Years ended March 31, 2007 and 2006 2007 2006 2007

Net income per share—basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥48.12 ¥114.08 $0.41Cash dividends per share attributable to the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.00 12.00 0.10See accompanying notes to consolidated financial statements.


Consolidated Statements of Changes in Net AssetsNippon Oil Corporation and Consolidated Subsidiaries

Millions of yen

Stockholders’ equity Valuation and translation adjustments

TotalNet Foreign valuation

Total unrealized Deferred currency andCommon Capital Retained Treasury stockholders’ holding gains gains on translation translation Minority Total net

Years ended March 31, 2007 stock surplus earnings stock equity on securities hedges adjustments adjustments interests assets

Beginning of year . . . . . . . . . . . . ¥ 139,437 ¥ 275,015 ¥ 599,517 ¥ (5,929) ¥1,008,039 ¥ 122,456 ¥ 19,713 ¥ (167) ¥ 142,001 ¥ 109,238 ¥ 1,259,280

Cash dividends . . . . . . . . . . . . . . — — (17,542) — (17,542) — — — — — (17,542)

Bonuses to directors . . . . . . . . . — — (26) — (26) — — — — — (26)

Net income . . . . . . . . . . . . . . . . — — 70,221 — 70,221 — — — — — 70,221

Acquisition of treasury stock . . . — — — (703) (703) — — — — — (703)

Disposal of treasury stock . . . . . — 745 — 4,158 4,903 — — — — — 4,903

Net decrease resulting from

inclusion of subsidiaries in

consolidation . . . . . . . . . . . . . . — — (753) — (753) — — — — — (753)


inclusion of affiliates in equity

method . . . . . . . . . . . . . . . . . . — — (122) — (122) — — — — — (122)

Net changes other than

stockholders’ equity . . . . . . . . — — — — — (625) 188 7,158 6,721 10,002 16,724

End of year . . . . . . . . . . . . . . . . . ¥ 139,437 ¥ 275,760 ¥ 651,294 ¥ (2,475) ¥1,064,016 ¥ 121,830 ¥ 19,901 ¥ 6,991 ¥ 148,723 ¥ 119,241 ¥ 1,331,981

Thousands of U.S. dollars

Stockholders’ equity Valuation and translation adjustments

TotalNet Foreign valuation

Total unrealized Deferred currency andCommon Capital Retained Treasury stockholders’ holding gains gains on translation translation Minority Total net

Years ended March 31, 2007 stock surplus earnings stock equity on securities hedges adjustments adjustments interests assets

Beginning of year . . . . . . . . . . . . $1,181,669 $2,330,636 $5,080,653 $(50,246) $8,542,703 $1,037,763 $167,059 $(1,415) $1,203,398 $ 925,746 $10,671,864

Cash dividends . . . . . . . . . . . . . . — — (148,661) — (148,661) — — — — — (148,661)

Bonuses to directors . . . . . . . . . — — (220) — (220) — — — — — (220)

Net income . . . . . . . . . . . . . . . . — — 595,093 — 595,093 — — — — — 595,093

Acquisition of treasury stock . . . — — — (5,958) (5,958) — — — — — (5,958)

Disposal of treasury stock . . . . . — 6,314 — 35,237 41,551 — — — — — 41,551


inclusion of subsidiaries in

consolidation . . . . . . . . . . . . . . — — (6,381) — (6,381) — — — — — (6,381)


inclusion of affiliates in equity

method . . . . . . . . . . . . . . . . . . — — (1,034) — (1,034) — — — — — (1,034)

Net changes other than

stockholders’ equity . . . . . . . . — — — — — (5,297) 1,593 60,661 56,958 84,763 141,729

End of year . . . . . . . . . . . . . . . . . $1,181,669 $2,336,949 $5,519,441 $(20,975) $9,017,085 $1,032,458 $168,653 $59,246 $1,260,364 $1,010,517 $11,287,975

FINAN

CIAL SECTION


Consolidated Statements of Cash FlowsNippon Oil Corporation and Consolidated Subsidiaries



Year ended March 31, 2007 and 2006 2007 2006 2007

Operating activitiesIncome before income taxes and minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 172,205 ¥ 298,332 $ 1,459,364Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131,872 135,133 1,117,559Amortization of excess of cost over net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (254) (753) (2,153)Reversal of allowance for doubtful receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,777) (3,601) (40,483)Reversal of allowance for accrued retirement benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (14,527) (7,635) (123,110)Provision for (reversal of) reserve for inspection of oil tanks,

machinery and equipment, and vessels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 864 1,344 7,322Reversal of allowance for accrued cost of abandonment of wells . . . . . . . . . . . . . . . . . . . . . . . . . 12,560 14,153 106,441Interest and dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (21,130) (11,262) (179,068)Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,789 23,160 210,076Gain on sales of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12,524) (8,322) (106,136)Loss on disposal of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,254 8,851 61,475Loss on impairment of fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,872 3,868 58,237Gain on sales of investments in securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (722) (2,457) (6,119)Increase in notes and accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (32,641) (138,466) (276,619)Decrease (increase) in inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59,135 (317,203) 501,144Increase in notes and accounts payable and excise taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . 8,975 119,627 76,059Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,121) 40,664 (26,449)

Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 334,828 155,432 2,837,525Interest and dividends received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,090 13,037 221,102Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (23,863) (22,791) (202,229)Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (116,150) (111,559) (984,322)Early retirement incentive payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,143) (97) (9,686)Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (13,893) — (117,737)

Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205,867 34,021 1,744,636Investing activities(Increase) decrease in time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10,015) 561 (84,873)Increase in short-term investments in securities and investments in other securities . . . . . . . . . . (10,346) (173) (87,678)Additions to property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (113,486) (97,916) (961,746)Proceeds from sales of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,105 19,876 195,805Proceeds from sales of shares of consolidated subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,187 4,112 10,059Proceeds from purchases of shares of consolidated subsidiaries due to change

in scope of consolidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 641 —Increase in cost of exploration and production of oil and related assets . . . . . . . . . . . . . . . . . . . . (33,150) (45,734) (280,932)Decrease in long-term receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,832 10,751 57,898Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,613) (7,194) (64,517)

Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (143,487) (115,073) (1,215,992)Financing activitiesIncrease in short-term loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94,411 248,488 800,093Proceeds from long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107,330 122,437 909,576Repayment of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (139,840) (185,791) (1,185,085)Expenditure for purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (691) (39,351) (5,856)Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (21,645) (19,940) (183,432)Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,843 127 41,042

Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,408 125,969 376,339Effect of exchange rate changes on cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . 308 9,660 2,610Increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107,096 54,577 907,593Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214,476 140,478 1,817,593Increase in cash and cash equivalents resulting from inclusion ofconsolidated subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212 19,409 1,797

Increase in cash and cash equivalents resulting from merger in consolidation . . . . . . — 10 —Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 321,786 ¥ 214,476 $ 2,727,000See accompanying notes to consolidated financial statements.


Notes to Consolidated Financial StatementsNippon Oil Corporation and Consolidated SubsidiariesMarch 31, 2007

1 Significant Accounting Policies

(a) Basis of preparation

The Company and its domestic consolidated subsidiaries maintain their accounting records and prepare their financial statements in accordance with accounting

principles generally accepted in Japan, and its overseas consolidated subsidiaries maintain their books of account in conformity with those of their countries of

domicile. The accompanying consolidated financial statements have been compiled from the accounts prepared by the Company in accordance with the provi-

sions set forth in the Securities and Exchange Law of Japan and in conformity with accounting principles generally accepted in Japan, which are different in certain

respects as to the application and disclosure requirements of International Financial Reporting Standards.

In addition, the notes to the consolidated financial statements include information which is not required under accounting principles generally accepted in

Japan but is presented herein as additional information.

As permitted under the Securities and Exchange Law of Japan, amounts of less than one million yen have been omitted. As a result, the totals shown in the

accompanying consolidated financial statements (both in yen and in U.S. dollars) do not necessarily agree with the sums of the individual amounts.

Certain amounts in the prior year’s financial statements have been reclassified to conform to the current year’s presentation.

(b) Principles of consolidation and accounting for investments in unconsolidated subsidiaries and affiliates

The accompanying consolidated financial statements include the accounts of the Company and all its significant subsidiaries. Investments in certain unconsoli-

dated subsidiaries and significant affiliates are accounted for by the equity method. All significant intercompany balances and transactions have been eliminated

in consolidation.

The excess of cost over the underlying equity in net assets at the dates of acquisition of the major consolidated subsidiaries is amortized by the straight-line

method over 5 years.

Investments in unconsolidated subsidiaries and affiliates not accounted for by the equity method are stated at cost or less. Where there has been a permanent

decline in the value of the investments, the Company has written them down to reflect the impairment.

(c) Foreign currency translation

Monetary assets and liabilities denominated in foreign currencies included in the current and noncurrent foreign currency accounts of the Company, of its

domestic consolidated subsidiaries and of its affiliates accounted for by the equity method have been translated into yen at the rates of exchange in effect at the

year end. Translation differences are charged or credited to income.

The accounts of the overseas consolidated subsidiaries are translated into yen as follows: all assets, liabilities and retained earnings at the end of the year and

items in the consolidated statements of income including net income, at the rate of exchange in effect at the year end; capital stock, at historical rates; and cash

dividends paid, at the rate of exchange in effect when paid. Translation differences arising from the balance sheet items are included in shareholders’ equity, and

those arising from minority interests in consolidated subsidiaries are reflected as translation adjustments.

(d) Cash equivalents

The Company and its consolidated subsidiaries substantially consider all highly liquid investments with a maturity of three months or less when purchased to be

cash equivalents.

(e) Securities

The accounting standard applicable to securities requires that all securities be classified into three categories: trading, held-to-maturity securities or other. Held-to-

maturity securities have been stated at their amortized cost. Marketable securities classified as other securities have been stated at fair value with any changes in

unrealized holding gain or loss, net of the applicable income taxes, included directly in shareholders’ equity. Non-marketable securities classified as other securities

have been stated at cost. Cost of securities sold has been determined by the moving average method.

(f) Property, plant and equipment and depreciation

Property, plant and equipment is stated at cost.

Depreciation of property, plant and equipment is computed principally by the straight-line method for buildings, and by the declining-balance method for

other property, plant and equipment, over the estimated useful lives of the respective assets.

Significant renewals and improvements are capitalized at cost. Maintenance and repairs are charged to income.

FINAN

CIAL SECTION


(g) Inventories

Inventories are stated mainly at cost determined principally by the average method.

(h) Accounting procedure for exploration and development investments

Expenditures relating to exploration and development under certain agreements are capitalized as assets and recovered in accordance with the terms of the

respective agreements.

(i) Leases

Noncancelable leases are accounted for primarily as operating leases (whether such leases are classified as operating or finance leases) except that leases which

stipulate the transfer of ownership of the leased assets to the lessee are accounted for as finance leases.

(j) Retirement benefits

Accrued retirement benefits are stated principally at the amount calculated based on the present value of the retirement benefit obligation and the fair value of the

pension plan assets, as adjusted for unrecognized actuarial gain or loss, and unrecognized prior service cost. Prior service cost is amortized as incurred by the

straight-line method, principally over 5 years. Actuarial gain or loss is amortized commencing in the subsequent period by the straight-line method, principally over

5 years.

(k) Income taxes

Deferred income taxes are determined based on the differences between the amounts determined for financial reporting purposes and the tax bases of the assets

and liabilities and are measured using the enacted tax rates and laws which will be in effect when the differences are expected to reverse.

(l) Reserve for inspection of oil tanks, machinery and equipment, and vessels

The Company and its domestic consolidated subsidiaries are required periodically to inspect their oil tanks, the machinery and equipment of their oil refineries,

and their vessels. A reserve for the inspection of oil tanks, machinery and equipment, and vessels is provided for the current portion of the estimated total cost for

such work.

(m) Accrued estimated cost for abandonment of wells

The accrued estimated cost of abandonment of wells is provided to cover the costs to be incurred upon the abandonment of wells at an estimated amount

allocated over a scheduled period based on consolidated subsidiaries’ plans for the abandonment of such wells.

(n) Accounting standard for presentation of net assets in the balance sheet

Effective the year ended March 31, 2007, the Company and its domestic consolidated subsidiaries adopted new accounting standards, “Accounting Standard for

Presentation of Net Assets in the Balance Sheet” (“Statement No. 5” issued by the Accounting Standards Board of Japan on December 9, 2005), and “the

Implementation Guidance for the Accounting Standard for Presentation of Net Assets in the Balance Sheet” (“the Financial Accounting Standard Implementation

Guidance No. 8” issued by the Accounting Standards Board of Japan on December 9, 2005), (collectively, the “New Accounting Standards”).

In addition, effective the year ended March 31, 2007, the Company and its domestic consolidated subsidiaries are required to prepare consolidated state-

ments of changes in net assets instead of consolidated statements of shareholders’ equity. In this connection, the previously reported consolidated balance sheet

as of March 31, 2006 has been restated to conform to the presentation and disclosure of the consolidated financial statements for the year ended March 31, 2007.

Total shareholders’ equity under the previous method of presentation at March 31, 2007, which comprised common stock, capital surplus, retained earnings,

unrealized gain on securities, net of deferred income taxes, and translation adjustments, amounted to ¥1,192,838 million ($10,108,797 thousand).

(o) Research and development costs

Research and development costs are charged to income when incurred.

(p) Derivatives

Derivatives are stated at fair value with any changes in unrealized gain or loss charged or credited to income, except for those which meet the criteria for deferral

hedge accounting under which unrealized gain or loss is deferred as an asset or a liability. Receivables and payables hedged by qualified forward foreign exchange

contracts and currency swaps are translated at the corresponding contract rates.


(q) Amounts per share

Basic net income per share for the years ended March 31, 2007 and 2006 has been computed based on the net income attributable to shareholders of common

stock and the weighted-average number of shares of common stock outstanding during the year.

2 U.S. Dollar Amounts

The translation of yen amounts into U.S. dollar amounts is included solely for convenience and has been made, as a matter of arithmetic computation only, at

¥118=U.S.$1.00, the approximate rate of exchange in effect on March 31, 2007. The translation should not be construed as a representation that yen have been,

could have been, or could in the future be, converted into U.S. dollars at that or any other rate.

3 Securities

a) Marketable securities classified as held-to-maturity securities at March 31, 2007 and 2006 were as follows:Thousands of

Millions of yen U.S. dollars

March 31, 2007 2006 2007

Carrying value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥64 ¥64 $542Aggregate market value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 63 542

Net unrealized holding gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ (0) ¥ (0) $ (0)

b) Marketable securities classified as other securities at March 31, 2007 and 2006 were as follows:Millions of yen Thousands of U.S. dollars

Net Netunrealized unrealized

Acquisition Carrying holding Acquisition Carrying holdingMarch 31, 2007 cost amount gain cost amount gain

Stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥124,539 ¥339,352 ¥214,812 $1,055,415 $2,875,864 $1,820,441Debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — — — —

¥124,539 ¥339,352 ¥214,812 $1,055,415 $2,875,864 $1,820,441

Millions of yen

Netunrealized

Acquisition Carrying holdingMarch 31, 2006 cost amount gain

Stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥54,548 ¥215,689 ¥161,141Debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 18 —

¥54,566 ¥215,707 ¥161,141

c) Sales of securities classified as other securities amounted to ¥497 million ($4,212 thousand) and ¥2,277 million, with a net aggregate gain of ¥338 million

($2,864 thousand) and ¥1,488 million for the years ended March 31, 2007 and 2006, respectively.

d) The redemption schedule at March 31, 2007 for securities with maturity dates is summarized as follows:Millions of Thousands of

March 31, 2007 yen U.S. dollars

Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥2,739 $23,212Due after one year through five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — —Due after five years through ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,101 51,703Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — —

FINAN

CIAL SECTION


4 Inventories

Inventories at March 31, 2007 and 2006 consisted of the following:Thousands of


March 31, 2007 2006 2007

Merchandise and finished products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥184,901 ¥189,436 $1,566,958Crude oil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236,490 264,378 2,004,153Crude oil and others in transit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 184,529 230,149 1,563,805Work in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212,706 210,044 1,802,593Containers and supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,497 41,016 410,992Real estate for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,701 16,020 192,381

¥889,827 ¥951,046 $7,540,907

5 Loss on Impairment of Fixed Assets

Recognition of impairment losses on fixed assets for the years ended March 31, 2007 and 2006 resulted primarily from a significant decrease in the market value

of the Company’s land as well as from the overall deterioration of its business environment.

Loss on impairment of fixed assets for the years ended March 31, 2007 and 2006 consisted of the following:Thousands of


March 31, 2007 2006 2007

Service stations Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 159 ¥1,183 $ 1,347

Plants Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 303 424 2,568

Offices Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175 — 1,483Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 — 68

183 — 1,551Real estate for rent Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177 — 1,500

Idle properties and others Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,808 1,867 32,271Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,332 226 11,288Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 908 166 7,695

6,049 2,260 51,263

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥6,872 ¥3,868 $58,237

Other than the above, loss on impairment of ¥3,760 million ($31,864 thousand) is included in “restructuring cost for cogeneration business” on consolidated

statements of income for the year ended at March 31, 2007.

An impairment loss on service stations, offices and real estate for rent was recorded at the total of the amount by which the acquisition cost of each asset group

exceeded its future cash flows, discounted at 4.5%.

An impairment loss on plants, other businesses and certain idle properties and others was recorded at the total of the amount by which the acquisition cost of each

asset exceeded its estimated fair value. The estimated fair value of these assets, if material, was determined in accordance with real estate appraisal standards.


6 Short-Term Loans and Long-Term Debt

Short-term loans are principally unsecured and generally represent bank overdrafts, commercial paper and notes maturing within one year. The weighted-average

interest rates for the years ended March 31, 2007 and 2006 were approximately 0.6% and 0.4%, respectively.

Long-term debt at March 31, 2007 and 2006 is summarized as follows:Thousands of


March 31, 2007 2006 2007

Unsecured Eurobonds in U.S. dollars, due through February 2007,at interest rates ranging from 4.45% to 5.92% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 2,739 ¥ 12,810 $ 23,212

Unsecured bonds in yen, due through June 2016, at interest rates ranging from 0.61% to 2.48% . . . . . . . . . 140,000 160,000 1,186,441Unsecured Eurobonds in yen, due through April 2013, at interest rates ranging from 0.30% to 1.62% . . . . . 7,796 24,368 66,068Loans from banks, life insurance companies and government agencies, due through March 2022,

at interest rates ranging from 0.65% to 6.00%:Secured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90,572 91,254 767,559Unsecured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 464,420 448,151 3,935,763

705,529 736,584 5,979,059Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (92,047) (84,509) (780,059)

¥613,481 ¥652,075 $5,198,992

Assets pledged at March 31, 2007 and 2006 as collateral for long-term debt or other debt were as follows:Thousands of


March 31, 2007 2006 2007

Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ — ¥ 49 $ —Notes and accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129 297 1,093Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217,317 217,821 1,841,669Other property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210,381 229,950 1,782,890Investments in other securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 73,416 8Long-term receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,106 2,624 17,847

The aggregate annual maturities of long-term debt subsequent to March 31, 2007 are summarized as follows:Thousands of

Year ending March 31, Millions of yen U.S. dollars

2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 92,047 $ 780,0592009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,643 471,5512010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,896 109,2882011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68,098 577,1022012 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 476,842 4,041,034

¥705,529 $5,979,059

FINAN

CIAL SECTION


7 Retirement Benefits

The Company and its major consolidated subsidiaries have defined benefit pension plans for their employees who are covered by non-contributory plans which

fall under the Welfare Pension Fund Plan of Japan.

Accrued retirement benefits at March 31, 2007 and 2006 consisted of the following:Thousands of


March 31, 2007 2006 2007

Retirement benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥(263,729) ¥(265,103) $(2,234,992)Plan assets at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212,469 200,193 1,800,585

Unfunded retirement benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (51,260) (64,909) (434,407)Unrecognized actuarial (loss) gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (25,330) (24,463) (214,661)Unrecognized prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,397) (9,476) (62,686)Prepaid pension cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (123) — (1,042)

Accrued retirement benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ (84,112) ¥ (98,849) $ (712,814)

Retirement benefit expenses for the years ended March 31, 2007 and 2006 are outlined as follows:Thousands of


March 31, 2007 2006 2007

Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 6,916 ¥ 7,746 $ 58,610Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,123 5,023 43,415Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,850) (3,832) (32,627)Amortization of actuarial loss (gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,930) 4,226 (16,356)Amortization of prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,069) (2,049) (17,534)

¥ 4,189 ¥11,115 $ 35,500

The assumptions used in accounting for the above plans were as follows:As of March 31, 2007 2006

Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mainly 2.0% Mainly 2.0%Expected rate of return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mainly 2.0% Mainly 2.0%

8 Shareholders’ Equity

The new Corporation Law of Japan (the “Law”), which superseded most of the provisions of the Commercial Code of Japan, went into effect on May 1, 2006. The

Law provides that an amount equal to 10% of the amount to be disbursed as distributions of capital surplus (other than the capital reserve) and retained earnings

(other than the legal reserve) be transferred to the capital reserve and the legal reserve, respectively, until the sum of the capital reserve and the legal reserve

equals 25% of the capital stock account. Such distributions can be made at any time by resolution of the shareholders, or by the Board of Directors if certain

conditions are met.


9 Income Taxes

Income taxes applicable to the Company and its domestic consolidated subsidiaries comprise corporation, enterprise and inhabitants’ taxes which, in the aggre-

gate, resulted in a statutory tax rate of approximately 41% for the year ended March 31, 2007.

An analysis of the difference between the statutory tax rate and the effective tax rate for the year ended March 31, 2007 was as follows:Year ended March 31, 2007

Statutory tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40.7%Adjustments:

Non-deductible expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.0Non-taxable dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1.2)Different tax rates applied to income of consolidated subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3Equity in earnings of unconsolidated subsidiaries and affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.7)Inhabitants’ per capita taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.3Adjustment to valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.8Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.7

Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51.9%

A corresponding analysis for the year ended March 31, 2006 has been omitted due to the immaterial difference between the statutory and effective tax rates

for the year then ended.

The significant components of deferred tax assets and liabilities at March 31, 2007 and 2006 were as follows:Thousands of


March 31, 2007 2006 2007

Deferred tax assets:Property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 15,971 ¥ 16,232 $ 135,347Accrued retirement benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,563 39,977 292,907Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,440 13,314 113,898Net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,937 14,875 168,958Loss on revaluation of securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,480 20,324 173,559Loss on impairment of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,372 52,802 460,780Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95,892 74,851 812,644Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (100,512) (91,647) (851,797)

Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154,145 140,730 1,306,314Deferred tax liabilities:

Fair value of subsidiaries on consolidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,610 70,303 598,390Reserves under Special Taxation Measures Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,504 39,421 334,780Net unrealized holding gain on securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85,545 87,146 724,958Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69,579 61,082 589,653

Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 265,240 257,954 2,247,797

Net deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥(111,094) ¥(117,223) $ (941,475)

10 Excise Taxes

Excise taxes are levied on gasoline and diesel fuel when delivered to the customers and are included under net sales and cost of sales in the consolidated

statements of income. Excise taxes amounted to ¥1,008,477 million ($8,546,415 thousand) and ¥1,015,013 million for the years ended March 31, 2007 and 2006,

respectively, and represented approximately 15% and 17% of net sales for the respective years.

FINAN

CIAL SECTION


11 Selling, General and Administrative Expenses

Selling, general and administrative expenses at March 31, 2007 and 2006 consisted of the following:Thousands of


March 31, 2007 2006 2007

Freight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥107,329 ¥107,112 $ 909,568Personnel expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69,291 72,011 587,212Retirement benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,376 5,544 11,661Repair and inspection costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,774 10,205 99,780Rental expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,914 15,899 126,390Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,771 23,918 184,500Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61,456 58,175 520,814

¥287,915 ¥292,866 $2,439,958

12 Research and Development Expenses

Research and development expenses of ¥12,632 million ($107,051 thousand) and ¥10,103 million were charged to income as incurred for the years ended March

31, 2007 and 2006, respectively.

13 Contingent Liabilities

(a) The Company and its consolidated subsidiaries had the following contingent liabilities at March 31, 2007 and 2006:Thousands of


March 31, 2007 2006 2007

As guarantors of indebtedness of:Unconsolidated subsidiaries and affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥24,575 ¥16,730 $208,263Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,806 21,513 244,119

¥53,381 ¥38,243 $452,381

(b) Based on debt assumption agreements with financial institutions, the Company has transferred the debt repayment obligation for certain bonds to such

financial institutions. As of March 31, 2007, the Company had contingent obligations of ¥40,000 million ($338,983 thousand) in respect of these bonds.

14 Leases

Lessee

(a) Finance leases

The following pro forma amounts represent the acquisition costs, accumulated depreciation, accumulated loss on impairment and net book value of the leased

buildings and machinery and equipment at March 31, 2007 and 2006, which would have been reflected in the consolidated balance sheets if finance lease

accounting had been applied to the finance leases currently accounted for as operating leases:Thousands of


March 31, 2007 2006 2007

Acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥9,621 ¥9,572 $81,534Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,221 3,858 35,771Accumulated loss on impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,165 — 9,873

Net book value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥4,234 ¥5,713 $35,881


The following amounts represent the lease payments relating to finance leases accounted for as operating leases, the pro forma depreciation expense of the

leased assets (calculated by the straight-line method over the lease terms), the pro forma interest portion of the lease payments (calculated by the interest

method) and loss on impairment at March 31, 2007 and 2006:Thousands of


March 31, 2007 2006 2007

Lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥1,848 ¥1,999 $15,661Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,683 1,818 14,263Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142 175 1,203Loss on impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,165 — 9,873

Future minimum lease payments (exclusive of the interest portion thereon) subsequent to March 31,2007 for finance leases accounted for as operating leases

are summarized as follows:Thousands of


2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥1,538 $13,0342009 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,186 35,475

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥5,724 $48,508

(b) Operating leases

Future minimum lease payments subsequent to March 31, 2007 for noncancelable operating leases are summarized as follows:Thousands of


2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥150 $1,2712009 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 345 2,924

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥496 $4,203

Lessor

(a) Finance leases

The following amounts represent the acquisition costs, accumulated depreciation and net book value of machinery and equipment leased out at March 31, 2007

and 2006:Thousands of


March 31, 2007 2006 2007

Acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥17,924 ¥18,058 $151,898Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,093 9,061 85,534

Net book value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 7,831 ¥ 8,996 $ 66,364

The following amounts represent lease revenues relating to finance leases accounted for as operating leases, the pro forma depreciation expense of the

leased assets and the pro forma interest income on lease revenues (calculated by the interest method) at March 31, 2007 and 2006:Thousands of


March 31, 2007 2006 2007

Lease revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥4,002 ¥4,041 $33,915Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,611 3,639 30,602Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 361 440 3,059

FINAN

CIAL SECTION


Future minimum lease revenues (exclusive of the interest portion thereon) subsequent to March 31, 2007 for finance leases accounted for as operating leases

are summarized as follows:Thousands of


2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥3,453 $29,2632009 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,782 40,525

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥8,235 $69,788

(b) Operating leases

Future minimum lease revenues subsequent to March 31, 2007 for noncancelable operating leases are immaterial.

15 Derivatives

The Company and its consolidated subsidiaries utilize forward foreign exchange contracts, currency options, currency swaps, interest-rate swaps, interest-rate caps,

commodity swaps and commodity collars in order to manage the risk arising from adverse fluctuation in foreign currency exchange rates, interest rates and

commodity prices.

The notional amounts, fair value and unrealized gain or loss on open derivatives positions at March 31, 2007 and 2006 are summarized as follows:Millions of yen Thousands of U.S. dollars

Notional Fair Unrealized Notional Fair Unrealized2007 amount value gain (loss) amount value gain (loss)

Currency:Forward foreign exchange contracts . . . . . . . . . . . . . . . . . . . . ¥17,375 ¥17,329 ¥ (41) $147,246 $146,856 $ (347)

Interest-rate contracts:Swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 2,800 ¥ 7 ¥ 7 $ 23,729 $ 59 $ 59

Commodity swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥11,067 ¥11,712 ¥11,712 $ 93,788 $ 99,254 $99,254

Commodity options:Collars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥11,303 ¥ 709 ¥ 709 $ 95,788 $ 6,008 $ 6,008

Millions of yen

Notional Fair Unrealized2006 amount value gain (loss)

Currency:Forward foreign exchange contracts . . . . . . . . . . . . . . . . . . . . ¥62,889 ¥63,045 ¥ 111

Interest-rate contracts:Swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 5,161 ¥ 161 ¥ 161

Commodity swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 7,202 ¥ (1,592) ¥(1,592)

Commodity options:Collars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥28,349 ¥ (5,527) ¥(5,527)

Note: The above information is presented exclusive of derivatives utilized in hedging transactions.

16 Segment Information

The business of the Company and its consolidated subsidiaries is divided into the following four categories: Refining and Marketing, Oil and Natural Gas E&P*,

Construction, and Other. The Refining and Marketing segment comprises gasoline, naphtha, kerosene, diesel fuel, heavy fuels, petrochemical products (paraxylene,

benzene), plastics and others; the Oil and Natural Gas E&P segment comprises exploration for, and production of, oil and natural gas; the Construction segment

comprises paving, civil engineering and construction; and the Other segment comprises leasing, finance, insurance, data processing and other businesses.

*Exploration and Production


The business and geographical segment information of the Company and its consolidated subsidiaries for the years ended March 31, 2007 and 2006 is

summarized as follows:

Business segmentsMillions of yen

Refining Oil andand Natural

Year ended March 31, 2007 Marketing Gas E&P Construction Other Total Eliminations Consolidated

Sales to third parties . . . . . . . . . . . . . . . . . . . . . . . . . . ¥5,954,390 ¥203,516 ¥407,893 ¥ 58,456 ¥6,624,256 ¥ — ¥6,624,256Intergroup sales and transfers . . . . . . . . . . . . . . . . . . . 9,259 — 1,371 17,369 28,000 (28,000) —

Total sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,963,649 203,516 409,265 75,826 6,652,257 (28,000) 6,624,256Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,934,308 89,704 399,181 71,762 6,494,956 (30,384) 6,464,571

Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 29,341 ¥113,811 ¥ 10,083 ¥ 4,064 ¥ 157,300 ¥2,384 ¥ 159,684

Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥3,542,084 ¥441,442 ¥428,095 ¥116,197 ¥4,527,820 ¥(142,287) ¥4,385,533

Depreciation and amortization . . . . . . . . . . . . . . . . . . ¥ 81,694 ¥ 39,625 ¥ 4,861 ¥ 5,758 ¥ 131,939 ¥ (67) ¥ 131,872

Loss on impairment of fixed assets . . . . . . . . . . . . . . ¥ 5,943 ¥ 430 ¥ 496 ¥ 2 ¥ 6,872 ¥ — ¥ 6,872

Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 107,438 ¥ 43,246 ¥ 8,496 ¥ 6,036 ¥ 165,219 ¥ — ¥ 165,219

Millions of yen

Refining Oil andand Natural


Sales to third parties . . . . . . . . . . . . . . . . . . . . . . . . . . ¥5,482,648 ¥180,503 ¥374,482 ¥ 80,353 ¥6,117,988 ¥ — ¥6,117,988Intergroup sales and transfers . . . . . . . . . . . . . . . . . . . 9,285 — 1,285 15,285 25,856 (25,856) —

Total sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,491,933 180,503 375,768 95,638 6,143,844 (25,856) 6,117,988Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,294,753 88,412 368,607 89,785 5,841,559 (27,501) 5,814,058

Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 197,180 ¥ 92,090 ¥ 7,160 ¥ 5,853 ¥ 302,285 ¥ 1,645 ¥ 303,930

Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥3,412,601 ¥404,078 ¥391,319 ¥135,765 ¥4,343,765 ¥(111,950) ¥4,231,814

Depreciation and amortization . . . . . . . . . . . . . . . . . . ¥ 85,026 ¥ 38,946 ¥ 4,792 ¥ 6,374 ¥ 135,139 ¥ (5) ¥ 135,133

Loss on impairment of fixed assets . . . . . . . . . . . . . . ¥ 3,834 ¥ — ¥ 34 ¥ — ¥ 3,868 ¥ — ¥ 3,868

Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 84,892 ¥ 63,903 ¥ 4,628 ¥ 4,985 ¥ 158,411 ¥ — ¥ 158,411


Oil andRefining and Natural


Sales to third parties . . . . . . . . . . . . . . . . . . . . . . . . . . $50,460,932 $1,724,712 $3,456,720 $495,390 $56,137,763 $ — $56,137,763Intergroup sales and transfers . . . . . . . . . . . . . . . . . . . 78,466 — 11,619 147,195 237,288 (237,288) —

Total sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,539,398 1,724,712 3,468,347 642,593 56,375,059 (237,288) 56,137,763Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,290,746 760,203 3,382,890 608,153 55,042,000 (257,492) 54,784,500

Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 248,653 $ 964,500 $ 85,449 $ 34,441 $ 1,333,051 $ 20,203 $ 1,353,254

Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $30,017,661 $3,741,034 $3,627,924 $984,720 $38,371,356 $(1,205,822) $37,165,534

Depreciation and amortization . . . . . . . . . . . . . . . . . . $ 692,322 $ 335,805 $ 41,195 $ 48,797 $ 1,118,127 $ (568) $ 1,117,559

Loss on impairment of fixed assets . . . . . . . . . . . . . . $ 50,364 $ 3,644 $ 4,203 $ 17 $ 58,237 $ — $ 58,237

Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . $ 910,492 $ 366,492 $ 72,000 $ 51,153 $ 1,400,161 $ — $ 1,400,161

FINAN

CIAL SECTION


Geographical segmentsMillions of yen

Asia and NorthYear ended March 31, 2007 Japan Oceania America Europe Total Eliminations Consolidated

Sales to third parties . . . . . . . . . . . . . . . . . . . . . ¥ 6,338,227 ¥ 196,709 ¥ 53,497 ¥ 35,821 ¥ 6,624,256 ¥ — ¥ 6,624,256Intergroup sales and transfers . . . . . . . . . . . . . . 53,830 900,513 286,483 1,138,583 2,379,411 (2,379,411) —

Total sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,392,057 1,097,223 339,981 1,174,405 9,003,668 (2,379,411) 6,624,256Operating expenses . . . . . . . . . . . . . . . . . . . . . . 6,348,195 1,003,789 339,490 1,152,748 8,844,223 (2,379,651) 6,464,571

Operating income . . . . . . . . . . . . . . . . . . . . . . . ¥ 43,862 ¥ 93,433 ¥ 491 ¥ 21,657 ¥ 159,444 ¥ 240 ¥ 159,684

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 4,018,433 ¥ 283,994 ¥ 160,557 ¥ 135,920 ¥ 4,598,906 ¥ (213,373) ¥ 4,385,533

Millions of yen


Sales to third parties . . . . . . . . . . . . . . . . . . . . . ¥ 5,828,966 ¥ 206,108 ¥ 49,037 ¥ 33,876 ¥ 6,117,988 ¥ — ¥ 6,117,988Intergroup sales and transfers . . . . . . . . . . . . . . 63,146 810,379 268,824 1,077,332 2,219,683 (2,219,683) —

Total sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,892,113 1,016,487 317,861 1,111,209 8,337,671 (2,219,683) 6,117,988Operating expenses . . . . . . . . . . . . . . . . . . . . . . 5,684,900 946,112 309,329 1,093,595 8,033,937 (2,219,879) 5,814,058

Operating income . . . . . . . . . . . . . . . . . . . . . . . ¥ 207,212 ¥ 70,375 ¥ 8,532 ¥ 17,613 ¥ 303,737 ¥ 196 ¥ 303,930

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 3,832,876 ¥ 313,095 ¥ 198,036 ¥ 243,490 ¥ 4,587,498 ¥ (355,683) ¥ 4,231,814



Sales to third parties . . . . . . . . . . . . . . . . . . . . . $53,713,788 $1,667,025 $ 453,364 $ 303,568 $56,137,763 $ — $56,137,763Intergroup sales and transfers . . . . . . . . . . . . . . 456,186 7,631,466 2,427,822 9,649,008 20,164,500 (20,164,500) —

Total sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,169,975 9,298,500 2,881,195 9,952,585 76,302,271 (20,164,500) 56,137,763Operating expenses . . . . . . . . . . . . . . . . . . . . . . 53,798,263 8,506,686 2,877,034 9,769,051 74,951,042 (20,166,534) 54,784,500

Operating income . . . . . . . . . . . . . . . . . . . . . . . $ 371,712 $ 791,805 $ 4,161 $ 183,534 $ 1,351,220 $ 2,034 $ 1,353,254

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $34,054,517 $2,406,729 $1,360,653 $1,151,864 $38,973,780 $ (1,808,246) $37,165,534

17 Subsequent Events

The following appropriations of retained earnings, which have not been reflected in the accompanying consolidated financial statements for the year ended March

31, 2007, were approved at a meeting of the shareholders of the Company held on June 28, 2007:Millions of Thousands of

yen U.S. dollars

Year-end cash dividends (¥6=$0.05 per share) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥8,783 $74,432


Report of Independent Auditors

The Board of Directors

Nippon Oil Corporation

We have audited the accompanying consolidated balance sheets of Nippon Oil Corporation and consolidated subsidiaries as of March 31, 2007 and 2006, and the

related consolidated statements of income, shareholders’ equity, and cash flows for the years then ended, all expressed in yen. These financial statements are the

responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in Japan. Those standards require that we plan and perform the audit to obtain

reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting

the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by

management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Nippon Oil Corporation and

consolidated subsidiaries at March 31, 2007 and 2006, and the consolidated results of their operations and their cash flows for the years then ended in conformity

with accounting principles generally accepted in Japan.

The U.S. dollar amounts in the accompanying consolidated financial statements with respect to the year ended March 31, 2007 are presented solely for

convenience. Our audit also included the translation of yen amounts into U.S. dollar amounts and, in our opinion, such translation has been made on the

basis described in Note 2.

June 28, 2007

FINAN

CIAL SECTION


Principal Nippon Oil Group Companies(As of July 1, 2007)

OIL REFINING AND MARKETINGNippon Petroleum Refining Company, LimitedCapital: ¥5,000 million (100%)Business: Refining and processing

of petroleum products andpetrochemical products

Nippon Petrochemicals Company, LimitedCapital: ¥5,000 million (100%)Business: Manufacture, processing, and

sale of petrochemical products

Wakayama Petroleum Refining Co., Ltd.Capital: ¥4,420 million (99.0%)Business: Manufacture of lubricants

Nihonkai Oil Co., Ltd.Capital: ¥4,000 million (66%)Business: Refining and processing

of petroleum products

ENEOS Frontier Company, LimitedCapital: ¥495 million (100%)Business: Sale of petroleum products

Nisseki Plasto Company, LimitedCapital: ¥200 million (100%)Business: Manufacture and sale of processed synthetic

resin products including nonwoven materials

Nippon Oil Europe LimitedCapital: $6 million (100%)Business: Purchase, sale, import, and export

of crude oil and petroleum products

Nippon Oil (U.S.A.) LimitedCapital: $3 million (100%)Business: Purchase, sale, import, and export


Nippon Oil Lubricants (America) LLCCapital: $23 million (100%)Business: Manufacture of lubricants

Nisseki Chemical Texas Inc.Capital: $30 million (100%)Business: Manufacture of ENB

Atlanta Nisseki CLAF, Inc.Capital: $8.9 million (100%)Business: Manufacture and sale of nonwoven materials

Nippon Oil (Guangzhou) Lubricants CorporationCapital: $17 million (90%)Business: Manufacture of lubricants

Nippon Oil LC Film (Suzhou) CorporationCapital: $25 million (100%)Business: Manufacture of Liquid Crystal Films

Nippon Oil (Asia) Pte. Ltd.Capital: S$300,000 (100%)Business: Purchase, sale, import, and export


OIL STORAGE AND TRANSPORTNippon Oil Staging Terminal Company, LimitedCapital: ¥6,000 million (100%)*1

Business: Operation of petroleum storageand terminal facilities

Nippon Oil Tanker CorporationCapital: ¥4,000 million (100%)*2

Business: Ocean transport of crude oiland petroleum products

Okinawa CTS CorporationCapital: ¥495 million (65%)Business: Crude oil stockpiling

EXPLORATION AND PRODUCTIONNippon Oil Exploration LimitedCapital: ¥9,815 million (100%)Business: Exploration and production

of oil and natural gas

Japan Vietnam Petroleum Company, LimitedCapital: ¥22,530 million (97.1%)*3

Business: Exploration and productionof oil and natural gas

Nippon Oil Exploration (Sarawak) LimitedCapital: ¥14,880 million (76.5%)*3

Business: Exploration and productionof natural gas

CONSTRUCTION AND ENGINEERINGNIPPO CORPORATIONCapital: ¥15,325 million (57.2%)Business: Road paving, civil engineering,

and construction

OTHERNippon Oil Real Estate Company, LimitedCapital: ¥500 million (100%)Business: Sale, purchase, leasing, and

management of real estate

Nippon Oil Trading CorporationCapital: ¥330 million (100%)Business: Planning of marketing and promotional

campaigns for service stations, developmentand marketing of products forsuch campaigns, travel agency business,and operation of sports facilities

Nippon Oil Information Technology CorporationCapital: ¥300 million (51%)Business: Commissioned development and operation

of computer and communications system

Nippon Oil (Australia) Pty. LimitedCapital: A$77 million (100%)Business: Purchase, sale, import, and export

of coal and LNG

Nippon Oil Business Services Co., Ltd.Capital: ¥50 million (100%)Business: Provision of accounting, payroll and

welfare services for Nippon Oil Group

Nippon Oil Research Institute Co., Ltd.Capital: ¥30 million (100%)Business: Research and consulting concerning

petroleum and petrochemical products

*1 Includes the shares owned by Nippon PetroleumRefining Company, Limited (50.0%)

*2 Includes the shares owned by Nippon PetroleumRefining Company, Limited (96.0%)

*3 The shares owned by Nippon Oil Exploration LimitedNote: Figures in parentheses indicate percentage of

equity ownership.


Overseas Bases(As of July 1, 2007)

Abu Dhabi OfficeAl Masaood Tower, Suite No. 503 (5th Floor),Sheikh Hamdan Street, P.O. Box 43212, Abu Dhabi,United Arab EmiratesPhone: 2631-4991Fax: 2631-0151

Jakarta OfficeMidPlaza 2, 22nd Floor, Jl Jend. Sudirman Kav. 10-11,Jakarta 10220, IndonesiaPhone: (21) 573-1234Fax: (21) 574-2275

Beijing OfficeRoom 1918, China World Tower 1,China World Trade Center No. 1,Jian Guo Men Wai Avenue, Beijing 100004, P.R. ChinaPhone: (10) 5866-9700Fax: (10) 5866-9704

Nippon Oil Exploration LimitedTripoli OfficeYousaf Ben Tashifian Street Hai Al Andalus, Tripoli,Great Socialist People’s Libyan Arab JamahiriyaPhone: (21) 335-1294Fax: (21) 335-1296

Nippon Oil Exploration U.S.A. Limited5847 San Felipe, Suite 2800,Houston, Texas 77057, U.S.A.Phone: (713) 260-7400Fax: (713) 978-7800

Japan Vietnam Petroleum Company, LimitedVietnam OfficePetro Vietnam Towers 7th Floor, No. 8,Hoang Dieu St., Vung Tau, S.R. VietnamPhone: (64) 856937Fax: (64) 856943

Nippon Oil Exploration (Malaysia), LimitedMiri OfficeLot 1168, 3rd Floor, Wisma Interhill Building,Miri Waterfront Commercial Center,98008 Miri, Sarawak, MalaysiaPhone: (85) 444111Fax: (85) 419036

Kuala Lumpur OfficeLevel 10, Tower 2,MNI Twins, 11, Jalan Pinang,50450 Kuala Lumpur, MalaysiaPhone: (3) 2168-3838Fax: (3) 2078-7680

Nippon Oil Exploration andProduction U.K. Limited4th Floor, 1 Finsbury Square, London EC2A 1AE, U.K.Phone: (20) 7309-7650Fax: (20) 7309-7676

Nippon Oil (U.S.A.) LimitedChicago Headquarters300 Park Blvd., #105, Itasca, Illinois 60143, U.S.A.Phone: (630) 875-9701Fax: (630) 875-9702www.eneos.us

Houston Branch Office5847 San Felipe, Suite 2850,Houston, Texas 77057, U.S.A.Phone: (713) 781-1300Fax: (713) 781-1329

Los Angeles Branch Office3625 Del Amo Boulevard, Suite 385,Torrance, CA 90503, U.S.A.Phone: (310) 214-2050Fax: (310) 214-2090

Nippon Oil Lubricants (America) LLC100 Nippon Drive, Childersburg, AL 35044 U.S.A.Phone: (256) 378-0131Fax: (256) 378-0169

Nippon Oil Europe Limited2nd Floor, New Liverpool House,15 Eldon Street, London EC2M 7LD, U.K.Phone: (20) 7309-6960Fax: (20) 7309-6969www.eneos.eu

Nippon Oil (Asia) Pte. Ltd.6 Battery Road, #29-02, Singapore 049909Phone: 6223-6732Fax: 6224-8921

Nippon Oil (Australia) Pty. LimitedLevel 32, Chifley Tower, 2 Chifley Square,Sydney, N.S.W. 2000, AustraliaPhone: (2) 9221-3366Fax: (2) 9221-9462

Taiwan Nisseki Co., Ltd.Siwei Street 6 24F A1, Linya Area,Kaohsiung City, TaiwanPhone: (7) 535-7458Fax: (7) 535-7819

Nippon Oil (Shanghai) CorporationShanghai Office27F, HSBC Tower, 1000 Lu-jia-zui,Ring Road, Pudong New Area,Shanghai 200120, P.R. ChinaPhone: (21) 6841-2008Fax: (21) 6841-2010

Guangzhou OfficeRoom 2312, Dongshan Plaza, No. 69 Xian LieRoad (C), Guangzhou 510095, P.R. ChinaPhone: (20) 8732-4035/4036Fax: (20) 8732-4050

Tianjin Nisseki Lubricants &Grease Company, LimitedHangu, Tianjin 300480, P.R. ChinaPhone: (22) 6716-1115/1116Fax: (22) 6716-1119

Nippon Oil (Guangzhou) Lubricants Corporation38 Yue Hai Road, Xiao Hu Cun,Huang Ge Zheng, Nan Sha Qu, Guangzhou,Guangdong, 511455, P.R. ChinaPhone: (20) 3497-3928Fax: (20) 3497-3925

Nippon Oil LC Film (Suzhou) Corporation555 Jin Feng Road, Suzhou,Jiangsu 215129, P.R. ChinaPhone: (512) 6701-5588Fax: (512) 6701-5589

Nippon Oil (Thailand) Ltd.Q. House Ploenjit (14A),598 Ploenchit Rd., Lumpini,Pathumwan, Bangkok 10300, ThailandPhone: 2627-3971~6Fax: 2627-3980

Nippon Oil Malaysia Sdn. Bhd.G17, Jusco Metro Prima, 1 Jalan Metro Prima,52100 Kepong, Kuala Lumpur, MalaysiaPhone: (3) 6250-8853Fax: (3) 6250-8851

Nisseki Chemical Texas Inc.10500 Bay Area Blvd.,Pasadena, Texas 77507, U.S.A.Phone: (713) 754-1000Fax: (713) 754-1001

Atlanta Nisseki CLAF, Inc., Head Office600 Town Park Lane Suite 075, Kennesaw,GA 30144, U.S.A.Phone: (770) 859-9885Fax: (770) 859-0515

European Office4 Avenue Jean Giono, F-13090 Aix-en-Provence,FrancePhone: (442) 277-624Fax: (442) 275-472

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Organization Chart(As of July 1, 2007)

Departments marked* deal with both Nippon Oil Corporation’s business and Nippon Petroleum Refining Co., Limited’s.

Executive Committee

Secretariat

Corporate Social Responsibility Dept.

Corporate Planning & Management Dept.

Internal Control Project Office

Comptrollers Dept.

Investor Relations Dept.

Human Resources Dept.

Public Relations Dept.

Information Systems Dept.

General Administration Dept.

Purchasing Dept.

Environment & Safety Dept.*

Quality Assurance Dept.*

Technical Service Dept.*

Engineering Dept.*

Petroleum Trading & Shipping Dept.

Overseas Business Dept.

Supply & Manufacturing Dept.

Distribution Dept.

Marketing Planning Dept.

Retail Marketing Dept.

Home Energy Dept.

Lubricants & Specialties Business Coordination Dept.

Lubricants & Specialties Sales Dept.

Energy Solution Planning & Coordination Dept.

Energy Solution Dept. I

Energy Solution Dept. II

Energy Solution Dept. III

Chemicals Planning & Coordination Dept.

Olefins Dept.

Aromatics Dept.

Specialty & Performance Chemicals Dept.

Fuel Cell Business Dept.

Merchandise Business Dept.

Research & Development Planning Dept.

Research & Development Dept.

Central Technical Research Laboratory

Corporate ManagementDivision I

Corporate ManagementDivision II

Environment, Safety & QualityManagement Division

Lubricants & SpecialtiesBusiness Division

Fuel Cell & MerchandiseBusiness Division

Research & DevelopmentDivision

Manufacturing Technology& Engineering Division

Overseas Business Division

Supply Division

Fuel Retail Sales Division

Energy Solution Division

Chemicals Division

Chairman ofthe Board

GeneralMeeting of

Shareholders

Board ofCorporateAuditors

Secretariat ofCorporateAuditors

DirectorsAppointed by the President

President

Executive VicePresidents

Senior VicePresidents

Board ofDirectors

Investor Information(As of July 1, 2007)

Date of EstablishmentMay 10, 1888

Paid-in Capital¥139,437 million

Head Office3-12, Nishi Shimbashi 1-chome,Minato-ku, Tokyo 105-8412, JapanPhone: +81-3-3502-1184 (IR Department)Fax: +81-3-3502-9862Website: http://www.eneos.co.jp

Securities TradedCommon stock listed on the Tokyo, Osaka,Nagoya, Fukuoka, and Sapporo exchanges

Transfer AgentThe Chuo Mitsui Trust and Banking Co., Ltd.

Other PublicationThis Nippon Oil Corporation publication can be obtained from our website.

CSR Report 2007http://www.eneos.co.jp/english/index.htmlNippon Oil Group activities for CSR

02FY 06FY05FY04FY03FY

200,000

150,000

100,000

50,000

0

Trading volume (Thousands of shares/months)

1,200

900

600

300

Trading volume (Thousands of shares/months)

Stock Price Range and Trading Volume

Major Shareholders (as of March 31, 2007)

Number of shares held(thousands of shares) (%)

Japan Trustee Services Bank, Ltd. (Trust Unit) 74,061 5.1The Master Trust Bank of Japan, Ltd. (Trust Unit) 72,171 4.9Mizuho Corporate Bank, Ltd. 47,298 3.2Mitsubishi Corporation 45,435 3.1Sumitomo Mitsui Banking Corporation 40,398 2.8The Bank of Tokyo-Mitsubishi UFJ, Ltd. 30,617 2.1Tokio Marine & Nichido Fire Insurance Co., Ltd. 29,323 2.0State Street Bank and Trust Company 505103 23,441 1.6Morgan Stanley and Company Inc. 22,043 1.5Mitsui Sumitomo Insurance Co., Limited 16,722 1.1

Note: Trading volume figures represent the average trading volumes for each quarter.


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Annual Report 2 007

Printed in JapanCert no. SGS-COC-2053

NI Turning Opportunities PP 2 Into Growth 7 · ity shortfalls for paraxylene and propylene, etc....

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Transcript of NI Turning Opportunities PP 2 Into Growth 7 · ity shortfalls for paraxylene and propylene, etc....