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Corporate Report [ Year ended December 31, 2014 ] 2015 ENERGIZING THE FUTURE Showa Shell Sekiyu K.K.

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  • Corporate Report [Year ended December 31, 2014]2015


    Showa Shell Sekiyu K.K.

  • Business Model

    Management strategiesCorporate governance

    Energy Solutions Business

    Allocation of Resources

    Technologies and expertise

    Financial base

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

    Power plant operation

    Synergies between assets

    l tP

    Electric Power Business


    orporate governance


    Oil product transportation

    Oil Business

    Manufacturing facilities

    Management Resources and Stakeholders

    Synergies between


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

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

    of the Groups management and business activities, Corporate Report 2015 includes a full

    range of information regarding management policies and strategies, business conditions and

    risks, and the Groups management resources and stakeholders. The Company referenced

    guidelines in compiling this report, such as the International Integrated Reporting Framework

    Ver. 1.0 released by the International Integrated Reporting Council.

    Editorial Policy

    Human resources

    Byproduct fuel

    Former business facility sites

    Manufactured solar modules

    Business partnersBusiness part

    Networks of the Shell Group and Saudi Aramco

    Solar Business


  • Managem

    ent StrategiesBusiness A


    anagement Resources

    Corporate G

    overnanceFinancial and C

    orporate Data


    Returns from Business Activities

    2 Our Road8 Showa Shells Value Creation

    Non-Financial Highlights andFinancial Highlights

    12 Management Strategies12 Group CEO Interview18 Message from the Group CFO20 Business Activities20 Progress of the Medium-Term Business

    Action Plan22 Oil Business30 Energy Solutions Business 32 Solar Business 38 Electric Power Business

    40 Management Resources40 Strengthening Human Resources46 Safe Operation and Stable Supply49 Environmental Preservation and

    R&D Activities54 Community and Social Contribution

    Activities56 Corporate Governance63 Financial Section and

    Corporate Data


    Communities and society

    Global environment


    Solar module sales

    Development, main-tenance, operation, and sale of solar power plants


    Business Activities

    power plants



    ManufacturingLubricants and asphalt

    CSR Book 2015 (available as PDF only)

    CSR Book 2015 contains detailed non-

    fi nancial data and information on the

    corporate social responsibility (CSR) activities

    conducted to the benefi t of Showa Shells

    various stakeholders, some of which are not

    included in Corporate Report 2015.






    1Showa Shell Sekiyu K.K. Corporate Report 2015

  • Our Road

    1985Establishment of Showa Shell Sekiyu K.K.

    Looking to the Energy ofthe FutureIn the 30 years since the establishment of Showa Shell Sekiyu,

    energy demand has increased signifi cantly. This demand is

    expected to continue growing into the future due to population

    growth and economic development in many regions around the

    world; and society will likely remain dependent on oil and other

    fossil fuels.

    However, this rise in energy consumption has caused higher

    greenhouse gas emissions, which has led to our planet having to

    face up to the serious issue of global climate change.

    The Showa Shell Group has continuously evolved in response

    to such energy-related issues: while we were just an oil company

    30 years ago, we have since transformed our business portfolio,

    allocating resources to developing eco-friendly energy sources.

    2 Showa Shell Sekiyu K.K. Corporate Report 2015

  • Continually Rising Global Energy Demand and CO2 Emissions




    Natural gas

    Nuclear power


    Solar/geothermal power



    (Million Tons) (Billion t-CO2/Year)

    1990 2012 20402020











    Based on World Energy Outlook 2014 New Policies Scenario, International Energy Agency

    CO2 emissions from energy usage(right axis)


    Showa Shell Sekiyu K.K. Corporate Report 2015 3

  • 2011Oil Business: Closure of Keihin Refi nery Ohgimachi Factory

    Energy Solutions Business: Start of Operations at the Kunitomi Plant,

    the Worlds Largest CIS Thin-Film Solar Module Factory

    Our Road

    Turning Point for anEnergy CompanyIn 2011, we closed the Keihin Refi nerys Ohgimachi Factory, which

    accounted for more than 20% of the Showa Shell Groups refi ning

    capacity. We decided to close the facility one step ahead of the

    industry to optimize supply capacity. Clearly holding our future

    business vision in mind, we shifted refi ning assets into another use

    to create new value, as the domestic oil market faced declining

    demand. A part of the Ohgimachi site was assigned to our electric

    power business (part of the Companys Energy Solutions Business),

    and the resulting Keihin Biomass Plant is scheduled to commence

    operations at the end of 2015.

    It was also in 2011 when we started operations at the

    worlds largest CIS thin-fi lm solar module production factory, the

    Kunitomi Plant in Miyazaki Prefecture. This move signaled the full-

    fl edged start of our solar business. The Energy Solutions Business

    faced a diffi cult business environment at its outset, but was able to

    survive and become profi table in 2013, supplying society with

    eco-friendly energy.

    2011 was a year in which the Showa Shell Groups two main

    businesses made leaps forward to secure future growth.

    4 Showa Shell Sekiyu K.K. Corporate Report 2015



    2010 2011 2012 20142013








    (Yen Billion)

    Oil Business (CCS operating income) Energy Solutions Business Other and adjustment Consolidated CCS operating income

    Operating Income (Loss) by Segment

    5Showa Shell Sekiyu K.K. Corporate Report 2015

  • 2015Establishment of New Group Management Philosophy

    Our Road

    Group Management Philosophy

    With our energy, we energize the future.

    In 2015, the start of our new 30-year journey, we established

    a new Group Management Philosophy, which embodies the

    commitment of Showa Shell Group employees to enrich society

    by providing the energy needed in the coming era.

    The Showa Shell Groups mission is to provide a stable supply

    of energy that supports peoples everyday lives, and spread the

    usage of new energy that addresses environmental issues on a

    global scale. In working to fulfi ll this mission, we will muster all our

    management resources, including strong relationships with business

    partners, technologies developed in our long history, and human

    resources that have grown and succeeded amidst a changing

    business environment. Going forward, the Showa Shell Group will

    continue to create its own unique value through an energy supply.

    6 Showa Shell Sekiyu K.K. Corporate Report 2015

  • 2012 2022

    CO2 reductions from use of produced CIS thin-film solar modules*2

    CO2 reduction volume

    CO2 reductions from use of CIS thin-filmsolar modules equals CO2 emissions frombusiness activities (offset)

    CO2 reductions from promotion of energy conservation and development of high-value-added oil products

    CO2 emissions from business activities*1

    Business Portfolio for Reducing CO2 Emissions

    *1. Calculated using average CO2 emission volumes from operations (all activities spanning from crude oil procurement to product sales) from 2012 to 2014.

    *2. Calculated based on annual production capacity of solar module plants (450 MW for 2012, 900 MW for 2013 onward) with the usable life of solar modules set at 20 years and the volume of CO2 emission reductions per module per year set at 524 g-CO2/kWh (from Voluntary Industry Rules Related to Indication (Fiscal 2014 edition), Japan Photovoltaic Energy Association).


    7Showa Shell Sekiyu K.K. Corporate Report 2015 7

  • 8

    Showa Shells Value CreationOn April 1, 2015, Showa Shell unveiled its new Group Management Philosophy: With our energy,

    we energize the future. This philosophy was chosen as it paints a clear and actionable picture of the

    future of the Showa Shell Group. The new philosophy is accompanied by fi ve corporate principles:

    Social Responsibility, Customer Focus, Innovation, Vitality, and Sustainable Growth. These are values

    that we have worked under in the past and that we will continue to leverage into the future.

    The Showa Shell Group will continue to move ahead to create a sustainable society under this

    new Group Management Philosophy.

    Group Management Philosophy

    With our energy,we energize the future.

    Five Corporate Principles

    Social Responsibility

    We contribute to thriving social development through the steady

    supply of energy that society needs.

    Customer Focus

    We aim at being trusted and appreciated by our customers at all

    times, thinking and acting from their point of view.


    Through the development of innovative solutions, we constantly

    challenge the improvement in the quality of our products and



    By combining the energy of people working together, we are

    able to deliver a corporate culture full of vitality and motivating

    job opportunities.

    Sustainable Growth

    For all stakeholders, we manage our company with integrity and

    pursue sustainable development of society and the company.

    Showa Shell Sekiyu K.K. Corporate Report 20158

  • Managem

    ent StrategiesBusiness A


    anagement Resources

    Corporate G

    overnanceFinancial and C

    orporate Data


    Non-Financial Highlights

    Group refi neries play an important role in providing a stable supply of oil products. We take steps to ensure safe and effi cient operations, and we are also investing in improving the energy effi ciency of the facilities used in orderto reduce our environmental footprint. At the same time, we also develop, manufacture, and sell eco-friendly oil products and solar modules to help our customers choose eco-friendly energy. We are working to lower the environmental impact from our operations across the supply chain. The consolidated number of employees includes employees at Showa Shell Sekiyu K.K., Oil Business consolidated subsidiaries in refi ning and other business activities, Solar Frontier K.K., and other Group companies. Employee numbers grew rapidly up until 2011 in conjunction with preparations for the start of operations at the Kunitomi Plant, Solar Frontiers fl agship solar module manufacturing plant. We strengthened corporate governance by increasing the ratio of outside directors on the Board of Directors and appointed independent directors earlier than other Japanese companies. In June 2015, we reformed our corporate governance systems to more clearly separate management supervision and business execution functions. With these foundations and through these efforts, the Showa Shell Group is striding forward in search of higher corporate value.

    Number of Employees (Consolidated / Non-Consolidated) Ratio of Outside Directors to Total Directors

    The consolidated number of employees rose rapidly up until 2011 due largely to increases in employees at Solar Frontier. Safety and compliance activities target all Group employees.

    The Company has increased the ratio of outside directors. In addition, it increased the number of independent directors to two in 2009 to ensure that management is transparent and that the interests of general shareholders are protected.

    20102009 2011 2012 2013 2014






    50.0 50.0 50.0 50.0



    Capacity Utilization Ratios of Group Refi neries*1 /Total Recordable Case Frequency*2

    Capacity utilization ratios of Group refi neries remained high due to the low occurrence of occupational accidents and unplanned shutdowns, and the Group has thus continued to meet its top priority of ensuring the safe refi nery operations and a stable product supply.

    (%) (%)

    *1. Total for Yokkaichi Refi nery, Keihin Refi nery, and Yamaguchi Refi nery*2. Per 1 million labor hours: Figures include Showa Shell Group companies and business partners, and

    recordable cases of all occupational accidents, including those that do not result in lost work days.

    20102009 2011 2012 2013 2014






    5,4395,761 5,947 5,848 5,829 6,039

    939 930 1,007 946 953 862

    (People) (%)

    20102009 2011 2012 2013 2014






    86.3 84.291.6 94.6







    1.41.0 0.8



    Consolidated Non-consolidated

    Domestic sales Overseas sales

    Capacity utilization ratios of Group refi neries Total recordable case frequency (right axis)

    Solar Module Shipment VolumesCO2 Emissions / Unit Energy Consumption (Group Refi neries)(Thousand t-CO2/Year) (Unit Energy Consumption) (MW)

    20102009 2011 2012 2013 2014






    5,641 5,673

    4,754 4,845 4,820






    7.90 7.96 7.67 7.89 7.67 7.63

    5,872 1,000




    020102009 2011 2012 2013 2014

    Unit energy consumption: Energy consumption (kiloliters of crude oil equivalent) / refi ned crude oil and feedstock (megaliter)

    Showa Shell is pursuing reductions in CO2 emissions across theentire supply chain. Unit energy consumption is an indicator being employed as a measure to reduce the environmental footprint of Group refi neries.

    Since the start of operations at the Kunitomi Plant in 2011, solar module shipment volumes grew rapidly. Since 2012, sales have been focused on the domestic market in the wake of the feed-in tariff scheme for renewable energy.

    CO2 emissions Unit energy consumption (right axis)

    Years ended December 31

    9Showa Shell Sekiyu K.K. Corporate Report 2015

  • 10

    Financial HighlightsShowa Shell Sekiyu K.K. and Consolidated SubsidiariesYears ended December 31

    Ordinary Income (Loss) Net Income (Loss) After Taxes

    Ordinary loss and net loss were recorded in 2014 largely due to the signifi cant inventory valuation losses in the Oil Business during the fourth quarter. CCS ordinary income declined year on year, but still remained positive.

    (Yen Billion) (Yen Billion)















    9020102009 2011 2012 2013 2014


    20102009 2011 2012 2013 2014










    Ordinary income (loss) CCS ordinary income (loss)

    Crude Oil Price Foreign Exchange Rate

    The price of Dubai crude oil began plummeting in September 2014 due to concerns over a supply glut stemming from the rise in shale gas production in the United States and the decision by the Organization of the Petroleum Exporting Countries (OPEC) to forgo reducing oil production, and the potential that the stagnant global economy would cause a decline in demand. While the value of the Japanese yen depreciated due to the infl uences of the additional monetary-easing measures by the Bank of Japan, the fall of the crude oil price outpaced the yens depreciation. As a result, the Company was forced to record signifi cant inventory valuation losses during the fourth quarter.

    (USD/Barrel) (JPYUSD)

    20102009 2011 2012 2013 2014










    020102009 2011 2012 2013 2014

    Net Sales

    Net sales in the Oil Business, which accounts for 90% of total net sales, rose in 2014 due to year-on-year increases in oil product sales volumes. Operating income in the Oil Business (CCS operating income) decreased primarily due to lower profi t margins in the domestic oil product market in the fi rst and fourth quarters. The Energy Solutions Business continued to secure solid operating income during 2014, almost at the same level as in 2013.

    (Yen Billion)

    20102009 2011 2012 2013 2014






    2,022.5 2,346.0

    2,771.4 2,629.2

    2,953.8 2,997.9

    Operating Income (Loss) by Business(Yen Billion)







    26.6 21.713.8 17.6

    2011 2012 2013 2014






    Oil Business (CCS operating income*) Energy Solutions Business

    * CCS operating income (operating income on a Current Cost of Supply basis): Operating income based on costs excluding inventory valuation effects

    For fi nancial and operations data,

    please refer to pages 6489.

    10 Showa Shell Sekiyu K.K. Corporate Report 2015

  • Managem

    ent StrategiesBusiness A


    anagement Resources

    Corporate G

    overnanceFinancial and C

    orporate Data


    Return on equity was negative in 2014 due to the net loss. When deciding investments, the Company considers capital productivity and ensures returns that match investment risks.

    In accordance with the basic policy of issuing stable and attractive dividends to shareholders and through periodical reviews of medium-term cash fl ows, the Company decided to raise dividend payments by 2 per share in 2014, following the increase in 2013.


    Return on Equity (ROE) Net Income (Loss) after Taxes per Share / Dividends per Share(%) (Yen)

    20102009 2011 2012 2013 2014















    4020102009 2011 2012 2013 2014

    Operating cash fl ow Investing cash fl ow(Cash out basis)

    Cash dividends paid(Cash out basis)

    Cash Flow / Cash Dividends Paid Gearing Ratio(Yen Billion) (%)

    20102009 2011 2012 2013 2014






    53.9 53.850.7 49.8


    Robust operating cash fl ows were once again secured in 2014 due to contributions from both businesses. Even after undertaking capital investment for operational maintenance and future growth opportunities in accordance with the Medium-Term Business Action Plan, free cash fl ow still remained positive and exceeded the amount of cash dividends paid. The gearing ratio on December 31, 2014, improved year on year following interest-bearing debt reduction.

    Gearing ratio = Net interest-bearing debt / (Capital employed Cash and deposits)

    Total Assets Total Shareholders Equity / Shareholders Equity Ratio

    Total assets on December 31, 2014, were down from a year earlier as the drop in crude oil price resulted in decreases in notes and accounts receivabletrade and inventories. Total shareholders equity declined following the payment of dividends and the net loss. Consequently, the shareholders equity ratio declined 0.1 percentage point year on year, to 23.1%, on December 31, 2014.

    (Yen Billion) (Yen Billion)

    20102009 2011 2012 2013 2014






    1,172.7 1,193.1 1,208.4 1,233.11,295.8












    20.1 20.1


    21.2 20.3


    23.2 23.1

    240.2 249.8235.5

    20102009 2011 2012 2013 2014

    20102009 2011 2012 2013 2014



















    Total shareholders equity

    Net income (loss) after taxes per share

    Shareholders equity ratio (right axis)

    Dividends per share (right axis)

    Total shareholders equity = Total net assets Minority interestsShareholders equity ratio = Total shareholders equity / Total assets


    11Showa Shell Sekiyu K.K. Corporate Report 2015

  • 12

    Group CEO Interview

    Tsuyoshi KameokaRepresentative Director, President, Group CEO

    Aiming to become a truly competitive group company

    with a transformative mind

    Brief career history

    After joining Showa Shell in 1979, Tsuyoshi Kameoka

    served in divisions including domestic fuel sales, human

    resources, and oil product trading. He also worked in

    oil product trading at Shell International Trading and

    Shipping Company Limited in the United Kingdom. He

    has assumed a number of senior roles over the years,

    including Oil Products Division Manager in 2003,

    Senior Offi cer and Kinki Area Manager in 2005,

    Executive Offi cer and Kinki Area Manager in 2006,

    Executive Offi cer and General Manager of the Sales

    Division in 2008, and Corporate Executive Offi cer

    overseeing all sales divisions in 2009. He then subse-

    quently rose to the position of Oil Business Chief

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

    he was appointed Representative Director, President,

    Group CEO.

    12 Showa Shell Sekiyu K.K. Corporate Report 2015

  • Managem

    ent StrategiesBusiness A


    anagement Resources

    Corporate G

    overnanceFinancial and C

    orporate Data


    Q&A with new Group CEO Tsuyoshi Kameoka on his vision and thoughts

    about the business.

    In 2014, the business environment changed drastically, and performance sufferedas a result. In this diffi cult environment, how did Showa Shell act, and how do you evaluate the Companys results

    Q 1

    The Oil Business created results that will fuel future growth even in adverse conditions.

    New regulations that came into effect on March 31, 2014*1 ,

    reduced Japans overall refi ning capacity, signaling a turning point

    for the domestic oil products market. In the fi rst quarter, prior to this

    capacity reduction, we suffered from low profi t margins due to an

    unfavorable supply and demand situation. In the second quarter,

    price increases following the consumption tax rate hike caused a

    temporary decline in demand. While the impact of these factors

    began to ease during the summer, we were again placed in a

    diffi cult situation by a sharp drop in crude oil prices during the fourth

    quarter. As oil products sales prices fell before the fall of crude oil

    costs, our profi t margins decreased substantially, leading to a year-

    on-year decline in CCS operating income*2.

    In response to these harsh business conditions, we continued

    to drive the Dantotsu Project forward by introducing new

    cutting-edge products and services and reinforcing structural cost

    competitiveness from a medium-term perspective. The benefi ts of this

    project became clear during 2014, and I am now confi dent that we

    will be able to produce competitive results even if this harsh business

    environment continues.

    *1. Reduction of refi ning capacity of Japans oil industry on March 31, 2014: The Law for Promoting Use of Non-Fossil Energy Resources and More Effective Use of Fossil Energy Resources by Energy Providers (Sophisticated Methods of Energy Supply Structures Law) required domestic oil refi ners to bring their oil refi ning facilities into compliance with specifi c technical standards by March 31, 2014. The aim of this requirement was to improve the competitiveness of Japanese refi neries on the global stage.

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

    The Energy Solutions Business performed solidly in the face of adversity.

    The current feed-in tariff (FIT) scheme for renewable energy

    continues to stimulate demand in the domestic solar market. While

    the purchase price of solar power under this scheme is subject to a

    phased reduction, the impact on the Groups earnings was limited

    through to the end of 2014, and as a result our margins remained

    high, even when compared to our international peers. However,

    power companies have not been able to issue permissions for grid

    connections at a pace that can keep up with solar power

    installations, and there have also been issues with grid capacity

    limitations. These issues have consequently impacted the construction

    of solar power plants. As a result, our subsidiary, Solar Frontier,

    recorded a year-on-year decrease in shipment volumes in 2014,

    as the Japanese market is currently this companys main target.

    Despite this, Solar Frontier was able to maintain the same level of

    income as in the previous year. This accomplishment was a result

    of Solar Frontiers continuous effort to reduce production costs,

    despite being a latecomer to the market. In this harsh environment,

    I am pleased that Solar Frontier continued to move forward,

    determining what actions it could take in the situation it faced.

    In the electric power business, as we were relatively quick to

    construct generation and sales systems, we had accumulated a

    signifi cant amount of expertise in this area, which we were then able

    to utilize in order to secure stable earnings in 2014. The stable

    earnings of this business supported the Group in the wake of

    diffi culties faced by the Oil Business and the solar business.

    (Yen Billion)

    Operating Income (Loss) by Business





    26.6 21.713.8 17.6



    2012 2013 2014 2015 (Forecast)*






    Oil Business (CCS operating income) Energy Solutions Business

    * Based on performance forecast released on May 14, 2015

    13Showa Shell Sekiyu K.K. Corporate Report 2015

  • 14

    Showa Shell formulated its new Group Management Philosophy as the Company marked its 30th anniversary. Could you please explain the background of this new philosophy and the steps leading up to its creation

    The new Group Management Philosophy leveraged input from all Group employees.

    The Showa Shell of today was born in 1985 through the merger of

    Showa Oil Co., Ltd. and Shell Sekiyu K.K. When the companies

    merged 30 years ago, domestic oil demand was rising rapidly,

    presenting a very different environment from today. In formulating the

    new Group Management Philosophy, we received input from over

    5,000 Showa Shell Group employees about the values we have

    held over these 30 years, the ones we should preserve over the

    years to come, and new values that we should take on going

    forward into the next 30 years.

    This input was compiled into the new Group Management

    Philosophy: With our energy, we energize the future. When we

    say our energy, we mean both the literal energy generated through

    Showa Shell Groups business and the fi gurative energy generated

    by Group employees.

    We will keep our focus of business on creating value through energy.

    When Shell entered Japan in 1900, it was in the business of selling

    candles and kerosene. Over the years, it continued to evolve its

    business, always keeping an eye on social change and remaining

    a step ahead of the times. No matter how the Company has

    changed, though, energy always remained a central part of its

    business. Providing society with the type of energy it needs has

    always been our reason for existence, and will continue to be so into

    our future.

    The oil business is not a high-tech business like the solar

    business, which is characterized by the constant evolution of

    technology. Oil refi ning technology today is basically the same as

    it was 20 or even 30 years ago, and it is more challenging for oil

    companies to tangibly differentiate their products. The value of

    Showa Shell Groups oil business lies in our ability to bring together

    expertise from across the supply chain, refi ne each drop of oil in

    the most effi cient way possible, and deliver this to customers safely

    and stably.

    When Showa Shell was founded 30 years ago, it was an oil

    company. Since then, however, the Company has transformed into

    an energy company that covers solar, power generation, and oil,

    and we may even be engaged in different businesses 30 years from

    now. Going forward, I want the Showa Shell Group to continue to

    be a company whose employees care about our values and help

    resolve social issues through providing a supply of energy that

    matches the needs of society at any given time.

    Q 2

    The Medium-Term Business Action Plan continues to move forward. How do you evaluate the progress of the plan and what challenges do you expect to encounter going forward

    We will develop the most profi table oil business in Japan.

    To begin with, we are strengthening our existing businesses in the

    pursuit of organic growth. We are taking steps to better match our

    current services to customer needs while also nurturing our people,

    including employees of our contract dealers. This has enabled us to

    drive forward strategies to secure stable sales even amidst declining

    demand, manifested in our strong sales volumes. We are also

    continuing to push forward with our Dantotsu Project, which targets

    structural improvements in cost competitiveness. This project has set

    the goal of improvements of 26.0 billion or more over a three-year

    period from 2013, and we successfully achieved this goal a year

    early. This all points to steady progress in terms of organic growth.

    We are also incorporating new types of earnings

    opportunities through what we call Step Changes. One signifi cant

    project we have completed in this area is the integration of our

    liquefi ed petroleum gas (LPG) operations with those of a group of

    industry peers. Approximately 80% of the LPG we sell is imported.

    The Middle East has traditionally been the primary source for LPG,

    but in recent years we have seen substantial change in the

    circumstances surrounding global LPG supply. A prominent factor

    behind such change is the rise in LPG produced from shale gas in

    North America. In this changing environment, we integrated our LPG

    operations with three of our peers with the aim of boosting

    profi tability by enabling us to leverage economies of scale while

    diversifying procurement sources. This project was completed in just

    over a year, and I commend all those involved for successfully

    completing this example of a Step Change.

    In the Oil Business, while we cannot stop the decline in domestic

    oil product demand, we can change the type of oil products we

    manufacture by fully utilizing our refi neries. For example, gasoline

    components can be used to manufacture petrochemicals. Given the

    Q 3

    14 Showa Shell Sekiyu K.K. Corporate Report 2015

  • Managem

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    anagement Resources

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    We aim to become a global leader in the solar business.

    ongoing rise in petrochemical demand in Asia, we decided

    investments to install additional facilities in our refi neries to convert

    gasoline components into petrochemical production.

    We are also forming business alliances with other companies.

    The Groups Keihin Refi nery has been linked via pipeline to

    TonenGeneral Sekiyus Kawasaki Refi nery, for example. By

    expanding usage of this pipeline, feedstock will be shared between

    the two facilities in the event that either fi nds itself lacking, which will

    allow for improved profi tability.

    In addition, in May 2015, we reached an agreement with

    Cosmo Oil Co., Ltd. to form a business alliance between our

    respective refi neries in Yokkaichi. Through this alliance, synergies

    will be maximized between the two facilities in order to become

    more competitive in the global market. While domestic oil product

    demand continues to decline, it will still be important to secure a

    stable supply of oil products going forward. That means we will

    need to fi nd ways to further improve operational effi ciency, and this

    needs to be done by thinking beyond Showa Shells current business

    framework. For this reason, we are always searching for the best

    possible answer to how Showa Shell should move forward in the

    future. We are considering alliances with other companies on a

    regional, businesses line, and corporate basis.

    Japan introduced the current FIT scheme for renewable energy in July

    2012, and demand for solar power remains strong today. However,

    the purchase price for renewables is being reduced in phases and

    the rules of the scheme itself have also been revised, raising hurdles

    for operators looking to construct new solar power plants. Despite

    this, solar module demand is expected to remain strong for at least

    three or four years. This is because the capacity of all the solar

    power plant projects currently approved to use the FIT scheme is

    roughly 70 GW. Even if only half of these projects are actually

    carried out, it will still create strong solar module demand. Overseas,

    meanwhile, demand is projected to keep growing. For this reason,

    Solar Frontier is developing its business area more into the global

    market, while also focusing on the Japanese market. Cost

    competitiveness is of the utmost importance to succeed on the global

    stage. Currently, Solar Frontiers costs are around the same level as

    those of Chinese and U.S. manufacturers. In other words, we can

    compete on the global stage, but we are not the unrivaled market

    leader. To help boost Solar Frontiers cost competitiveness, we

    constructed the Tohoku Plant. While this plant is much smaller than

    the fl agship Kunitomi Plant, it has been positioned as a model plant

    to achieve the levels of cost competitiveness that will be essential for

    our full-fl edged expansion into the global market. We aim to reduce

    unit production cost by 30% compared to the Kunitomi Plant. Once

    we achieve this level of cost competitiveness, we plan to start

    manufacturing our products in the demand-rich regions where they

    will be sold, namely North America, Asia, and Europe.

    Profi t from panel production and sales alone can be limited, so

    some international manufacturers have developed a build, operate,

    and transfer (BOT) business model to build and sell solar power

    plants themselves, and thereby increase profi tability. Conversely,

    some international manufacturers, which tend to specialize in

    manufacturing and sales, are seeing low profi ts. Solar Frontier

    stands between these two business models. With the aim of

    improving profi tability, Solar Frontier has successfully started on a

    BOT path by selling a solar power plant it had built and operated in

    Miyazaki Prefecture.

    While it continues to accumulate know-how in Japan, it is

    simultaneously expanding operations overseas. Solar Frontier

    acquired solar power projects of 280 MW in the United States, and

    plans to build-out and sell those plants. I believe these initiatives

    represent steady progress in the Medium-Term Business Action Plan,

    which is designed to guide us to becoming a global leader in the

    solar business.

    15Showa Shell Sekiyu K.K. Corporate Report 2015

  • 16

    We have continued to effi ciently expand the electric power business.

    In the electric power business, Showa Shell has the advantage of

    being able to utilize idle land where oil-related facilities used to

    stand. Former sites of oil terminals and refi neries in the Keihin area

    are suited to the construction of large-scale power plants thanks to

    their location near the Tokyo metropolitan area (the most energy-

    hungry area in Japan), their harbor facilities, which can receive fuel

    shipments, as well as having facilities to store this fuel. The Ohgishima

    Power Station, a natural gas-fi red thermal power plant built in

    collaboration with Tokyo Gas Co., Ltd., on a former oil storage site

    in this area, is highly effi cient thanks to its sophisticated equipment

    and its scale.

    April 2016 will see the complete deregulation of the electricity

    retail market in Japan. The electric power business entails going

    directly to the homes or offi ces of potential customers, and so it is

    fundamentally different from our oil business in which customers visit

    our service stations to purchase fuel. For this reason, we intend to

    utilize the sales network of our LPG business, which involves

    delivering products directly to customer homes, to strengthen retail

    sales in the electric power business.

    We have also been accumulating knowledge about how to

    balance supply and demand since the Ohgishima Power Station

    started operations in 2010, and this knowledge is now also one of

    our strengths.

    Looking to the future, we will start up a biomass power plant in

    2015, and the capacity increase at the Ohgishima Power Station will

    be completed in early 2016. With these moves, we are developing

    unique power resources, and are steadily putting into action the

    measures outlined in the Medium-Term Business Action Plan.

    What do you believe is the secret behind Showa Shells steady progress

    We make fast decisions and are transforming our corporate culture.

    One reason behind our steady progress is the speed at which we

    make decisions. In the Oil Business, for example, only fi ve corporate

    executive offi cers related to business lines are involved in making

    decisions, and we can communicate easily, which makes for fast

    decision making. We employ a similar approach to form executive

    management teams for other businesses as well. Another reason for

    our success is our corporate culture. We are working to transform

    our corporate culture as we also strengthen our various businesses.

    A major initiative in this regard is the Dantotsu Project. While this

    project may seem like it is merely aimed at cutting costs, it is much

    more than that. The goal of the Dantotsu Project is to transform

    Showa Shell into a corporate group unrivaled in terms of competitiveness.

    To this end, we are working to foster a corporate culture of

    pursuing effi ciency and acting from the perspective of ensuring

    success for the entire company. I believe that this type of culture

    is crucial to realizing medium- to long-term improvements in

    competitiveness. In determining what areas need improvement, we

    analyzed our annual employee opinion survey*3 conducted in

    2012. The survey contains around 80 areas, and in 2012 four

    areas in particular were indicated as requiring the most improvement:

    collaboration that spreads across departmental boundaries;

    learning from the successes of other employees and companies;

    improvement of workfl ow processes; and elimination of unnecessary

    work procedures, which both relate to our constant quest to boost

    work procedure effi ciency. These areas were designated as key

    indicators for the improvement of our corporate culture, and

    initiatives that show these traits were prioritized when implementing

    the Dantotsu Project.

    Q 4

    16 Showa Shell Sekiyu K.K. Corporate Report 2015

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    What are your thoughts on the Companys corporate governance system

    We have developed a corporate governance system with both braking and accelerating functions.

    Five of our eight directors are outside directors, so we have excellent

    oversight. But oversight is not the only function of the Board. We

    receive a wealth of advice from our outside directors to improve

    corporate value. For example, our outside directors that have

    experience in the Shell Group and Saudi Aramco have a great deal

    of global experience, and are therefore able to provide knowledge

    about the practices of different countries and regions around the

    world. While their advice comes from different perspectives, it is an

    invaluable asset in our business in dealing with a global product, oil.

    The Board of Directors also has two independent directors that

    make meaningful contributions by providing us with business advice

    while fulfi lling their duty of protecting the interests of general

    shareholders. Mr. Masuda, one of the independent directors, offers

    opinions and advice grounded in the wealth of experience

    accumulated during his many years in the energy business. Mr.

    Nakamura, our other independent director, has an abundance of HR

    experience at a durable goods manufacturer, giving us a different

    world view than we are used to. As Showa Shell has devoted most

    of its history to manufacturing oil products, a form of consumable

    good, his suggestions have been a great help due to the

    applicability of his manufacturers perspective to our solar business.

    Mr. Nakamura also provides advice on HR strategies.

    Participating in meetings with an international perspective

    means nothing if you do not voice your opinion. Our Board of

    Director meetings, however, are always very lively. If you think of the

    supervisory functions of the Board of Directors that arise from its

    membership as the brakes of management, then lively discussions

    would have to be the accelerator. Our governance system has

    both the braking and the accelerating functions.

    On June 1, 2015, we further strengthened our corporate

    governance system by separating the position of Group CEO, the

    highest authority on business execution, from the position of

    chairman of the Board of Directors, which holds responsibility for

    supervising management. I believe this system will allow for more-

    effective supervision coupled with fast and aggressive business


    Q 5

    What are your policies with regard to shareholder returns

    We issue stable and attractive dividends while also advancing the Medium-Term Business Action Plan.

    Showa Shell has long continued to practice the basic policy of

    increasing the value of the capital entrusted in the Company by its

    shareholders, and then returning this increased value to these

    shareholders in the form of stable and attractive dividends. In

    deciding dividend levels, we do not merely consider earnings from

    a single fi scal year. Rather, we also look at Medium-Term Business

    Action Plans and cash fl ow as well as the need to maintain a robust

    fi nancial position going forward. Based on a comprehensive

    evaluation of these factors, we determine a dividend level that is

    attractive and can also be paid sustainably.

    Going forward, we will advance the Medium-Term Business

    Action Plan in order to maintain a robust fi nancial position and

    generate strong cash fl ow, thereby enabling us to continue to issue

    stable and attractive dividends.

    Q 6

    It is important to act from the perspective of optimizing the

    operations of the entire company. Should the manufacturing, supply,

    and sales divisions of the Oil Business focus only on their own

    individual performance, it is possible that they will fail to think and

    act in the best interest of the entire company. They may fail to see

    that, for example, even if costs of the distribution division increase,

    the sales division may be able to create profi ts that exceed the

    incremental rise in costs by achieving higher sales volumes. Through

    our various projects, we have succeeded in constructing the

    foundations necessary for resolving issues from a company-wide

    perspective, and the results are indicated by the improvement of all

    four prioritized items on the 2014 employee opinion survey.

    I led the Dantotsu Project in my previous position as the COO

    of the Oil Business. Now that I am the Group CEO, I want to extend

    this project to the solar business and the electric power business, and

    eventually to affi liates and business partners. An example of this

    extension is the practice of targeting LPG customers in making retail

    electricity sales as I previously mentioned.

    *3. Employee opinion surveys are instituted each year and administered to all Showa Shell Group employees. For further details, please refer to page 44.

    17Showa Shell Sekiyu K.K. Corporate Report 2015

  • 18

    Financial Position for Supporting Growth StrategiesProfi ts were secured in both the Oil Business on a CCS basis*1 and

    the Energy Solutions Business in 2014. We focus on CCS operating

    income as an important income performance indicator for which

    management is held responsible, as it refl ects the Companys

    substantive underlying earnings. While underlying profi tability was

    positive on this basis, on a headline consolidated profi t basis, we

    posted a net loss in 2014. This outcome was mainly due to the

    substantial inventory valuation losses that occurred in the Oil

    Business as a result of the steep crude oil price decline throughout the

    fourth quarter. Cash fl ow from operations, another of our fi nancial

    key performance indicators, remained at a very healthy level,

    including a signifi cant contribution from the Energy Solutions

    Business. This enabled us to fund all our planned expenditure for

    future growth and an increase in the dividend. In addition, free cash

    fl ow was once again positive, resulting in an improvement in the

    gearing ratio*2 to approximately 38% compared to the previous

    year-end. Therefore, we are confi dent that our fi nancial position is

    currently robust enough to cope with unexpected impacts from

    changes in the business environment and to support additional

    funding for new growth investments or other purposes. We also

    retained our strong credit ratings, and it is a priority to maintain these

    sound ratings for the future.

    Message from theGroup CFO

    Douglas WoodRepresentative Director,Chief Financial Offi cer

    We seek to achieve robust,

    sustainable growth through

    the balanced allocation of

    management resources and

    investment strategies based

    on sound fi nancial discipline.

    20102005 2006 2007 2008 2009 2011 2012 2013 2014











    (%)(Yen Billion)

    Cash Flow / Gearing Ratio

    Operating cash fl ow Investing cash fl ow Gearing ratio (right axis)

    Rating andInvestment Information, Inc.

    Japan Credit Rating Agency, Ltd.

    Long-term ratings A A

    Short-term ratings a1 J1

    Credit Ratings (As of December 31, 2014)

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

    *2. Gearing ratio = (Interest-bearing debt Cash and deposits)/(Total shareholders equity + Interest-bearing debt Cash and deposits)

    This displays fi nancial soundness by showing the ratio of net interest-bearing debt to used capital.

    18 Showa Shell Sekiyu K.K. Corporate Report 201518

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    In 2015, we expect the stabilization of both crude oil prices

    and domestic oil product margins in the Oil Business and a further

    incremental contribution from our ongoing structural cost

    competitiveness improvement projects. Such factors are expected to

    lead to a year-on-year increase in CCS operating income.

    Performance in the Energy Solutions Business, meanwhile, will likely

    be impacted mainly in the solar business from once-off start-up costs

    of the new Tohoku Plant as well as a reduction in solar module selling

    prices in Japan. We expect these factors to cause a year-on-year

    decrease in operating income. Overall, we anticipate another year

    of healthy operating cash fl ow generation with contributions from both


    Financial Risk Management for Ensuring Continuous Energy SupplyThe Company maintains revolving credit contracts (commitment lines)

    totaling up to 160.0 billion with various fi nancial institutions as part

    of a contingency plan to ensure the liquidity of capital under

    extraordinary circumstances. Of this amount, 150.0 billion is

    committed for the purpose of disaster response. As such, in the event

    that a major earthquake, tsunami, or storm surge were to damage

    our core production facilities, we will have ready access to suffi cient

    fi nancing to resume any operations that may have been halted and

    thereby minimize any impact to our ability to ensure the stable supply

    of energy.

    The Group has secured property and casualty insurance for its

    manufacturing facilities. In addition, we have established guidelines

    for managing fi nancial risks, including foreign exchange risks and

    counterparty credit risks.

    Shareholder ReturnsShowa Shells basic policy on shareholder returns is to distribute

    stable, attractive dividends. When determining the dividend, we

    consider our assessment of current and forecast business performance

    and underlying cash fl ow, taking into account a range of factors

    including the external macro environment, current balance sheet,

    and future investment plans.

    Based on this policy, we decided to raise annual dividends for

    2014 by 2 per share, or 5%, to 38 per share. Going forward,

    we will maintain our focus on disciplined cash management in order

    to continue to distribute stable, attractive dividends, as well as to

    maintain our sound fi nancial position and implement the strategies of

    the Medium-Term Business Action Plan.

    Financial Management under the Medium-Term Business Action PlanThe Medium-Term Business Action Plan calls for operating cash fl ow

    generated during the planning period to be allocated in a balanced

    manner under a framework of three key areas: (1) Capital investment

    to maintain our operations and implement our future growth

    strategies, (2) Maintaining a strong balance sheet, and (3) Providing

    returns to shareholders. To date, operating cash fl ow has been

    consistently robust, and we have been able to strengthen our

    fi nancial position while conducting planned capital investments.

    Accordingly, we are confi dent to say that the Medium-Term Business

    Action Plan is progressing smoothly from the perspective of our

    fi nancial framework as well as operationally.

    Investment decisions are made with emphasis on sound

    fi nancial discipline. In this process, we stringently and carefully

    evaluate the strategic benefi ts, expected risks, and appropriate

    returns of the investment cases in accordance with our internal rules.

    All investments outlined in the Medium-Term Business Action Plan

    have been or will be subject to this process. Additional growth

    investments and increased shareholder returns will depend on

    business performance and the status of operating cash fl ow.

    In 2014, we conducted investments to maintain the operations

    of each business while also implementing growth investments, such

    as the Tohoku Plant in the solar business, and biomass and solar

    power plants as well as the third unit of the Ohgishima Power Station

    in the electric power business. Furthermore, we approved an

    investment to construct a toluene disproportionation process (TDP)

    unit at the Yokkaichi Refi nery to boost production of petrochemicals.

    These all represent signifi cant steps forward to the next growth stage.

    Operating cashflow from EnergySolutions Business

    Operating cashflow from Oil

    Business Dividend

    Care & maintenance

    Strategic investmentfor future growth

    Additional dividend,further strengtheningfinancial position,additional strategic







    0Cash in Cash out

    (Yen Billion)

    Five-Year Operating Cash Flow Forecast and Fund Allocation Plan

    Framework for Capital Allocation

    Financial base

    Cash fl ow from operating activities

    Dividends Investment

    For details, please refer to the section on Business Activities

    from page 20 to 39.

    19Showa Shell Sekiyu K.K. Corporate Report 2015

  • Progress of the Medium-TermBusiness Action PlanIn 2013, Showa Shell formulated the Medium-Term Business Action Plan. Setting forward medium-term targets for each business and

    the action plans for meeting these targets, this plan was designed to help us effi ciently provide society with the necessary energy

    under the prevailing energy business environment. In these two years, from 2013 to 2014, the plan has progressed smoothly,

    despite the highly volatile crude oil and solar markets.

    Framework of Medium-Term Business Action Plan

    Organic GrowthGrowing Existing Businesses Sustaining domestic sales size

    Increasing margins through value creation

    Cost reduction including supply chain improvements

    Step ChangeGrowing through Structural Business Transformations Expand petrochemical business

    Partnerships with other companies

    Goal: Become the most profi table oil company in Japan

    Framework of Medium-Term Business Action Plan

    Winning in Japan

    High-added-value business model

    Technology development for growth

    CIS global platform

    Business scale expansion to 1 GW class Diversify sources of power generation

    Solar business goal: Become a global leader

    Electric power business goal: Expand business scale and sources of power generation

    Oil Business

    Energy Solutions Business

    We offered a sophisticated line-ups of high-value-added products and services

    and advanced the Dantotsu Project, and these efforts have subsequently begun

    producing results. Projects related to Step Changes are also progressing


    The expansion of domestic operations in the solar business proceeded as planned, effectively solidifying its earnings base. We are in the process of advancing measures to further strengthen this earnings base. In the electric power business, we are developing a diverse range of power sources, and new power plants are sequentially coming on-stream.

    Progressprior to2015

    Progressprior to2015

    Business Activities

    20 Showa Shell Sekiyu K.K. Corporate Report 2015

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    Progress of Major Projects

    Structural cost competitiveness improvement measures were completed ahead of schedule in existing businesses, and smooth progress was

    seen in the rationalization of operations and improvement of value through business alliances. In addition, investments for increasing

    petrochemical production capacity were approved to expand new earnings bases.

    Project 2013 2014 2015 2016 2017

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

    Integration of LPG operations

    Mixed xylene production capacity increases

    Overseas petrochemical operations feasibility examination

    Business alliances to rationalize supply systems

    Progress of Major Projects

    We strengthened the cost competitiveness of the solar business as a core element of its overall competitiveness. In addition, the Tohoku

    Plant, which will form the foundation for developing overseas manufacturing sites in this business, was completed on schedule. In the

    electric power business, we decided to invest in new power plants, and the construction of these plants is progressing on schedule.

    Project 2013 2014 2015 2016 2017

    Solar: Tohoku Plant

    Electric power: 3rd unit of OhgishimaPower Station

    Electric power: Biomass plant

    34.5 billion achieved, exceeding the target ahead of schedule


    Surveys and examination

    Evaluation and implementation

    Agreement to examine reached

    Agreement to examine reached

    Surveys and examination completed

    Investment approved

    Integration agreement concluded

    Joint-venture company established, businesses integrated

    Investment approved

    Investment approved







    21Showa Shell Sekiyu K.K. Corporate Report 2015

  • Oil Business Value Chain


    Lubricants and asphaltManufacturing



    Gasoline, kerosene, diesel oil, heavy fuel oil, petrochemicals, and LPG

    Refi ning

    At its three Group refi neries*, the Showa Shell Group refi nes crude oil to produce fuels such as gasoline, kerosene, diesel oil, heavy fuel oil, and jet and marine fuels, as well as petrochemical products such as mixed xylene, benzene, and propylene. In addition, we purchase petroleum products from Fuji Oil Co., Ltd., a business alliance partner.

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

    Showa Shell sells fuels and lubricants mainly through its contract dealers. In addition to customers purchasing our products at 3,339 Showa Shell branded service stations (as of December 31, 2014) located across Japan, we supply petroleum products to industrial users in the manufacturing, transportation, electricity, agriculture, forestry, fi shing, air travel, and shipping industries.

    Showa Shell acts fl exibly and responsively by importing the crude oil that will deliver the highest performance at Group refi neries. This oil comes primarily from major shareholders the Shell Group and Saudi Aramco. As the state-owned oil company of Saudi Arabia, one of the worlds most dominant producers of oil, Saudi Aramco provides a wide range of crude oil from which Showa Shell is able to choose multiple oils, and receive them all in a single shipment.Crude oil procurement

    Masayuki KobayashiExecutive Offi cerOil Business COO

    The Oil Business is facing an increasingly diffi cult business environment in

    which quick and decisive action is crucial to staying competitive. By steadily

    moving forward year after year and completing the objectives of the

    Medium-Term Business Action Plan, we will establish the most profi table oil

    business in Japan.

    Oil products are transported safely and effi ciently.



    Oil Business

    22 Showa Shell Sekiyu K.K. Corporate Report 2015

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    Showa Shells Oil Business primarily operates in the domestic market, which is projected to experience a yearly decline in fuel demand of 12% over the foreseeable future. At the same time, Japans refi ning capacity has declined due to the introduction of the Sophisticated Methods of Energy Supply Structures Law*, which is helping to alleviate the supply glut that has continued to plague Japan, but fi erce competition within the oil industry is expected to continue. It is also possible that the high volatility of natural resource prices seen in 2014 could also occur in the future. In addition, state-of-the-art refi neries with a high capacity for exporting oil products will keep popping up throughout Asia, meaning that Japanese oil companies will be forced to compete with products from overseas in both importing and exporting. To improve profi tability and achieve sustainable growth, the Showa Shell Group will need to continue to understand changes in current operating conditions while remaining future-focused to implement strategies prior to such changes. We have a history of making such signifi cant decisions before the rest of the market. We decided to close the Keihin Refi nerys Ohgimachi Factory, which had a refi ning capacity of 120,000 barrels per day, before the legal mandate to reduce production capacity was imposed by the Sophisticated Methods of Energy Supply Structures Law. Building on our current competitive position achieved through rationalization measures we have already implemented, we are currently driving forward with the Medium-Term Business Action Plan by pursuing further effi ciencies and adding value to existing operations, strengthening alliances with business partners, and expanding the range of revenue opportunities we have access to. Through these efforts, we are aiming to develop business structures that can maintain their competitive edge in any operating environment that may come. To date, our efforts have led to enhanced value through differentiated strategies fusing our capabilities in products, services, and human resources as well as heightened cost effi ciency through radical measures to improve

    structural cost competitiveness across the supply chain. We have also undertaken strategic initiatives with other companies, such as supply and distribution area coordination in partnership with TonenGeneral Sekiyu K.K. Collectively, these efforts have helped improve the profi tability of Showa Shells existing businesses. In addition, in May 2015, we reached an agreement with Cosmo Oil Co., Ltd., to form a business alliance between our respective refi neries in Yokkaichi. Through this alliance, we will optimize facilities at both refi neries to improve competitiveness for Cosmo Oil and Showa Shell. We have also been installing additional facilities for manufacturing xylene and other petrochemicals in the Yokkaichi Refi nery to respond to the growing demand for these chemicals in Asia, for expanding our earnings base by addressing demand trends around the world. Meanwhile, the Companys liquefi ed petroleum gas (LPG) operations were integrated with those of Cosmo Oil Co., Ltd., Sumitomo Corporation, and TonenGeneral Sekiyu to boost effi ciency and reinforce our earnings base. Gyxis Corporation was established through this integration on April 1, 2015. These are all examples of how we are pushing forward with the best strategies based on the individual characteristics of each business fi eld and in accordance with the Medium-Term Business Action Plan, and I believe we have made smooth progress to date. Going forward, we will remain vigilant and responsive to changes in the operating environment as we work to bring the Medium-Term Business Action Plan to a successful conclusion. At the same time, I will help facilitate the innovative aspirations of our employees as we move forward in our quest to become the most profi table oil company in Japan.

    Aim of Becoming the Most Profi table Oil Company in Japan

    (Yen Billion)

    Operating Income (Loss)

    2010 2011 2012 2013 2014







    2,695 2,539

    2,803 2,850

    2010 2011 2012 2013 2014






    45.5 37.7







    Operating income (loss) CCS operating income

    * Sophisticated Methods of Energy Supply Structures Law: The laws full name translates to the Law for Promoting Use of Non-Fossil Energy Resources and More Effective Use of Fossil Energy Resources by Energy Providers. In 2010, this law required oil companies in Japan to bring their oil refi ning facilities in compliance with certain technical standards by March 31, 2014.

    (Yen Billion)

    Net Sales

    23Showa Shell Sekiyu K.K. Corporate Report 2015

  • Faced with a structural decline in demand, Japans oil industry continued to suffer due to excessive refi ning capacity. To address this issue, in 2010, the Sophisticated Methods of Energy Supply Structures Law required Japanese oil companies to meet a mandated installment ratio for heavy oil cracking units capable of creating high-value-added petroleum products from relatively low-value heavy oil. Domestic oil companies proceeded to reduce their refi ning capacity in accordance with this law, and the overall capacity of the Japanese oil industry on March 31, 2014, was 20% lower than the level seen in April 2008, which was the peak of the last decade. While the supply and demand balance in the oil industry temporarily improved thereafter, there is now the possibility of another refi ning capacity glut resulting from declining demand. In light of this, oil companies are now required to improve their cracking unit installment ratio again by March 31, 2017*1. When all domestic oil companies decrease their refi ning capacity in line with the new requirement, the overall refi ning capacity of Japans oil industry is expected to decline by an additional 10%.

    Refi ning Capacity of Japans Oil Industry

    Refi ning and Supply

    Characteristics of Group Refi neries

    Taking into account projected changes in the operating environment, the Showa Shell Group took strategic steps including the installation of additional heavy oil cracking units and closing a refi nery. As a result, Group refi neries are now the most competitive in Japan, and we have production facility structures that are capable of producing relatively large quantities of high-value-added petroleum products from low-priced crude oil. In addition, accurately matching our refi ning capacity to the scale of sales not only allows us to limit fi xed costs, but also helps us maintain capacity utilization ratios that greatly exceed the industry ones. Another source of competitiveness for Group refi neries is their safe and stable operation. Unplanned shut-downs in operations due to facility malfunctions or human error have a signifi cant impact on overall business plans, and worsen fi nancial performance as a result. Furthermore, accidents can result in lost trust from local communities, which can endanger the continuity of facility operations. To constantly pursue further improvements in safety, Group refi neries employ the best practices that the Shell Group implements at their refi neries around the world. Thanks to this, Showa Shell has been able to keep unplanned shut-downs at an industry low.

    By not holding excessive assets, Showa Shell prioritizes stability and effi ciency in its refi nery operations, constantly

    working to improve refi nery competitiveness by fl exibly supplying products in response to the ever-changing needs of

    domestic and overseas markets.

    2008 2014 2017 (Forecast)











    Domestic Refi ning Capacity and Fuel DemandRefi ning Capacity (Thousand Barrels/Day) Fuel Demand (Million KL)

    Fuel demandTotalTonenGeneral GroupJX Group

    Refi ning capacityIdemitsu Kosan

    Showa Shell Group Fuji Oil Other TotalCosmo Oil

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


    Capacity Utilization Ratio of Domestic Refi neries

    2010 2011 2012 2013 2014

















    Group refi neries (Yokkaichi Refi nery, Keihin Refi nery, and Yamaguchi Refi nery)Industry Source: Petroleum Association of Japan

    *1. The installation ratio requirement for heavy oil cracking units was revised and a new installation ratio requirement was defi ned for residual oil processing units.

    Showa Shell Sekiyu K.K. Corporate Report 201524

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    Supply and demand in domestic and overseas petroleum markets are changing all the time, affected by factors such as political and economic conditions, energy trends, and the weather. At Showa Shell, we have developed a system that enables us to ensure a stable and effi cient supply of petroleum products no matter how the market environment may change. Based on market conditions, we determine the optimal mix of petroleum products to be produced, and then select crude oils to be refi ned accordingly. When transporting these crude oils, we realize effi cient operations through coordination with major shareholders the Shell Group and Saudi Aramco. As a result, we are able to keep refi neries operating as planned. We also work to maintain a stable supply to our customers throughout Japan by ensuring safety and effi ciency when transporting petroleum products by sea and over land as well as at storage facilities. While ensuring a stable supply to the domestic market, Showa Shell also exports its products to take advantage of revenue

    opportunities overseas. By leveraging the Shell Groups world-leading global trading network, we are able to export the right products in a quick and fl exible way. Our ability to export was limited after the closure of the Keihin Refi nerys Ohgimachi Factory. However, in February 2014, the refi ning capacity of the Yokkaichi Refi nery was raised by 45,000 barrels per day, meaning that we are now geared for fl exible exports in response to market trends.

    Stable and Effi cient Supply System







    26,952 25,397

    28,030 28,502

    Expansion of Petrochemical Operations to Boost Refi nery Competitiveness and Strengthen Earnings Base

    In the 1990s, when the rising motorization trend drove an increase in gasoline demand, we were quick to respond to the resulting social need by refi tting our refi neries to realize high levels of gasoline production. However, the high ratio of gasoline production recently became an issue due to a continuous decline in gasoline demand that began in the late 2000s. Inverse to this trend, demand for petrochemicals is on the rise in China and other parts of Asia, particularly with regard to paraxylene, a raw material used in producing polyester fi bers and PET bottles, and mixed xylene, from which paraxylene is produced. Looking to boost earnings, Showa Shell is maximizing production of high-value-added mixed xylene by utilizing gasoline distillates. In addition, we approved the construction of toluene disproportionation process (TDP) facilities*2 at the Yokkaichi Refi nery in March 2014 as part of our attempt to provide a more structural response to such fundamental changes in product demand. The TDP facilities will be built by renovating existing facilities at the Yokkaichi Refi nery, allowing us to limit initial investment and realize high investment effi ciency. Scheduled to be operational in 2016, these facilities will increase the total annual

    production volume of mixed xylene at Group refi neries by approximately 30%, or 200,000 tons. Through this project, we will boost the international competitiveness of the Yokkaichi Refi nery while strengthening the Groups earnings base.

    Improvement of Refi ning and Supply System Competitiveness through Business Alliances

    With the aim of improving the global competitiveness of Group refi neries and increasing the Groups profi tability, we are forming business alliances with other companies to rationalize refi ning and supply operations prior to demand declines. We formed an alliance with TonenGeneral Sekiyu for oil product supply in 2013. TonenGeneral Sekiyu owns a refi nery in the city of Kawasaki, which neighbors the Groups Keihin Refi nery. These facilities are currently linked via underground pipelines, which allow for feedstock to be supplied between the two refi neries to maximize the effi ciency of both of their refi ning processes. The scope of this alliance is being expanded to include the operation of crude vessels, depots, and terminals as well as distribution area coordination with the aim of improving supply effi ciency for both parties. In addition, in May 2015, we reached an agreement with Cosmo Oil to form a business alliance for our respective refi neries in

    Yokkaichi, and we will start joint operations by March 2017. This alliance entails halting operations at one of the crude oil distillation units at Cosmo Oils refi nery, and, at the same time, supplying Cosmo Oil with petroleum products and feedstock to optimize the facilities of both companies in the Yokkaichi region and subsequently increase competitiveness for both refi neries. We are also working to maximize the benefi ts of this alliance by expanding the scope of coordination to include not only refi ning facilities, but also offsite facilities, such as storage tanks. The Yokkaichi Refi nery has also been linked to the adjacent Yokkaichi Plant of Mitsubishi Chemical Corporation. By better utilizing the current facilities of both companies as well as residue fl uid, a byproduct of the refi ning process, we have reduced our own energy consumption while increasing production of high-value-added products.

    Shell Groups Global Trading Network













    02009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 20242023


    Forecast of Northeast Asian Demand for Paraxylene


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

    *2. Toluene disproportionation process (TDP) facilities: Facilities for producing mixed xylene and benzene using aromatic compounds such as toluene

    25Showa Shell Sekiyu K.K. Corporate Report 2015

  • We are expanding our customer base by responding to evolving customer needs with the superior products, services,

    and human capabilities born out of Group union.


    In Japan, Showa Shell sells fuels including gasoline, kerosene,

    diesel oil, heavy fuel oil, jet fuel, and marine fuel mainly through its

    contract dealers. In Japans shrinking oil product market, we

    believe that to improve profi tability we must expand our customer

    base by increasing the number of customers that always choose

    Showa Shell products. To expand our customer base in this

    manner, we are developing an even deeper understanding of the

    needs of consumers and industrial users, based on which we


    more-refi ned responses to these needs.

    We respond to the needs of consumers through offering

    attractive service stations, Shell V-Power and other appealing

    products, and a lineup of affordable and convenient services

    including Shell Starlex Card, Ponta joint point cards, Shell-Ponta

    credit cards, and Shell EasyPay. These efforts have resulted in

    praise from visiting customers.

    Industrial users in the manufacturing, transportation, electricity,

    agriculture, forestry, fi shing, air travel, and shipping industries are

    served primarily through contract dealers. In addition, overseas

    supply networks belonging to the Shell Group are utilized to

    provide fueling services on a global scale. We are working

    together with contract dealers to capture customers even in the

    midst of decreasing demand resulting from energy conservation

    efforts and shifts toward different fuel sources, and have expanded

    sales channels focused on middle distillates, such as kerosene,

    diesel oil, and fuel oil A.

    Going forward, Showa Shell will continue to build stronger

    relationships with contract dealers and its various other business

    partners. Leveraging the collective human capabilities of the Group

    and its partners, we will provide consumers and industrial users

    with high-value-added products and services with the aim of

    expanding our customer base.

    Domestic Fuel Sales

    Expanding Our Customer Base by Providing

    Services that Respond to Customer Needs

    26 Showa Shell Sekiyu K.K. Corporate Report 2015

  • Managem

    ent StrategiesBusiness A


    anagement Resources

    Corporate G

    overnanceFinancial and C

    orporate Data

    Shell EasyPayShell EasyPay is a system launched in response to customer

    requests for a means of making fueling and credit card payments

    at service stations quicker and easier. This system employs a

    device that fi ts on a key ring and is equipped with a contactless

    IC chip containing information on fueling patterns and payment

    methods. Fueling and payment can be completed simply by

    touching this device to specialized readers at service stations.

    In addition to the Shell Starlex Card and Shell-Ponta credit

    cards, this system is also compatible with other types of credit

    cards. With Shell EasyPay, customers only have to grab their car

    key, get out of their car, and touch the device to the reader. This

    convenience is appealing to customers, and the number of

    customers using this system is growing rapidly.

    Apr. 2012 Dec. 2014



    (10,000 Registrations)

    Number of Shell EasyPay Registrations

    Shell V-PowerIn July 2014, we launched the new premium gasoline Shell V-Power to

    respond to the desire of drivers to keep their highly valued vehicles

    running as long as possible and in top condition. Shell V-Power employs

    the Shell Groups unique Clean & Protect Technology, which has been

    cultivated through its technical partnership with Ferrari S.p.A. This

    technology helps bring out the full potential of automobiles by effectively

    removing the deposits inside engines that cause lower performance,

    thereby cleaning and protecting engines the more automobiles are driven.

    Shell V-Power has been exceptionally well-received since its release, and

    its sales performance is among the best in the premium gasoline market.

    Moreover, Shell V-Power is now available in 46 prefectures throughout

    Japan, an increase from the 40 prefectures at launch.

    Approximately 60% ofusers said yes.*

    * Responses from 2014 customer feedback survey

    Principal Retail Measures

    Ponta Joint Point Cards and Shell-Ponta Credit CardsAs of December 31, 2014, user numbers of the Ponta joint

    point card had grown to 67.4 million, meaning that roughly

    half of the Japanese population is carrying a Ponta card. This

    reward point system allows users to collect and use points at

    affi liated stores in a wide variety of different industries, all with

    just one card. Winning customer favor by offering high

    convenience, Ponta cards have proven incredibly effective at

    drawing cash-paying customers to our service stations.

    In April 2015, we began issuing Shell-Ponta credit cards,

    which combine the convenience of credit card payments with a

    reward point return rate that is even higher than that of standard

    Ponta cards. The point return rate is one of the highest for any

    joint-point card, and Shell-Ponta credit cards have therefore

    become immensely popular

    among carriers of standard

    Ponta cards as well as new

    users picking up their fi rst

    Ponta card.

    Dec. 2013 Dec. 2014



    (10,000 Cardholders)

    Number of Shell Starlex Cardholders

    Shell-Ponta credit card

    Shell Starlex CardThe Shell Starlex Card is a credit card equipped with a cashback

    feature that provides returns on gasoline purchases. Currently,

    more than 1.2 million customers are carrying this card, and a

    signifi cant number of them also tend to purchase large quantities

    of fuel. In April 2014, the Shell Starlex Card program was

    redesigned to enhance its benefi ts for cardholders by raising the

    rate of cashback to one of the highest levels in the industry, and

    cardholder numbers have increased rapidly as a result.



    Did you feel the difference when using Shell V-Power

    Most Commonly Felt Benefi ts

    No. 1 Increased power54%

    No. 2 Higher fuel effi ciency53%

    No. 3 Faster acceleration51%

    No. 4 Improved responsiveness48%

    27Showa Shell Sekiyu K.K. Corporate Report 2015

  • Lubricants and AsphaltExpanding Lineup of High-Value-Added Products in Response to Customer and

    Social Needs

    Showa Shell sells lubricants mainly for transportation and industrial

    applications. Production activities at factories and logistics trends

    in Japan have a major impact on the demand for lubricants.

    However, we have been witnessing a gradual rise in customer and

    social needs for the means of improving the effi ciency of factory

    operations and increasing energy savings. To respond to such

    needs, Showa Shell is working to develop and expand sales of

    products such as lubricants that extend the interval between oil

    changes and help extend the lifespan of machinery and engines.

    As one such product, we introduced a synthesized base oil for

    lubricants that uses gas to liquids (GTL)*1 technologies in 2013.

    This base oil takes advantage of the resilience to degeneration that

    is characteristic of oil made with GTL technologies. We have also

    launched new long-lasting, energy-effi cient products for industrial

    machinery and automobiles. Sales of these highly functional, high-

    value-added products have been solid.

    In ship lubricants, more-stringent restrictions on sulfur

    emissions in exhaust gas have stimulated a rise in demand for

    ultralow-sulfur heavy fuel oil and diesel distillates along certain sea

    routes around Europe and the United States. The Shell Group

    launched Alexia S3, a cylinder oil for use with low-sulfur fuel, and

    we will utilize the Shell Groups supply network to respond to

    customer demand for this product.

    Showa Shell has a diverse lineup of lubricants with different

    applications and functions. For this reason, it is crucial to ensure

    sales staff at contract dealers can effectively explain and propose

    products that best meet customers diverse needs. Showa Shell is

    trying to cultivate this type of human resources, and has introduced


    Business Process Re-Engineering ActivitiesBusiness process re-engineering activities are being conducted in the Oil Business as part of the Dantotsu Project, with the aim of

    realizing structural competitiveness improvements though enhanced business process effi ciency. Over the years, Showa Shell has

    instituted a number of reform programs that have increased effi ciency. However, current business process re-engineering activities differ

    from past efforts in that they spread beyond the boundaries of business divisions to improve and integrate business processes on a more

    overarching level. By quickly addressing various issues, these activities have successfully resulted in an improvement in operating

    effi ciencies and customer service.

    Project Case Study: Consolidation of Call CentersPreviously, the Company positioned call centers in each business division to provide specialized responses to customer inquiries, such as

    those regarding Shell EasyPay and general questions related to oil products or service stations. However, as we push forward with efforts

    to enhance our services, we reached the conclusion that offering one single, integrated venue for inquiries about Showa Shells products

    and services would contribute to improved customer convenience, and so we started a call center consolidation project.

    There was a risk that consolidating call centers could result in less specifi c responses to specialized questions. However, by

    identifying and addressing risks and issues in this regard, we succeeded in rationalizing the allocation of resources previously dispersed

    throughout different call centers while maintaining the same high level of service

    quality and boosting customer satisfaction. The results of the consolidation were

    impressive, with incoming call response rates, response speeds, and customer

    satisfaction all improving to a degree that exceeded initial targets.

    After the projects completion, we have continued to pursue higher levels of

    customer satisfaction by entrenching an improvement cycle for addressing issues

    uncovered in operations.

    Overview of Consolidation

    Call center

    Responsible division Division A Division B

    Inquiry response

    Shell EasyPay Fuel / Service stations

    Division A Division B

    Call center 1 Call center 2 Consolidated call center

    EasyPay / Fuel / Service stations

    28 Showa Shell Sekiyu K.K.