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Corporate Report [Year ended December 31, 2014]2015

ENERGIZING THE FUTURE

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

Procurement

orporate governance

Procurement

Oil product transportation

Oil Business

Manufacturing facilities

Management Resources and Stakeholders

Synergies between

technologies

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 Group’s management and business activities, Corporate Report 2015 includes a full

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

risks, and the Group’s 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

Manufacturing

Managem

ent StrategiesBusiness A

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anagement Resources

Corporate G

overnanceFinancial and C

orporate Data

1

Returns from Business Activities

2 Our Road8 Showa Shell’s 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

Contents

Communities and society

Global environment

Storage

Solar module sales

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

Customers

Business Activities

power plants

Sales

Shareholders

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 Shell’s

various stakeholders, some of which are not

included in Corporate Report 2015.

http://www.showa-shell.co.jp/english/

csr/index.html

l

rage

asphalt

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

EVER-CHANGING

ENERGYINDUSTRY

Oil

Natural gas

Nuclear power

Coal

Solar/geothermal power

Biomass

Hydropower

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

1990 2012 20402020

20,000

15,000

10,000

5,000

0

40.0

30.0

20.0

10.0

0

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

CO2 emissions from energy usage(right axis)

Forecast

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 World’s Largest CIS Thin-Film Solar Module Factory

Our Road

Turning Point for anEnergy CompanyIn 2011, we closed the Keihin Refi nery’s Ohgimachi Factory, which

accounted for more than 20% of the Showa Shell Group’s 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 Company’s 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

world’s 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 Group’s two main

businesses made leaps forward to secure future growth.


TRANSFOR-MATION TO

ENERGYCOMPANY

2010 2011 2012 20142013

80

60

40

20

0

–20

–40

(Yen Billion)

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

Operating Income (Loss) by Segment


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 Group’s 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.


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).

ENERGIZINGTHE FUTURE

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

8

Showa Shell’s 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.

Innovation

Through the development of innovative solutions, we constantly

challenge the improvement in the quality of our products and

services.

Vitality

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

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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 Frontier’s 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

100

75

50

25

0

50.0 50.0 50.0 50.0

62.5

75.0

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

8,000

6,000

4,000

2,000

0

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

939 930 1,007 946 953 862

(People) (%)

20102009 2011 2012 2013 2014

100

75

50

25

0

86.3 84.291.6 94.6

86.64.0

3.0

2.0

1.0

0

2.11.8

1.41.0 0.8

1.7

93.2

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

6,400

4,800

3,200

1,600

0

5,641 5,673

4,754 4,845 4,820

16.0

12.0

8.0

4.0

0

7.90 7.96 7.67 7.89 7.67 7.63

5,872 1,000

750

500

250

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


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)

–56.4

–11.6

34.2

61.8

11.2

42.130.0

12.6

76.2

41.8

–16.7

90

45

0

–45

–9020102009 2011 2012 2013 2014

34.5

20102009 2011 2012 2013 2014

70

35

0

–35

–70–57.6

15.923.1

1.0

–9.7

60.2

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 yen’s depreciation. As a result, the Company was forced to record signifi cant inventory valuation losses during the fourth quarter.

(USD/Barrel) (JPY–USD)

20102009 2011 2012 2013 2014

160

120

80

40

0

140

120

100

80

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

3,200

2,400

1,600

800

0

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)

2010

37.7

–11.5–28.8

–15.4

17.5

55.4

26.6 21.713.8 17.6

2011 2012 2013 2014

120

80

40

0

–40

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 64–89.


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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

30

15

0

–15

–30

6.70.4

21.9

–3.4

–21.2

9.3

120

80

40

0

−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

60

45

30

15

0

53.9 53.850.7 49.8

37.739.0

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 receivable–trade 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

1,600

1,200

800

400

0

1,172.7 1,193.1 1,208.4 1,233.1 1,295.81,176.2

480

360

240

120

0

24

18

12

6

0

20.1 20.1

255.8

21.2 20.3

272.0300.6

23.2 23.1

240.2 249.8235.5

20102009 2011 2012 2013 2014

20102009 2011 2012 2013 2014

200

100

0

–100

–200

40

20

0

−152.9

42.3

18

61.3

18

2.6

18160.0

36

–25.7

3836

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

(Yen)


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.


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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 Company’s 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 Japan’s 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 Japan’s 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 Group’s 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 company’s 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 Frontier’s 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

2011–28.8

–15.4

17.5

55.4

26.6 21.713.8 17.6

56.0

–3.0

2012 2013 2014 2015 (Forecast)*

120

80

40

0

–40

Oil Business (CCS operating income) Energy Solutions Business

* Based on performance forecast released on May 14, 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 Group’s 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 Group’s 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


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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 Group’s Keihin Refi nery has been linked via pipeline to

TonenGeneral Sekiyu’s 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 Shell’s 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 Frontier’s 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 Frontier’s 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.


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 Shell’s 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


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What are your thoughts on the Company’s 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 manufacturer’s 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

execution.

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.


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 Company’s

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

100

50

0

–50

–100

60

45

30

15

0

(%)(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 a–1 J–1

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.


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19

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

businesses.

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 Shell’s 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

investment

500

400

300

200

100

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.


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 Growth—Growing Existing Businesses• Sustaining domestic sales size

• Increasing margins through value creation

• Cost reduction including supply chain improvements

Step Change—Growing through Structural Business Transformations• Expand petrochemical business

• Partnerships with other companies

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


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

smoothly.

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


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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

OperationConstruction

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

Construction

Construction

Construction

Operation

Operation

Operation


Oil Business Value Chain

Sales

Lubricants and asphaltManufacturing

Storage

Transportation

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 world’s 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.

Transportation

Customers

Oil Business


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Showa Shell’s Oil Business primarily operates in the domestic market, which is projected to experience a yearly decline in fuel demand of 1–2% over the foreseeable future. At the same time, Japan’s 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 nery’s 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 Shell’s 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 Company’s 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

3,000

2,250

1,500

750

0

2,304

2,695 2,539

2,803 2,850

2010 2011 2012 2013 2014

120

80

40

0

–40

45.5 37.7

87.2

55.4

28.1

56.1

–37.3

13.821.726.6

Operating income (loss) CCS operating income

* Sophisticated Methods of Energy Supply Structures Law: The law’s 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


Faced with a structural decline in demand, Japan’s 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 Japan’s oil industry is expected to decline by an additional 10%.

Refi ning Capacity of Japan’s 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)

6,000

4,500

3,000

1,500

0

320

240

160

80

0

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

100

90

80

70

60

0

80.8

86.6

77.0

94.6

75.7

91.6

75.3

93.2

77.0

84.2

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.


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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 Group’s 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 nery’s 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

30,000

22,500

15,000

7,500

0

23,040

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 Group’s 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 Group’s 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 Group’s 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 Oil’s 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 Group’s Global Trading Network

Calgary

Houston

Barbados

LondonRotterdam

Tokyo

Singapore

Dubai

Moscow

40,000

30,000

20,000

10,000

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

(KT/Year)

Forecast of Northeast Asian Demand for Paraxylene

Forecast

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


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.

Sales

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 Japan’s 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

provide

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


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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

120

0

(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 Group’s 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

130

100

(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.

Yes61%

No39%

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%


Lubricants and Asphalt—Expanding 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 Group’s 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

COLUMN

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 Shell’s 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 project’s 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


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its unique Lubricant Expert Program as part of this undertaking. By

developing products that match customer needs and fostering sales

staff exceptionally capable of making viable proposals, we aim to

further increase sales, particularly those of high-value-added

products.

Demand for asphalt is infl uenced by trends in government

spending and private-sector capital investment. We expect that

demand will be strong going forward in light of the replacement of

aging infrastructure as part of national resilience improvement

plans as well as the need to install infrastructure in preparation for

the 2020 Tokyo Olympic and Paralympic Games. A stable supply

of asphalt will be required to meet this demand. Showa Shell has

a prestigious position as Japan’s only integrated asphalt

manufacturer. We have developed a vast product lineup ranging

from straight asphalt for streets, blown asphalt for use in building

materials and roof waterproofi ng materials, and high-value-added

asphalt with superior durability, environmental performance, and

other features. In addition to maintaining a stable supply of existing

products, we are taking steps to develop and subsequently expand

sales of new products that help resolve specifi c issues. Examples of

such products include highly durable asphalt able to withstand

heavy traffi c conditions as well as eco-friendly and improved-

installing-process asphalts that can be applied at lower

temperatures.

Aiming to respond to customer needs with proposals

grounded in accurate technical knowledge, Showa Shell has been

focusing on human resource development. As part of this effort, in

2012, we established the Bitumen Academy.

LPG—Integrating Operations to Pursue Further Growth

Since the Great East Japan Earthquake, people have re-acknowledged

the benefi ts of eco-friendly LPG as an independent source of energy that

is useful in the case of disaster. However, domestic demand for LPG is

declining, and this energy source is facing intense competition in the

energy market due to the trend toward all-electricity-powered homes

and the switch to city gas, making for a diffi cult operating environment

in the LPG business. In addition, as the LPG produced through oil

refi ning processes only provides a portion of the Company’s total LPG

sales, we are heavily dependent on imports, and the business model for

our LPG operations therefore varies signifi cantly from those for other Oil

Business products. Looking at supply circumstances from a global

perspective, shale gas production and the expansion of the Panama

Canal have increased the feasibility of procuring LPG from North

America, which has now joined the ranks of the Middle East as a

leading LPG supplier. This has led to a changing business environment

for LPG.

Under these circumstances, Showa Shell,

Cosmo Oil, Sumitomo Corporation, and

TonenGeneral Sekiyu established Gyxis

Corporation*2 on April 1, 2015, through the

integration of their LPG import and wholesale

operations. The aim of this integration was to

leverage economies of scale in the LPG business in order to boost

effi ciency and profi tability. Taking advantage of this scale, Gyxis will

pursue sustainable growth as an LPG import and wholesale company.

This endeavor will include rationalizing wholesale and distribution

networks, diversifying procurement sources, increasing purchasing

power, and expanding overseas trading.

LPG retail operations are handled by Enessance Holdings Co.,

Ltd.*3, a company formed by integrating the operations of Showa Shell,

Cosmo Oil, and Sumitomo Corporation. This company strives to boost

profi tability while also reinforcing its systems for ensuring the safe and

secure supply of its products. To these ends, it is rationalizing its retail

and distribution networks, expanding its customer base, and stepping

up its efforts to provide high-value-added proposals in its home solutions

and energy solutions operations.

*2. Gyxis Corporation: 25% investments by Cosmo Oil Co., Ltd.; Sumitomo Corporation; TonenGeneral Sekiyu K.K.; and Showa Shell Sekiyu K.K.

*3. Enessance Holdings Co., Ltd.: 47.7% investment by Showa Shell Sekiyu K.K.; 45.9% investment by Sumitomo Corporation; and 6.4% investment by Cosmo Oil Co., Ltd.

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

New Products Using GTL Synthesized Base Oil

Shell Tellus S3 VE

This ultra-functional hydraulic oil is categorized as an energy-saving, long-lasting combustible oil.It contributes to fewer equipment troubles, lower maintenance costs, and a reduced environment footprint.

Shell RIMULA R6 LME-J5W-30

This diesel engine oil protects engines from wear and tear while lengthening their lifespan.



Energy Solutions Business Value Chain

Tsuyoshi KameokaRepresentative DirectorChief Executive Offi cerEnergy Solutions Business COO

Customers

Solar module sales

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


Solar Business Raw material procurement

Manufactured solar modules

Manufacturing

Power plant operations

Byproduct fuelFormer business facility sites

Asset synergies

Oil Business

Solar Frontier’s proprietary CIS thin-fi lm solar modules can be produced using fewer raw materials and through a shorter manufacturing process than crystalline silicon modules, currently prevailing in the market. These modules are primarily made at the Kunitomi Plant, our fl agship solar module manufacturing plant boasting a world-leading production capacity, and are then shipped throughout Japan and around the world. In addition, our newest solar module manufacturing plant, the Tohoku Plant, was completed in March 2015.

Solar Frontier’s Solar Module Manufacturing Plants• First Miyazaki Plant (Miyazaki Prefecture; annual production capacity: 20 MW)• Second Miyazaki Plant (Miyazaki Prefecture; annual production capacity: 60 MW)• Kunitomi Plant (Miyazaki Prefecture; annual production capacity: 900 MW)• Tohoku Plant (Miyagi Prefecture; annual production capacity: 150 MW)

Solar Frontier solar modules are used in developing large-scale solar power plant projects. We handle all aspects of these projects from funding to procurement of materials and construction. Completed projects are owned, maintained, and operated in-house or sold to third-party operators.

We are also operating power plants on land no longer used by the Oil Business, and collaborating with other companies. The electricity we generate is sold through retail sales to consumers or through wholesale sales to corporate clients or traded on the Japan Electric Power Exchange.

Solar modules are sold to various customers around the world (primarily through sales agents) to be used at residences or solar power plants.

Technological synergies

Changes in the energy landscape represent opportunities for the future

growth of the Energy Solutions Business. We are steadily expanding our

solar business overseas and increasing retail sales in the electric power

business by utilizing the resources from the Oil Business, while also

generating synergies between the two businesses.


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Renewable energy is expected to play a signifi cant role in responding to the issue of global climate change, which needs to be addressed on a worldwide basis. Of particular note among renewable energy sources is solar power, which is anticipated to see demand grow in regions across the globe, due to its ease of installation and functionality as an independent power source. In addition, future reductions in system costs have the potential to further stimulate demand. In July 2012, Japan introduced its feed-in tariff (FIT) scheme for renewable energy. The goal of this scheme is to promote the spread of renewable energy and quickly reduce the associated costs. The introduction of this scheme resulted in a rapid rise in demand for solar modules, and this brisk demand is expected to continue over the next three to four years. After this period, demand for large-scale solar power plants will likely decline as the purchase price of solar-power-generated electricity undergoes a phased reduction in accordance with the FIT scheme. Nevertheless, demand for solar systems to be used for self-consumption purposes is anticipated to remain robust, particularly in market segments for which electricity prices are relatively high, such as the residential sector. Demand in this area will be driven by dropping solar system costs and technological innovation related to peripheral equipment. Based on this outlook for the market, Solar Frontier will maintain its

Competition in the domestic electricity retail market is expected to intensify due to an infl ux of new players following the complete deregulation of the market in 2016. At the same time, Japan continues to struggle with the challenging energy issues that appeared subsequent to the Great East Japan Earthquake. On one hand, there has been concern with regard to the country’s ability to supply electricity. On the other hand, Japan is experiencing a rise in CO2 emissions stemming from the increased use of thermal power to compensate for the decline in nuclear power generation. In this environment, electricity providers are charged with the task of securing a stable supply of power while at the same time reducing their environmental footprint to the greatest extent possible, and this must be done amidst fi erce competition. Over the years, Showa Shell expanded its electric power business by effectively utilizing Company assets and generating synergies with other businesses. Some characteristics of this

focus on domestic sales, remaining responsive to changes in demand structures. At the same time, it will institute measures to boost competitiveness over the medium term as it strives to become a global leader. Cost reductions will be an important part of this endeavor, and we are thus working to lower production costs at the Kunitomi Plant. In addition, March 2015 saw the completion of the Tohoku Plant, which is designed to serve as a model for future overseas production sites, and verifi cation testing for new technologies commenced subsequently. We are aiming for lower production costs at the Tohoku Plant than at the Kunitomi Plant, making for a best-in-class level of costs. The Tohoku Plant will also play a pivotal role in achieving our medium-term goal of expanding the total production capacity of our domestic and overseas operations to 2 GW. Furthermore, Solar Frontier is branching out to expand its earnings base by developing a build, own, and transfer (BOT) business to undertake all aspects of solar power plant projects, including development, maintenance, operation, and sale. We are already making steady progress in our BOT operations in 2015, as evidenced by the conclusion of our fi rst sale of a Company-owned power plant in Japan and the acquisition of solar power plant development projects in the United States.

business include the large-scale, highly effi cient power plants we have been able to construct on idle Company land already equipped with the necessary infrastructure and located close to the Tokyo metropolitan area, which boasts the largest amount of energy demand in Japan. Another characteristic is an expanding range of eco-friendly power sources, which include liquefi ed natural gas (LNG), solar power, and biomass. Over the medium term, we will work to expand generation capacity to around 1 GW, primarily using eco-friendly power sources while carefully monitoring market trends. In addition, the complete deregulation of the retail market will be used as an opportunity to strengthen our earnings base by expanding retail sales to residential and other users. To this end, we will utilize Group resources to maximize inter-business synergies, such as using our network of Liquefi ed petroleum gas (LPG) contract dealers to conduct door-to-door electricity sales.

Solar Business: Becoming a Global Leader

Electric Power: Expanding Scale, Diversifying Power Sources

(Yen Billion)

Net Sales(Yen Billion)

Operating Income (Loss)

2010 2011 2012 2013 2014

160

120

80

40

0

28.8

65.778.2

141.2 138.6

2010 2011 2012 2013 2014

30.0

15.0

0

–15.0

–30.0

–11.5

–28.8

–15.4

17.5 17.6


What is CIS and what are its ecological benefi ts

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

Solar Frontier’s CIS thin-fi lm solar modules differ from standard

crystalline silicon modules in both their material makeup and

manufacturing process. While most solar modules use crystal-

line silicon to generate electricity, Solar Frontier’s modules use

a proprietary copper, indium, and selenium-based compound.

With a semiconductor layer about one hundredth of the

thickness of a crystalline silicon solar cell, Solar Frontier’s CIS

solar modules require fewer resources to produce. Combined

with fewer production steps and a less energy-intensive

production process, Solar Frontier’s modules offer a shorter

energy payback time (EPT)*1 than crystalline silicon modules.

Solar Frontier’s modules are also cadmium- and lead-

free*2. Our eco-friendly modules give our customers greater

peace of mind when developing both rooftop and ground-

mounted installations.

*1. Energy payback time (EPT): The time required for a module to generate the same amount of energy spent in its production.

*2. As defi ned by the Restriction of Hazardous Substances (RoHS) Directive

QCIS thin-fi lm solar module Q&A

Solar BusinessSolar Frontier K.K. develops, manufactures, and sells CIS thin-film solar modules. Our

proprietary technology delivers compelling economic and ecological benefits. Solar Frontier

is growing by “creating the most economical and ecological solar solutions on Earth.”

EPT Comparison

(Years)2.0

1.0

0Crystalline silicon

solar module

EPT=approx. 1.5 yrs.


Amorphous silicon

CIS thin-fi lm solar module

Signifi cant reduction


Voluntarily Meeting High Standards

Does not contain cadmium

Solar Frontier’s CIS thin-fi lm solar

modules

CIS (CIGS)

Cadmium telluride

Amorphous silicon

Microcrystalline

Hybrid

Monocrystalline

Polycrystalline

HIT(Heterojunction with intrinsic thin layer)

Spherical

Silicon

Compound

Silicon

Dye sensitization

Organic thin-fi lm

Crystalline

Thin-fi lm

Organic

Contains cadmium

(When annual production volume is approximately 100 MW)

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


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Temperature Performance of CIS Thin-fi lm Solar Modules*3

Mod

ule

Out

put (

Rate

d ou

tput

= 1

)

Module Temperature ( C)

1.2

1.1

1.0

0.9

0.8

0.70 25 50 75 100

*3. Diagram compares a CIS (SF170-S) module with a temperature coeffi cient of –0.31%/ and a standard crystalline silicon module with a temperature coeffi cient of –0.41%/ when using a light source intensity of 1000 W/m2.

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

Solar Frontier’s modules not only pass standard certification tests, but they also undergo strenuous internal tests, ensuring our modules will hold up under almost any conditions.

One of the tests conducted at Solar Frontier is the hailstorm test

in which specifi ed areas of a module are bombarded with hail

to test impact resistance. Another test involves exposing

modules to various stresses under actual operating conditions

to confi rm their ability to function stably over extended periods

of time. Solar Frontier conducts tests that are designed to

evaluate the ability of products to maintain performance levels

over the long term when exposed to conditions that are more

strenuous than those experienced in normal usage.

Solar Frontier’s CIS thin-fi lm solar modules also demonstrate

signifi cant resistance to potential induced degradation (PID)*5.

Our modules showed no loss in conversion effi ciency in the

PID tests conducted by independent third-party verifi cation

company TÜV Rheinland Japan Ltd.

Solar Frontier was also the fi rst company in Japan to

acquire the JETPVm certifi cation mark, which guarantees the

long-term reliability of solar modules and the warranty systems

of their manufacturer. We have been recognized not only for

the quality of the warranties on our products, but also for the

service systems backing these warranties.

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

2. Better Shadow ToleranceWhen a standard crystalline silicon module is partially shaded, output drops signifi cantly. CIS thin-fi lm solar modules are able to

maintain stable output even when partially shaded thanks to their circuitry design.

3. Light Soaking EffectExposure tests have shown that the output of CIS thin-fi lm solar

modules rises above initial output fi gures following exposure to light.

*4. Based on data from tests conducted at Solar Frontier’s Kunitomi Plant in 2014

“Light Soaking” Effect of CIS Thin-Film Solar Modules*4

Exposure Test Period (Days)Cha

nge

in M

axim

um O

utpu

t

100

1.0

20 30 40 50

Crystalline silicon solar module

When a cell in the module ceases to generate electricity, the overall output of the modules drops signifi cantly.

Shade may cause a temporary drop in output but has only a limited effect on the entire module.

CIS thin-fi lm solar module

Shade ShadeFlow of electricity

Flow of electricity

Solar Frontier’s CIS thin-fi lm modules are more economical due to the higher amount of electricity generated under actual operating conditions.

This high output is primarily due to the following

three factors:

1. Better Performance at Higher TemperaturesOn a sunny summer day, solar modules installed on roofs can

reach temperatures of 60–80°C, which can adversely affect

output. CIS thin-fi lm solar modules have a lower temperature

coeffi cient than standard crystalline silicon modules, meaning

energy output is less affected by high temperatures.

Crystalline silicon modulesCIS modules

When looking at rated output, the output loss of a CIS thin-fi lm solar module heated to 75 is approximately 5% less than the loss of a standard crystalline silicon module under the same conditions.

*5. PID is a phenomenon in which module generation capacity drops signifi cantly due to degradation from being used under high-voltage conditions, such as in large-scale solar power plants.


The performance of solar modules is primarily measured in terms of energy conversion effi ciency*. Solar

Frontier’s proprietary CIS thin-fi lm solar modules got off to a late start compared to crystalline silicon

modules, which are the current market standard and utilize more mature technologies. Nonetheless, our

technology has great theoretical potential for further improvements in energy conversion effi ciency.

Solar module research and development is generally conducted using small 1cm x 1cm cells. At the

Atsugi Research Center (ARC) of Solar Frontier, however, research is based on larger 30 cm x 30 cm

research-use submodules, and also employs the same equipment that is used for commercial

manufacturing. Conducting research on these larger submodules better ensures that the results of R&D

efforts will be applicable to actual manufacturing lines. Through successful research at ARC, we set the

world record for CIS thin-fi lm cell conversion effi ciency by realizing an effi ciency of 19.7% on a 0.5

cm2 cell in 2013. We later rewrote this record in 2014 with an effi ciency of 20.9%. The 0.5 cm2 cells

used to achieve these records were cut from 30 cm x 30 cm research-use submodules.* Energy conversion effi ciency: This indicator represents the per area effi ciency at which a solar module can convert solar energy into

electricity. However, this fi gure displays nominal output (catalog fi gure) measured under controlled conditions, and the performance of modules under actual operating conditions may vary as a result.

Solar Module Development

Technological Development

Manufacturing Technology Development

ARC undertakes the development of unique production technologies to ensure that the results of its R&D

efforts can be quickly transferred to commercial production lines in order to realize increases in yield

rates and module conversion effi ciencies. At the same time, ARC works in close coordination with

existing plants to pursue daily improvements in manufacturing effi ciency.

Completed in March 2015, the Tohoku Plant is equipped with ARC’s latest technologies. These

technologies will enable the plant to more quickly and accurately control precision manufacturing

processes, such as those related to creating the absorbing layer of solar modules, a core technology,

and forming the electrodes used to extract generated electricity. In this manner, ARC’s technologies will

be used to shorten manufacturing processes and boost product performance.

The solar business is characterized by rapid technological innovation. Solar Frontier is rapidly enhancing its

technologies to provide power sources with higher economic benefi ts by reducing the costs of individual solar modules

as well as the overall solar power system.

15%

14%

13%

12%

Energy Conversion Effi ciency

AA 17.8%AA 19.7%

AA 20.9%

AA 15.7%

150W 12.2% AA 13.3%

160W 13.0% AA 14.2%

165W 13.4% AA 14.6%

170W 13.8% AA 15.0%

180W 14.7% AA 15.9%

AA: Aperture Area30cm x 30cm

submodule

0.5cm2 cell taken from 30cm x 30cm submodule

Transfer of technology to

products

AtsugiResearch Center

CIS Thin-Film Solar Module Energy Conversion Improvement Roadmap

2010 2011 2012 2013 2014 2016


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Production System

Ongoing Evolution of the Kunitomi Plant

The Kunitomi Plant commenced production in February 2011. With an annual production capacity of

900 MW, it is one of the largest solar module manufacturing plants in the world. In order to meet robust

demand in Japan, the plant operated at full capacity throughout 2014, as was also the case in 2013.

Since operations began, the Kunitomi Plant has continued to increase the output of the modules it

manufactures while also boosting productivity by introducing research milestones from ARC and an

improving effi ciency onsite. At the beginning of 2014, the plant was primarily producing modules with

an output of 165 W (energy conversion effi ciency of 13.4%). However, by the second half of the year,

170 W (energy conversion effi ciency of 13.8%)

modules came to represent a larger portion. As the

crowning achievement from 2014, we succeeded in

creating a module with output of 180.2 W (equivalent

to a conversion effi ciency of 14.7%). This constant

evolution has driven product cost reductions, and the

Kunitomi Plant is now operating at one of the lowest

cost levels among its global peers. In 2015, we will

strive to further cut costs at the Kunitomi Plant.

Solar Frontier’s fl agship Kunitomi Plant, one of the world’s largest solar module manufacturing plants, continues to

operate stably while constantly pursuing production cost reductions. The new Tohoku Plant was completed in March

2015, moving us one step forward on the path to full-fl edged overseas expansion.

COLUMN

Feasibility Study with the State University of New YorkTogether with the State University of New York College of Nanoscale Science and Engineering

(SUNY CNSE), Solar Frontier began conducting a technical and economic feasibility study for

possible joint R&D and manufacturing of CIS thin-fi lm modules in April 2014. We will continue to

investigate and verify the potential for adapting the fi ndings of this study to overseas production sites.

Completion of Tohoku Plant and Verifi cation Testing of New Technologies

for Development Overseas

For Solar Frontier to commence full-fl edged overseas expansion, it will need to secure a production

capacity that is suffi cient for supplying the global market together with world-leading levels of cost

competitiveness. The Tohoku Plant, which was completed in March 2015 (annual production capacity

of 150 MW), will play a pivotal role in achieving these objectives.

By fusing the latest technologies developed by ARC with the production technologies forged at the

Kunitomi Plant, we aim to reduce unit production costs

by 30% compared to Kunitomi. This means that the

Tohoku Plant will produce modules with output

exceeding previous offerings with world-leading levels

of cost competitiveness. Furthermore, after verifying

these technologies at the Tohoku Plant, the plant itself

will be used as a model when establishing overseas

production sites to help us realize our goal of 1 GW in

overseas production capacity in the medium term. Tohoku Plant

Kunitomi Plant


The adoption of renewable energy is currently progressing on a worldwide scale in response to the rise

in energy demand and the accompanying advance of global warming. Among renewable energy

sources, solar power is garnering particular attention. Solar power systems are expected to spread

rapidly due to their ease of installation, fewer limitations in terms of installation location, and functionality

as independent power sources.

In Europe and North America, governments were quick to institute measures to promote the

introduction of renewable energy, and these measures have driven global solar module demand.

Currently, demand expansion is

centered on Japan, China, and

other parts of Asia that have recently

launched their own renewable

energy promotion measures. As

ongoing technological innovation

reduces costs, solar power systems

are expected to spread in emerging

countries over the medium to long

term due to their functionality as

independent power sources in areas

lacking power lines.

Solar Module Demand in JapanThe total capacity of all projects approved under the FIT scheme for renewable energy introduced in

Japan in July 2012 is approximately 70 GW. However, as of December 31, 2014, around 55 GW

worth of projects were yet to be completed. While it is possible that various factors may cause a part of

these projects to never come to fruition, it can still be expected that the number of installation projects

conducted over the next three to four years will be in line with levels seen in 2013 and 2014.

The purchase price of solar power under this scheme is subject to a phased reduction. Accordingly,

the number of new solar power plants is expected to decline over the medium term, especially in the

large-scale solar power plant segment. Conversely, as the development of solar power system

technologies progresses, the cost of

introducing systems will continue to

decrease. For this reason, grid

parity—when an alternative energy

source is cost competitive when

compared with the retail rate for

electricity from the grid—is expected

to be achieved for solar power in

the residential sector in the near

future as the electricity purchase

price is relatively high. We can

therefore anticipate strong demand

in this sector over the medium term.

Globally Growing Solar Module Demand

Source: IHS

Global Solar Module Demand Forecast (By Region)(GW)

2010 2011 2012 2013 2014 2015 20172016 20192018

80

60

40

20

0

Forecast

EuropeJapan

Middle East & Africa North America Asia (excluding Japan)

Sales

In addition to providing solar modules for use in a wide range of applications in Japan and overseas, Solar Frontier is

expanding its business scope to include sales of systems that utilize its solar modules as well as electricity generation

operations as it strives to offer high-value-added energy solutions.


Source: Showa Shell Sekiyu K.K. (based on documents disclosed by the Japan Photovoltaic Energy Association on February 19, 2015)

Domestic Solar Module Demand Forecast(GW)

2012 2013 2014 2015 20172016 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 20302018

10.0

7.5

5.0

2.5

0

Above 10kW Below 10kW (primarily residential)

Forecast

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Solar Frontier’s Sales Strategies

Solar Frontier practices the highest levels of quality management when manufacturing its CIS thin-fi lm solar modules, which therefore feature outstanding quality. These modules are used around the world for a wide range of applications, including residential and industrial uses. When the Kunitomi Plant commenced operations in 2011, roughly 70% of Solar Frontier’s products were shipped to Europe, the United States, and other overseas markets. However, Solar Frontier later shifted its focus toward the growing demand in Japan that resulted from the introduction of the FIT scheme. As solar systems have become more common place in Europe and the United States, sales prices for solar modules have started to decline. Conversely, these products are still relatively profi table in

the domestic market. Accordingly, approximately 90% of the total volume of modules shipped by Solar Frontier in 2013 and 2014 was sold in Japan. While Solar Frontier will maintain its focus on the domestic market, it will also set its sights on a future full-fl edged expansion into overseas markets. To build the foundations for this expansion, beginning in 2015, we plan to gradually expand the ratio of exports in order to facilitate the development of overseas sales networks. At the same time, Solar Frontier will accelerate operations based on the BOT business model to expand its earnings base by building, owning, and transferring power plants using its CIS thin-fi lm solar modules.

Domestic Sales

In the short term, Solar Frontier will primarily supply solar modules to solar power plants in Japan by taking advantage of the FIT scheme. At the same time, the company is also strengthening its ability to sell to residential customers in order to secure the volume of sales necessary to cement its position as a leading Japanese solar module manufacturer over the medium term. As part of this undertaking, Solar Frontier is reinforcing its network of sales agents throughout Japan. In addition to contract dealers in the Oil Business, which have close ties to local communities, Solar Frontier is expanding its network to include home renovation specialists and building contractors. It is also forming ties with housing developers to provide solutions such as embedding solar modules into energy-saving housing units. In addition, Solar Frontier is exploring new business models, such as developing solar power plants using its solar modules. Large-scale solar power projects must undergo a number of steps before being completed, which include fi nancing, design, and construction, and this process also requires a signifi cant time investment. Solar Frontier is able to cover this entire process. Moreover, once plants have been constructed, we have the option to retain ownership to

collect income from electricity sales or to sell these facilities to investors. Encompassing the building, owning, and transferring of power plants, this BOT model is both highly profi table and capable of providing buyers with additional value. To further develop its operations based on this model, Solar Frontier established a joint venture company with the Development Bank of Japan named SF Solar Power K.K. to fi nance solar power plant development projects. In the fi eld of plant construction, Solar Frontier has formed strategic alliances with Germany’s BELECTRIC, a global contractor of solar power plant construction, as well as Shoseki Engineering & Construction Co., Ltd, a Showa Shell Group company. As such, Solar Frontier is now poised to handle a wide range of BOT projects. In February 2015, an agreement was concluded with Mitsubishi UFJ Trust and Banking Corporation regarding the saleof the Kunitomi Solar Power Plant, which has a power generation capacity of approximately 2 MW and was the fi rst power plant developed by Solar Frontier under the BOT model. After this plant was sold, Solar Frontier continued to participate in the operation of the facility by conducting maintenance on a contract basis.

Overseas Expansion

We are implementing sales strategies custom-tailored to match the trends of specifi c regional markets in order to build sales networks that can support our future full-fl edged overseas expansion. In countries that have already experienced a period of rapid demand growth fueled by government measures, such as Germany and Italy, we expect to see stable demand for solar systems for self-consumption purposes. In these countries, we provide PowerSet, a high-value-added offering that packages small-scale generation-use solar modules with peripheral equipment. Elsewhere, we supplied a complete set of modules and peripheral equipment for an 8.1 MW solar power plant in the United Kingdom in 2014, which continues to witness strong demand thanks to its FIT scheme. Solar Frontier’s CIS thin-fi lm solar modules are capable of absorbing and generating electricity from a wide spectrum of light, and this feature won great praise in the United Kingdom, where daylight hours are relatively short. The market of the United States features large demand for completed power plants stimulated by federal and state measures.

Solar Frontier already has a strong track record of delivering solar modules to the United States. In the future, we plan to push forward with more profi table businesses centered on the BOT model. As one facet of these efforts, in March 2015, we acquired 10 U.S. solar power plant development projects, staff and all, with a combined generation capacity of 280 MW from Spanish company Gestamp Solar SL. This move has enabled us to establish a foothold from which the solar business can be expanded in the United States and in the Americas as a whole. Asia is a promising market that is expected to drive growth in global demand going forward. India, for example, is promoting the introduction of clean and economically sound renewable energy systems, and has defi ned the target of securing solar power generation capacity of 100 GW by 2022. In March 2015, Solar Frontier concluded an agreement with Welspun Renewables Energy Ltd., a solar power company with operations throughout India, to supply 100 MW of solar modules. This agreement is anticipated to serve as a foothold for future business development in India.


In Japan, the partial deregulation of the electricity market has opened the door for users under contracts calling for the supply of over 50 kW to purchase electricity from utility companies, such as Tokyo Electric Power Company, Incorporated, or from new power suppliers, such as Showa Shell, which are designated as “Specifi ed-Scale Electricity Utilities.” While electricity sales by new power suppliers only accounted for 8% of the total amount of electricity sold in the deregulated domestic market as of April 2015, this still represents a year-on-year increase of 3%. In this manner, the share of the market serviced by new power suppliers is gradually expanding as we approach the complete deregulation of the market scheduled for April 2016. Companies from various industries are preparing to enter the market in light of impending deregulation. In addition to companies that possess their own power plants, business operators that are directly connected to fi nal consumers, such as residential households and corporations, are also actively looking to expand their operations in the electricity market. The Showa Shell Group has been steadily building its track record in the electric power business since 2003, and it has continued to grow these operations into a third central business pillar. Over the years, we have persistently expanded our generation capacity, primarily by utilizing idle land once used for Oil Business facilities. In 2010, we entered into the retail electricity market after operations commenced at the Ohgishima Power Station. The Medium-Term Business Action Plan calls for us to expand the scale of our power generation capacity to around 1 GW, double the Company’s generation capacity of approximately 500,000 kW as of December 31, 2014. Utilizing idle land will remain at the heart of expansion efforts, and we will also focus mainly on acquiring eco-friendly power sources as we quickly develop highly competitive power plants. Specifi c ventures scheduled on this front include commencing operations at the Keihin Biomass Plant during 2015 and the third unit of the Ohgishima Power Station in early 2016. In sales, we are expanding our operations in the highly profi table electricity retail market. As the deregulation coming in April 2016 will also apply to low-voltage users, we plan to ramp up sales activities geared toward residential households and other such retail users. Our approach toward residential users will mainly be conducted through collaboration with the contract dealers that are in daily contact with such users through LPG sales activities. We will also examine other possible forms of collaboration through which to approach residential users more effi ciently and effectively.

The Ohgishima Power Station is a highly effi cient natural gas-fi red thermal power plant with a total output of approximately 800,000 kW established in partnership with Tokyo Gas Co., Ltd. Located in Yokohama, Kanagawa Prefecture, the fi rst and second units of this power station are currently operational. The Ohgishima Power Station boasts superior levels of cost competitiveness thanks to its large-scale generation facilities that utilize highly effi cient combined cycle gas turbines, as well as the fact that the plant makes effective use of a former crude oil storage site. The plant also has signifi cant geographical advantages. Natural gas is supplied by the adjacent natural gas terminal belonging to Tokyo Gas, and transmission losses are minimized by the plant’s proximity to the Tokyo metropolitan area, which boasts the highest energy demand in Japan. Showa Shell currently receives approximately 200,000 kW of the Ohgishima Power Station’s output in refl ection of its 25% stake in this facility. This output is primarily sold to customers in Tokyo Electric Power Company’s supply area. The third unit, with an output of approximately 400,000 kW, is scheduled to commence operations in early 2016 at the Ohgishima Power Station on a plot of land adjacent to the fi rst and second units. Excluding the emergency power supply set up by Tokyo Electric Power Company, the third unit will be the fi rst large-scale thermal power plant installed in Japan since the 2011 Great East Japan Earthquake. With the third unit on-stream, the Ohgishima Power Station will continue to provide a stable supply of electricity to the Japanese market as a highly effi cient, large-scale power supplier.

Japan’s Electricity Market and Showa Shell’s Strategies

Highly Effi cient Natural Gas-Fired Thermal Power Plant

—Ohgishima Power Station


In Showa Shell’s electric power business, we are contributing to providing Japan with a stable supply of electricity

while expanding our line-up of eco-friendly power supplies, effectively utilizing Group assets, and generating inter-

business synergies.


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Showa Shell subsidiary Genex Co., Ltd., operates the Mizue Power Station, which is located on the site of the Keihin Refi nery and has an output of 270,000 kW. This power station is fueled by the off-gas and residue fuel resulting from petroleum refi ning processes at the Keihin Refi nery. Moreover, the Mizue Power Station employs a cogeneration system that delivers high energy effi ciency. This system is operated through optimal coordination

between Genex and the Keihin Refi nery. The electricity generated by this system is sold to Tokyo Electric Power Company, helping contribute to a stable supply of electricity.

Genex’s Mizue Power Station, Located on Keihin Refi nery Site

Showa Shell constructs and operates a number of solar power plants that utilize Solar Frontier’s CIS thin-fi lm solar modules on land previously used for Oil Business facilities. We are also collaborating with other companies to develop power plants that merge our strengths with those of our partners. Currently, operational solar power plants are generating an average of 10% more power than initially expected, a testament to the high generation capacity of Solar Frontier’s solar modules. As of March 31, 2015, we had either commenced operations at or approved investment for a total of 17 solar power plants located throughout Japan in which Showa Shell’s share of generated power will total 33 MW.

Niigata Yukigunigata Megasolar Power PlantIn 2010, the Niigata Yukigunigata Megasolar Power Plant, the fi rst commercial-use megasolar plant in Japan, began operations with an output of approximately 1 MW at the former site of the Niigata Refi nery in Niigata Prefecture. We employed special construction methods and installed the modules at specifi c angles to ensure the plant could function even in the heavy snowfall area that is Niigata Prefecture. At a neighboring site, the Niigata Second Megasolar Plant commenced operations in April 2014, with a generation capacity of approximately 7 MW. In constructing the Niigata Second Megasolar Plant, we not only employed the technologies used in its predecessor, but also utilized installation technologies from Germany’s BELECTRIC to complete the plant quickly and at low cost.

CSD SolarIn partnership with Cosmo Oil Co., Ltd, and the Development Bank of Japan, we established CSD Solar LLC (35% investment by the Company), a joint venture company established to construct and operate solar power plants. CSD Solar has constructed solar power facilities at eight locations throughout Japan on former sites of oil terminals and depots belonging to Cosmo Oil and Showa Shell affi liates. The eight sites will boast a total generation capacity of 24 MW when all are on-stream, and CSD Solar has been gradually commencing operation at these sites since June 2014.

US Power Megasolar PlantA joint venture company between Ube Industries, Ltd., and Showa Shell, US Power Co., Ltd. (50% investment by the Company), was established to construct and operate a solar power plant. Utilizing idle land in Yamaguchi Prefecture belonging to Ube Industries, this company constructed a megasolar power plant that came on-stream in July 2014, with a generation capacity of approximately 21 MW. All electricity generated at this plant is sold to The Chugoku Electric Power Co., Inc., through the FIT scheme.

Solar Power Plants Using CIS Thin-Film Solar Modules

In 2013, the Company decided to construct the Keihin Biomass Plant, which is slated to have a generation capacity of approximately 50,000 kW. The construction of this plant will serve as a means of utilizing the former site of the Keihin Refi nery’s Ohgimachi Factory, which was closed in September 2011, and of expanding our range of eco-friendly power sources. The plant will also be able to take advantage of the FIT scheme. The site for this plant comes with a number of advantages, such as access to the infrastructure previously used by the Ohgimachi Factory, including harbor and other fuel discharge facilities. It is also located close to a major consumption center, the Tokyo metropolitan area. The primary fuel source for the plant will be wood pellets, which

will mainly be procured from North American manufacturers certifi ed by the Forest Stewardship Council. We are also examining the possibility of using palm kernel shells procured from Southeast Asia. The biomass power plant is scheduled to be operational by the end of 2015, after which it will help provide Japan with a stable supply of electricity through its ability to generate eco-friendly power 24 hours a day.

Keihin Biomass Plant Located on Former Site of Ohgimachi Factory

Artist rendition of Keihin Biomass Plant


Strengthening Human Resources

Talent Vision and Education SystemsShowa Shell established the Talent Vision in 2011, which defi nes

the type of human resources needed by Showa Shell, and we are

constantly working to strengthen human resources in accordance

with this vision. Specifi cally, we have restructured our employee

education systems and revised employee evaluation frameworks.

The three pillars of the Talent Vision are Initiative, Outbound,

and Team Spirit. These are the characteristics we intend for our

employees to share, regardless of age, qualifi cations, or position.

Aiming to cultivate the type of employees described by the

Talent Vision, we have developed education systems based on the

following three development areas: development of competency

and way of thinking, development of professional talent, and

improvement of adaptability to a global business environment. The

education systems contain a variety of programs designed to help

employees more actively work to acquire the skills that will be

necessary for their individual career paths. Programs include

seminars for specifi c business fi elds, such as crude oil procurement,

refi ning, logistics, legal affairs, and IT, which are held on a

Groupwide basis, spreading across division boundaries to allow

any employee to develop specialized skills. We also offer training

arranged based on the number of years worked and current

position, such as junior employees in their fi rst three years, mid-level

employees, and managers, as well as voluntary training.

Furthermore, in 2014, we launched a new training program

designed to improve the leadership capabilities of managers. This

program aims to instill an understanding with regard to Showa

Shell’s leadership model into all managers, and help them to

develop and display consistent leadership behaviour.

The people that implement management strategies are an invaluable resource in

Showa Shell’s ongoing quest to respond to society’s energy needs as a pioneer in its

fi eld. Showa Shell’s Talent Vision defi nes the credo and behavioral guidelines to

which we expect employees to adhere. Based on this vision, we are strengthening

human resources and developing a comfortable workplace environment with the

aim of maximizing the potential of all employees, who possess a diverse range of

skills and capabilities.

Initiative

Outbound Team spirit

2010 2011 2012 2013 2014

200

150

100

50

0

(Yen Million)

Investment in Training (Non-Consolidated Basis)

Talent Vision


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Showa Shell’s Code of Conduct requires us to conduct business

as a responsible member of society, observe laws, and respect

fundamental human rights. We respect the human rights of our

employees and of all our other stakeholders. We adhere to

international labor standards, such as those forbidding child labor,

and promote initiatives to create opportunities for fair and impartial

treatment eliminating discrimination, on many fronts: from hiring,

transfers, treatment, and educational opportunities to retirement.

As a hiring initiative and in accordance with the Policy for

Diversity and Inclusiveness, we hire employees based on their

compatibility with the Talent Vision, regardless of their nationality,

gender, or disability status.

Employment Statistics (Non-Consolidated Basis)As of December 31, 2014

Number of employees 862

Percentage of employees that are female 22.7%

Percentage of employees with disabilities 2.02%

Number of managers (including executives) 207

Percentage of managers that are female 2.9%

Average age 44.1 years old

Average length of employment 19.9 years

Hiring Statistics (Non-Consolidated Basis)As of December 31, 2014

Number of new graduates hired in 2014 25

Women among new graduates hired over past 5 years 32.8%

Non-Japanese among new graduates hired over past 5 years 6.0%New graduate retention rate (percentage of new graduates hired in April 2011 that were still employed in April 2014)

95.7%

Number of mid-career personnel hired in 2014 4

The Company is committed to establishing a workplace environment

that enables all employees to fully utilize their skills, and we supply

a range of support programs that exceeds legally required levels.

In 2008, we introduced a telecommuting system. In 2014, we

expanded the scope of our fl extime system to make it available to

employees working shortened hours for childcare or nursing care

purposes in addition to standard employees. The goal of this change

was to provide an environment that facilitates more-fl exible work

styles. To promote the usage of under-used programs going forward,

we will continue to improve the programs themselves while also

cultivating a corporate culture that is conducive to their use.

Showa Shell also aims to empower female employees. To this

end, we conducted a survey of female employees in October 2014,

and 95.3% of applicable employees responded. Based on the results

of this survey, we plan to develop measures to support female

employees in their medium- to long-term career development efforts

and in establishing a good work-life balance, with possible measures

being considered including discussion forums for female employees.

Work-Life Balance Support Systems and Usage NumbersFigures in parentheses indicate number of men

2012 2013 2014

Childcare or nursing care leave 11 (1) 23 (3) 20 (2)

Shortened working hours for childcare or nursing care 3 (0) 9 (1) 13 (1)

Leave to care for a sick child 27 (16) 35 (19) 41 (22)

Family care leave of absence 15 (8) 23 (11) 20 (13)

Telecommuting 5 (1) 4 (0) 4 (0)

Self-development leave of absence 2 (1) 3 (0) 2 (0)

Respect for Human Rights

Systems to Promote a Work-Life Balance

Realizationof the Talent

Vision

Education Systems

GMs

Development of Competency and Way of Thinking

HR Division

Training Programs of General Managers

Basic Management Training

Leadership Training

Training before Joining

Advanced Courses by Business Segment

Basic Courses by HR Division

Studying Abroad Program

Basic Leadership Training

Training Programs of New Managers, MBO, and

Managers

Training Programs of New Graduates and Based on Number of Years at the

Company

Business Segments HR Division & Business Segments Test Support for

Self-Education

Development of Professional Talent Improvement of Adaptability to Global Business Environment Other

Managers

Mid-Level Employees

Junior Employees (1–3 Years)

Pre-Employment

Elective Domestic Off-Site Training Specialized

Skill Development Courses by Business Segment

Support for Specialized

Skill Development

Courses Outside of the

Company

Shell Overseas Training

Elective Overseas Off-Site Training

TOEIC Test (Offered

Companywide)

Correspondence Education /

English Trainingby Schooling

Information on other initiatives can be found in the Together with

Our Employees section of CSR Book 2015, which is available

on the Company’s website.


Roundtable Employee DiscussionThe Showa Shell Group’s Human Resources and Spirit of Innovation

Suzuki: Showa Shell’s operating environment has changed

substantially, as evidenced by the decline in domestic oil demand

following the peak in 2009 and appearance of new refi neries

overseas. These circumstances mean we must think and act

differently from the way we have done in the past. It is therefore now

crucial for companies to tell their employees in plain terms what type

of human resources are needed, and action must be taken to ensure

that this information is thoroughly communicated throughout the

organization. It was for this reason that we established the Talent

Vision—consisting of the three pillars of Initiative, Outbound, and

Team Spirit—in 2011, and restructured education systems to give

form to this vision.

Iwamatsu: In the past, it seemed that on-the-job training was the

main form of education, and that each employee was somehow

expected to act in a leadership role. With the establishment of the

Talent Vision, however, I think it has become easier for employees to

know what type of professional they should strive to become.

Sakamoto: I was recently transferred to a new department.

Charged with different duties, the clarity of the Talent Vision was

most helpful. The clarity of this vision has fostered a shared

Shindome: To quote Showa Shell’s senior management,

“A company can only grow as much as its employees.” Taking

this message to heart, we believe human resources are our most

important asset. We therefore hope to refl ect the input of employees

in our human resource systems—and into the operation of these

systems—to the greatest degree possible. For this reason, I would

like to ask for your honest opinions.

understanding among employees from all positions and divisions.

For this reason, there is no fear of employees losing focus or not

having the appropriate mindset.

Ootsu: Employee evaluation frameworks have also been revised

based on the Talent Vision. With evaluation categories like, “How is

the employee taking the initiative?” and “Does the employee exhibit

team spirit?,” it is much easier to perform such evaluations.

Suzuki: As the Talent Vision has become a common thread binding

us together as Showa Shell, many people have started expressing

the vision in their own words. I think this is a success in and of itself.

Rank-based training was previously conducted mainly for employees

in their fi rst three years at the Company, meaning that the next

opportunity for formal training was new manager training. The gap

was fi lled by on-site education initiatives aimed at developing

specialized skills. However, this meant there was no program for

teaching the type of conduct and thought processes that were

expected of new and mid-level employees. Conversely, the new

education systems clearly defi ne the expectations for each employee

rank with regard to the ideals of the Talent Vision. This has led to a

rise in systematic training programs for mid-level employees

Over the fi ve years since the establishment of the Talent Vision and the restructuring of education systems, what have been the benefi ts of these measures


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designed to get employees up to the expected level. The aim of

education programs instituted by human resource divisions,

meanwhile, is to spread and entrench understanding of the Talent

Vision. For this reason, these programs include training for improving

logical thinking and problem solving skills in addition to leadership

trainings. We have also developed a range of courses conducted

by specifi c business segments, made possible by the cooperation of

people in these segments.

Shindome: In 2011, Showa Shell began to rapidly increase the

amount of investment it conducted in training. This shift in focus was

a result of the Company adopting a basic stance of incorporating

whatever new innovations were needed for its business. The

environment around us is always changing. As a company, we have

to be able to determine the best way to respond to such changes at

any given time, and this means that all employees should be able to

think and act of their own accord. At the moment, Showa Shell is in

the process of incorporating training designed to make this type of

autonomy common place in everyday operations and then utilize it

for further business development. With regard to training

participants, it is important to gain the understanding of their

supervisors, and then work to facilitate the development of ambitious

employees as an entire company.

Ootsu: In the past, it was often the case that employees had to be

selected to participate in training. Today, however, Showa Shell has

more training programs than employees can participate in of their

own volition. Moreover, the training sessions themselves are

stimulating, and it is becoming more common to hear employees

recommend certain training to their colleagues.

Iwamatsu: I participated in Leadership Training in 2014. During

this training, I was told that I had room for improvement when it

comes to taking the initiative to address issues. This inspired me to

play a more central role in my workplace, encouraging other

employees to follow my lead. The training served as a good

opportunity for me to think about whether or not I was acting in

accordance with the spirit of initiative defi ned as a pillar of the

Talent Vision.

Sakamoto: Previously, I had the opportunity to study at a business

school in the United States for two years through the Company’s

open application study abroad program. In addition to the

curriculum I studied over these two years, I also had the opportunity

to work in teams with various non-Japanese colleagues. Forced to

keep pace with these highly ambitious individuals, who all had

different sensibilities, I became mentally stronger, and was able to

install a wider-ranging perspective into my own sense of values. I am

putting this new sense of scope to good use in the workplace.

Ide: In the past, I have taken part in holding a business segment

course. In determining the content of the course, senior employees in

the segment sat down with newer employees to discuss the matter,

taking a different perspective from their normal work. In these

discussions, it became clear just to what extent the knowledge of the

older employees was being replaced with that of the new. This

experience also made me feel that there could be a real advantage

to transmitting my knowledge as an instructor.

Suzuki: I think that Mr. Ide’s experience with the business segment

course is characteristic of these courses. Rather than management-

rank employees, it is usually mid-level or younger employees that

teach these courses. As such, these courses are also helping cultivate

a corporate culture in which employees are encouraged to actively

teach and train the employees that joined after them.

Kondo: Last year, there was a training I wanted to participate in,

but it took place at an external facility, and would have required

several nights staying at a hotel. Unfortunately, I had to give up on

attending the training. For employees raising young children, the

hurdle for participating in trainings can be high. It would be helpful

if, in the future, such trainings could be held at the Showa Shell head

offi ce or perhaps split over several days.

Shindome: Ms. Kondo brings up an incredibly good point. In the

future, we will try to develop more-fl exible training programs to make

these learning opportunities available to all employees.

The clarity of the Talent Vision was most helpful. The clarity of this vision has fostered a shared understanding among employees from all positions and divisions. For this reason, there is no fear of employees losing focus or not having the appropriate mindset.

Toshifumi IwamatsuEmployee seconded to Showa Shell Business & IT Solutions Ltd. from the Integrated Finance & Control Division

Mai OotsuManager, Public Affairs Division

Katsuaki ShindomeCorporate Executive Offi cer

Yoriko SakamotoLubricants & Bitumen Division


Roundtable Employee Discussion The Showa Shell Group’s Human Resources and Spirit of Innovation

Nobuhiro OkabeManager, Research & Development Division

Hiroaki IdeSupply Division

Has Showa Shell Sekiyu’s spirit of innovation taken root in its employees, and how is innovationbeing pursued

*1. Employee opinion survey response rates: 96.0% in 2012, 95.3% in 2014*2. Increase in ratio of employees choosing “conditions favorable” from three

response choices (“conditions favorable,” “no strong feeling,” and “conditions unfavorable”)

(1) Collaboration that spreads across departmental boundaries

55%44%20142012

+11 percentage points*2

(3) Improvement of workflow processes

57%47%20142012


(2) Learning from the successes of other employees and companies

48%42%20142012


(4) Elimination of unnecessary work procedures

54%50%20142012


Employee Opinion Survey: Improvement in Prioritized Items

Okabe: In the Oil Business, we are advancing the Dantotsu Project with the aim of achieving structural improvements in cost competitiveness over the medium term. I took part in cutting costs by reorganizing our line-up of fuels as part of this project. The Dantotsu Project spreads across the entire supply chain to link divisions throughout the Oil Business. Each division has its own desires and a different perspective. It was by turning my ear toward the front lines of operations that I was able to understand the actual condition of operations and the needs of operating sites, and thereby help fi nd resolutions to the issues they faced. In this process, a lot of different ideas were presented by the various divisions, including the Sales Division, Supply Division, Manufacturing Division, and Distribution & Operations Division. By shifting the focus of conversation from what is best for individual divisions to what is best for the entire Company, I was able to gain the understanding needed to complete my part of the project.Ide: I was involved in a similar project, this one aimed at improving the profi tability of refi neries. Looking at refi neries, there were a lot of areas in which operations were still continuing in the same manner as always, despite changes in the operating environment. At the same time, there were cases when we had good ideas for improvement, but were unable to move into action. I set about advancing reforms in areas where these two issues had been preventing us from even taking the fi rst step forward. In the project team in which these reforms were studied and conducted, the specialized knowledge of the team members assembled from various divisions was incredibly helpful in this undertaking. To achieve the goals of our project, we formulated and implemented plans for crude oil selection, refi nery operations, and other factors. In overseeing this process, I honestly felt that the members involved were functioning as an effective team, which had a comfortable and unrestrained atmosphere, despite the members being from different divisions.Kondo: In my division, we hold quarterly meetings that are attended by representatives from all departments under the jurisdiction of the managing executive offi cer. These serve as an opportunity to share information regarding the initiatives being implemented in each department. Last year, representatives from the electric power business and the solar business of the Energy Solutions Business were given the opportunity to explain their operations. In response,

employees from other departments offered suggestions about where solar modules could be installed or how electricity proposals could be made and presented other business ideas, making the meeting into a synergy-building event.Yamaguchi: Business conditions for Solar Frontier are always changing, and, for us too, a spirit of innovation is imperative to success. To cultivate such a spirit, it is crucial to establish a shared focus on employee initiative. Based on this recognition, we undertook a branding project in 2014, and we were engaged in the process of redefi ning our corporate vision and code of conduct up until April 2015. The design elements of our brand were reinvented as part of this process. At a recent sales division summit, the president as well as senior managers from technology and production divisions expressed that they too shared the same focus, and I truly felt that we were all aligned along a common vector with a sense of unity throughout the Company and beyond divisional boundaries.Ootsu: Ms. Yamaguchi spoke of a common vector. Showa Shell also is working to align employees along a common vector. The Town Hall Meetings designed to provide employees with an opportunity to communicate directly with the Company’s senior management team are playing a role in establishing this vector. These meetings now take place periodically, and include sessions for all employees and those for managers and are even held at various operating sites.Suzuki: I think you are right about that. We have recently been prioritizing improvements with regard to the following four items on annual employee opinion surveys: (1) collaboration that spreads across departmental boundaries, (2) learning from the successes of other employees and companies, (3) improvement of workfl ow processes, and (4) elimination of unnecessary work procedures. In the 2014 survey, all of these items showed improvement over the 2012 survey, when they were identifi ed as needing improvement. For example, items (1) and (3) improved 11 percentage points and 10 percentage points, respectively. However, only about half of the Company responded that conditions were favorable in relation to any of the items, and it is clear that we must pursue further improvements in these areas.


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Yuri YamaguchiSolar Frontier K.K.Seconded from the Energy Solutions Business Center

Hitomi KondoCommercial Sales Division

Has Showa Shell been successful in improving the workplace environment in order to leverage a diverse range of human resources and allow individual employees to realize their full potential

Shindome: Our basic human resource policy is to offer all

employees equal opportunities to develop their skills and provide fair

and impartial evaluations of their performance. In addition, we

realize that empowering female employees is also necessary to live

up to the expectations of society, and that clear and objective

numerical goals must be defi ned in this regard. We plan to step up

efforts to address this matter going forward.

Suzuki: To defi ne its view on diversity, Showa Shell established the

Policy for Diversity and Inclusiveness in 2004. The Company has

pushed forward with training related to this policy since its

introduction in addition to other measures geared toward raising

awareness. In hiring, as well, our policy is to select capable

individuals regardless of gender, nationality, or other factors. In

addition, Showa Shell has long been active in the advancement of

work-life balance measures. Expanding upon these measures, we

instituted our fi rst Company-wide survey of female employees in

2014 as one facet of our efforts to further empower these

employees. We are in the process of developing specifi c initiatives

based on the results of this survey.

Kondo: I have two children, a nine-year-old and a two-year-old.

Between childbirth and childcare leave, I took two years off from

work for each child. Upon my return, balancing my work and

childcare was a struggle. Today, I am able to take advantage of

Showa Shell’s superior work-life balance support systems, such as

the one that provides leave to care for sick children. However, the

biggest support came in the form of the understanding and

cooperation of my supervisors and coworkers. The conditions

relating to one’s family and work differ from person to person, and

the situation waiting for them when they return from leave is also, of

course, different. Being able to sit down with one’s supervisor

immediately after coming back to work to discuss the future course

of one’s career is a form of aid that is of monumental importance to

employees using leave systems.

Yamaguchi: For me, the period after returning from childcare

leave was a time of searching for a way of balancing my work life

with my home life. To support

people also seeking their own

answer to this quandary, I think

it would be most helpful if there

was a framework for

introducing such employees to

a network of other working

mothers that had previously

found themselves in the same

position. Furthermore, my

husband works at the same

Group company as me. Using

the fl extime system, he is able

to take our child to the nursery,

and he is able to manage his

work in a way that allows him

to return home at a reasonable hour to help with raising our child.

Understanding and supporting men’s involvement in childrearing is

the same as giving support to women, and this recognition is

incredibly important.

Iwamatsu: Just as you say, it is important to create a corporate

culture in which it is natural for people to help colleagues that fi nd

themselves struggling after returning from childcare leave or when

taking care of sick children, and this support must be provided

regardless of gender. At the same time, however, employees raising

young children must not come to rely on this support, but rather

should focus on generating the greatest results possible in their

limited time at work.

Ide: I once took three months off from work for childcare leave.

I, of course, realized the importance of working even more effi ciently

than before after returning to work. However, at the same time I

believe that if more people become more aware of the fact, like

women, men also have various different ways of taking part in

childrearing, I think it will be even easier for employees raising

children to make greater contributions in the workplace.

Shindome: In the future, it will be more important than ever to

realize that raising children, caring for family members, and other

life events affect both men and women. As a company, we must

create a workplace environment in which people striving to balance

their work and home lives can still use their skills to the fullest at work.

Today, a number of important issues were brought up in various

areas, and I hope to use the knowledge gained today to further

entrench Showa Shell’s Talent Vision and improve the workplace

environment. With an ambitious spirit for pursuing higher goals and

a forward-looking perspective, I plan to advance further innovation

in response to future changes. In closing, I would like to thank you all

for participating today.

Dan SuzukiManager, Integrated Human Resources Division


Safe Operation and Stable Supply

HSSE Promotion SystemWe established the Risk Management Committee to serve as the

highest HSSE decision-making body. This committee is responsible

for all aspects of internal control, including HSSE and compliance.

Matters discussed by the Risk Management Committee are all top

priorities for our business activities, which is why Group CEO

Tsuyoshi Kameoka chairs this committee and reports important

matters discussed to the Board of Directors. Under the Risk

Management Committee, there are three subcommittees devoted to

specifi c areas of discussion, and members of these subcommittees

include leaders of departments in the Showa Shell head offi ce. In

addition, there are site-level teams at individual work sites and

divisions.

Oil products are indispensable to our daily lives. To maintain a consistent supply, it is essential to procure a stable

supply of crude oil, manufacture quality products safely at refi neries, and then ensure these products are transported

securely by tankers, trucks, and other means. Ensuring safe operations and a stable supply of oil products is our top

priority. We pursue excellence in health, safety, security, and the environment (HSSE), and employ a HSSE

management system (HSSE-MS) built on the expertise of the Shell Group. We also conduct emergency response drills

and other initiatives.

Company level

Site level

Risk Manage-ment CommitteeChair:Group CEO

Product Safety Sub-Committee

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

Showa Shell Group HSSE Conference

Follows the Basic Policy for HSSE and discusses matters pertaining to the formulation of HSSE plans, progress monitoring, and performance reviews for the entire Showa Shell Group.

Security Liaison Committee Meeting (SLCM)

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

Safety and Hygiene Committees (At all work sites)

HSSE Conference(Each workplace / offi ce)

Reports


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The Shell Group has developed the HSSE Management System

(HSSE-MS) as a system to track and continuously improve HSSE

performance. The system is also employed by the Showa Shell Group

to help comprehensively manage risks related to HSSE. Investigations

are conducted at individual work sites in accordance with the HSSE-MS

to identify hazardous or environmental risks at relevant facilities. The

potential impact of these risks is measured based on the chance of

occurrence and projected damage or environment impact. The scores

are then used to prioritize the facilities and hazards for which responses

are needed. Response measures for high-priority hazards are developed

through the Hazard and Effects Management Process (HEMP)*1, and

corrective plans are formulated. Group refi neries and other principal

operating sites have acquired certifi cation under the ISO 14001

international environmental management standard, and we have

instituted an environmental management system based on this standard.

HSSE Management System (HSSE-MS)

Showa Shell has been holding the Safety Awards since 1992 as a

means of raising safety awareness at all Group companies and

increasing the overall level of safety throughout the Group. At the

award ceremony held in March 2014, a total of 34 work sites were

presented with the Safety Excellence Award for being free of

accidents and other incidents for a whole year, while 20 work sites

received the Special Safety Award for going a specifi ed amount of

time without experiencing any incidents.

Safety Awards

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

*2. TRIPOD: An accident analysis technique used by the Shell Group. *3. Risk Assessment Matrix (RAM): A management table for assessing the effects and incidence

probability of risks by person, capital, environment, and popularity categories.

Correction Plan / Recurrent Prevention Policy

Act

HSSE Inspection / Self-Review

Check

Management Risk Review Management Committee

Do

Safe Operation and Stable Supply

HSSE Priority Strategy Risk Management Committee

HSSE Action Plan

Plan

Hazard and Effects Manage-

ment Process (HEMP*1)

Risk Assessment Matrix (RAM*3)

Accident(Accident report)

Causal Analysis(TRIPOD*2)

We realize the extreme importance of preventing serious accidents

that result in lost work time, as this is absolutely crucial to fulfi lling our

mission of providing a stable supply of products and earning

customer trust. We approach this from both hard and soft

perspectives. Hard initiatives include improving facilities and

developing accident prevention guidelines and procedures. Soft

initiatives include spreading safety awareness, and one initiative in

this area is the Goal Zero Movement. Since its launch in 2011, we

have continued to advance the Goal Zero Movement with the aim

of reducing accidents that result in lost work days and other

accidents to zero. In 2014, a plethora of activities were undertaken

as part of this movement during the period from June to August.

Activities included the distribution of safety messages from all

executives and safety-related discussion forums held at all work sites.

In addition, employees prepared declarations about their activities

and initiatives geared toward accomplishing Goal Zero, and these

declarations were displayed for view by other employees. These

efforts have resulted in a decline in the total recordable case

frequency for occupational accidents.

Goal Zero Movement

0.81.0

1.4

1.71.8

2010 2011 2012 2013 2014

2.0

1.5

1.0

0.5

0

(%)

Total Recordable Case Frequency

Incident rates (%) per 1 million labor hours

Figures include Showa Shell Group companies and business partners, and recordable cases of all occupational accidents, including those that do not result in lost work days.

Goal Zero


Since 2006, all Showa Shell executives have participated in site visits to our refi neries, our oil depots, and other work sites to examine working conditions, as well as exchange opinions and share awareness regarding issues with onsite staff, to improve overall HSSE performance. In 2014, these visits were focused on encouraging employees to hold “Tool Box Meetings,” onsite safety meetings conducted before the start of work to confi rm what tasks need to be accomplished that day and the potential dangers that should be addressed. All executives took part in visiting a total of 62 work sites during 2014.

HSSE Site Visits by Executives

We hold comprehensive disaster drills at our refi neries and other workplaces in cooperation with business partners and government organizations. These drills prepare employees for large-scale earthquakes, tsunamis, and other disasters. In addition, oil clean-up

drills are used to train employees how to respond in the event of a major oil leak. Conducting such drills on an ongoing basis enhances employees’ response skills, and enables us to periodically revise and improve our systems to assure the safety of operations.

Disaster Drills at Refi neries

Showa Shell has formulated a crisis management plan (CMP) and a business continuity plan (BCP) to prepare for crises. These plans include provisions to guarantee that products can be ordered and shipped anywhere in Japan even if an earthquake strikes directly below the Tokyo metropolitan area or in the Nankai Trough, if there is an outbreak of a new strain of infl uenza, or if some other disruption occurs. The plans also provide for the continuation of business activities in the event that the head offi ce ceases to function due to such disruptions. We conduct yearly drills based on these plans. In May 2014, we instituted a drill in which employees responded to a simulated earthquake in the Nankai Trough (magnitude 9). This drill included disruptions to the refi ning capabilities of Group refi neries and to product shipping functions. The drill also assumed that the earthquake had damaged electricity, communications, and transportation infrastructure used by work sites in a wide-ranging area centered on the Tokai, Kinki, and Chugoku regions. This drill was conducted twice, and none of the participants were informed of the scenario prior to training. The fi rst drill was conducted in accordance with the Company’s CMP. After the outbreak of the simulated earthquake, employees set about establishing a Disaster Control Headquarters, performing mock procedures for assessing the

damage inside and outside of the Company, formulating response measures, and verifying timetables for the head offi ce taskforce. In addition, we simultaneously tested the safety confi rmation email system in which all Group employees are enrolled and drilled procedures for confi rming the safety of head offi ce staff. The second drill tested our BCP. This drill entailed developing the procedures necessary for recovering the shipping functions of principal Group refi neries and continuing oil product supply from the day following the simulated earthquake. To this end, employee representatives responsible for related manufacturing, supply, distribution, and sales functions were assembled to discuss the matter. Based on issues uncovered during both of these drills, we instituted improvements to both the CMP and the BCP.

Comprehensive Disaster Response Drills

As we operate potentially hazardous facilities that face the possible risk of complex, large-scale fi re incidents, employees must be able to accurately predict how a fi re will react to given circumstances and how to fi ght fi res strategically. The Niigata Disaster Control Training Center serves as a place for cultivating fl exible and profi cient fi re-fi ghting capabilities. At this facility, trainees face actual fi res, allowing them to develop an understanding of how fi res act, and are included in team drills where their decisiveness is put to the test. Since opening in 1993, the center has been a site for fi re drills not only for Company employees, but also for companies in and outside of Niigata, thereby helping Showa Shell fulfi ll its social responsibility by coexisting with and contributing to the community. It is also used by local fi re-fi ghting

brigades and schools. In addition, the center dispatched lecturers to the Tokyo Fire Department in 2014. These lecturers were highly evaluated for their specialized knowledge. In the 21 years since the center fi rst opened, 5,805 people have undergone training there.

Fire-Fighting Drills

Group CEO Tsuyoshi Kameoka visiting Yamaguchi Refi nery of Seibu Oil Co., Ltd.


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Environmental Preservation and R&D Ventures

As an energy company, we have two responsibilities with regard to the environment. One is to maintain a clear

understanding of how our business activities impact the environment, and use this understanding to work toward

reducing our environmental footprint by investing in energy-saving and environmental preservation measures. Showa

Shell also develops energy sources and products that help prevent damage to the environment, and provides society

with a stable supply of these products.

Showa Shell has formulated its Environmental Preservation Guidelines

in accordance with the Basic Policy for Health, Safety, Security and

Environment. Based on these guidelines and the guidance of the

HSSE Division, we operate an HSSE-MS (management system) to

improve our environmental performance on a continuous basis

through a process of determining, evaluating, and managing

environmental risks. In addition, our refi neries and other principal

work sites have acquired certifi cation under the ISO 14001

international environmental management standard. With regard to

environmental initiatives, we have formulated the Medium-Term

Environmental Action Plan out of recognition for the need to manage

such activities in a focused and systematic manner, and have

defi ned medium-term environmental targets based largely on

ensuring compliance. In 2014, managers and employees

responsible for waste management were gathered from various work

sites to participate in a seminar on the Waste Management and

Public Cleansing Act as part of our efforts to ensure strict compliance

with this law.

Structure for Promoting Environmental Preservation

and Medium-Term Environmental Action Plan

Information on the acquisition status of ISO certifi cation and the

Medium-Term Environmental Action Plan can be found in the

HSSE section of CSR Book 2015.

The majority of the environmental impacts from Showa Shell’s business

can be attributed to either the oil product manufacturing processes at

Group refi neries or the consumption of oil products by customers.

These two areas are therefore important in reducing our environmental

footprint. To lower the impact from Group refi neries, we are making

capital investment related to environmental preservation and instituting

energy-saving measures. In regard to consumption, we are reducing

the environmental impact by promoting the use of eco-friendly oil

products and solar modules. In addition, we have introduced a

cloud database service to help us maintain an understanding of the

quantitative effects of our environmental preservation initiatives. This

system enables environmental performance fi gures from refi neries,

work sites, branch offi ces, and other bases to be managed in an

integrated manner via the Internet.

Important Areas for Reducing Environmental

Footprint


Atmospheric Pollution PreventionSulfur oxides (SOx) and nitrogen oxides (NOx) are produced by fuel

oils and gases in refi nery furnaces and boilers. The Group strictly

maintains SOx emissions below regulated levels by using low-sulfur

fuel oil and sulfur-free fuel gas treated with gas-cleaning equipment.

Efforts to prevent atmospheric pollution by NOx emissions include

improved combustion methods achieved through the introduction of

low NOx burners and the installation of fl ue gas denitration

equipment. Through these efforts, we are working to prevent

atmospheric pollution.

Water Usage and Water Pollution PreventionGroup refi neries use water in large quantities, primarily for cooling

purposes or to generate high-pressure steam for refi ning processes.

The water used at oil refi neries is strictly managed so that it meets

environmental regulations related to chemical oxygen demand

(COD) and oil content. Coolant water is confi rmed to have no oil

content before it is discharged into the ocean. Water quality is

managed through wastewater purifi cation, either via oil separators,

chemical treatment using fl occulating agents, or the use of activated

sludge treatment equipment.

Industrial Waste ReductionThe petroleum refi ning process generates industrial waste, including

sludge and disposable catalysts. The Group is building a

Company-wide waste management system to ensure the optimum

disposal of industrial waste and reuse of resources. In 2014, fi nal

waste output by refi neries amounted to 0.05% of the total amount

of waste generated, or 24 tons. Accordingly, the Group has

continued to meet its zero-emissions goal (emissions of 1% or less)

since 2008, and also successfully achieved the goal set forth in the

Petroleum Industry’s Action Plan for a Low-Carbon Society released

by the Petroleum Association of Japan of realizing an 89%

reduction in the fi nal output of industrial waste from the level in

2000 by 2015.

Initiatives at Group Refi neries

Initiatives at Group Refi neriesThe Company conducts the in-house generation of electricity by

utilizing certain intermediary products created through the refi ning

process used to manufacture oil products, and this results in a

substantial amount of greenhouse gas emissions. For this reason, it is

incredibly important for us to conserve energy as a means of

preventing global climate change.

In 2010, the Petroleum Association of Japan launched its

“Petroleum Industry’s Action Plan for a Low-Carbon Society”. This

plan targets a total reduction in energy use among all companies

in the association of 530,000 KL (crude oil equivalent) by fi scal

2020, and efforts to meet this goal are primarily taking the form of

energy-saving measures at refi neries. Group refi neries are also

participating in these activities. We are investing in equipment

such as heat exchangers, waste heat recovery boilers, and exhaust

gas recycling equipment while also pursuing the optimization of

Energy Conservation and Climate Change Prevention

Showa Shell Total Adverse Environmental Impact for 2014

*2. Total is for Yokkaichi Refi nery, Keihin Refi nery, and Yamaguchi Refi nery.

*3. From 2013, fi gures are displayed for intake volumes of general-use water, seawater, and tap water and discharged volumes of wastewater.

*1. Fuel calculations are in terajoules (1 TJ = 1012 J).

•CO2 emissions 506 Thousand t-CO2

OUT

Procurement and transport(primarily crude oil)

IN

•Energy 7,085 TJ*1

(crude oil equivalent) 183 Thousand KL


•Total waste 10,716 t•Wastewater*3 4,497 Thousand t

OUT

Other manufacturing plants(for asphalt, lubricant, LPG, petrochemical

products, solar modules, etc.)

IN

•Energy 3,231 TJ (crude oil equivalent) 83 Thousand KL•General-use water*3 2,052 Thousand KL•Seawater*3 2,248 Thousand KL•Tap water*3 197 Thousand KL

•CO2 emissions 4,820 Thousand t-CO2

•Total waste 46,009 t•Sulfur oxides (SOx) 2,902 t•Nitrogen oxides (NOx) 2,125 t•Soot dust 80 t• Wastewater*3 168,374 Thousand t

OUT

Manufacturing plants(refi neries)*2

IN

•Energy 69,164 TJ (crude oil equivalent) 1,784 Thousand KL•General-use water*3 32,718 Thousand KL•Seawater*3 135,472 Thousand KL•Tap water*3 184 Thousand KL


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•CO2 emissions 69,390 Thousand t-CO2

OUT

Consumption(usage of oil products by customers)

IN

•Gasoline 8,694 Thousand KL•Jet fuel 1,791 Thousand KL•Kerosene 2,681 Thousand KL•Diesel oil 5,395 Thousand KL•Heavy fuel oil 3,099 Thousand KL•Other petroleum products 6,085 Thousand KL

*5. 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).

OFFSET2014 carbon offset volume of aggregate total of solar modules produced as of December 31, 2014

Approx.1,400,000 t-CO2*5

*4. From 2013, fi gures are included for environmental impact of domestic solar module transport.


OUT

MarketingService stations

(approx. 3,400 stations)

IN

•Energy 1,669 TJ (crude oil equivalent) 43 Thousand KL


OUT

Product transportation and storageOil depots, ground and sea transport of oil

products and solar modules, etc.*4

IN

•Energy 2,514 TJ (crude oil equivalent) 65 Thousand KL

Showa Shell recognizes the importance of protecting biodiversity,

and is taking action to this end. For example, we have defi ned our

basic stance on the subject in the Basic Policy for Biodiversity,

became a promotion partner for the “The Declaration of Biodiversity

by Keidanren” issued by the Japan Business Federation (Keidanren),

and provide donations to The Nature Conservation Society of

Japan. In addition, we conduct environmental assessments and take

other steps to protect biodiversity when utilizing or developing land,

and are also instituting measures to reduce the impact of production

sites on biodiversity with regard to the amount of wastewater

discharge, the quality of this water, and the release of chemicals.

Furthermore, employees at the Yokkaichi Refi nery of Showa

Yokkaichi Sekiyu Co., Ltd. frequently participate in the activities of a

local organization that aims to preserve the green sea turtle

(Chelonia mydas). This organization conducts cleanup activities

around green sea turtle breeding grounds on the Yoshizaki Coast,

which serves as an estuary for the Suzuka River, which fl ows

alongside the Yokkaichi Refi nery.

At other work sites as well, employees periodically conduct

cleanup activities along coasts and riversides to help preserve the

natural environment. Showa Shell is also a participant in the

Tokyo-Bay PP Forum, and is taking part in this organization’s efforts

to restore the biodiversity of the Tokyo Bay area.

Biodiversity Protection Initiatives

15,000

12,000

9,000

6,000

3,000

0

12.00

10.00

8.00

6.00

4.00

1990 2007 2008 2009 2010 2011 2012 2013 2014

4,820

7.63

8.60

3,965

10.19

9.45

CO2 Emissions and Unit Energy Consumption at Group Refi neriesrefi ning facility operations.

Furthermore, the Medium-Term Environmental Action Plan

prescribes measures targeting reductions in unit energy

consumption*6 of more than 1% annually on average over the

medium to long term, as mandated by the Act on the Rational Use of

Energy. In 2014, energy consumption at Group refi neries was

7.63, down 19% from 1990 levels. Improvements have been

particularly pronounced at the Keihin Refi nery of Toa Oil Co., Ltd.,

which met all of the energy benchmarks*7 defi ned for fi scal 2013

based on the Act on the Rational Use of Energy. The refi nery was

therefore included in the list of benchmark-meeting facilities released

by the Agency for Natural Resources and Energy.

(Kilotons/Year) (Unit Energy Consumption*6)

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

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

*7. Energy benchmarks: Energy benchmarks are part of a system designed to promote energy conservation measures by publicizing lists of business operators with superior performance with regard to various benchmarks. These benchmarks are set for specifi c industries and fi elds in order to allow operators from these industries and fi elds to compare their energy conservation performance with that of their peers.


COLUMN

High-Value-Added Lubricant ProductsLubricants are used in automobiles, factory machinery, and other

pieces of equipment. Showa Shell has a robust line-up of high-

value-added lubricant products tailored to meet customer needs.

Our automobile engine lubricants utilize the Company’s low-

viscosity and specialty additive technologies to pursue higher

levels of fuel effi ciency while also lengthening the replacement

cycles for engine and gear oil to reduce maintenance costs.

Moreover, Showa Shell’s lubricants excel at protecting the

equipment in which they are used. This feature provides a

response to the recently rising demand for means of extending

automobile lifespans, and has won much customer acclaim for

this reason. Our factory machinery lubricants, meanwhile, deliver

energy-saving performance by reducing the amount of electricity

required to operate lubricated equipment. Furthermore, we are

developing a number of specialty products aimed at helping

customers reduce factory management costs, such as high-fl ash-

point lubricants developed to facilitate compliance with the

Fire Service Act.

The high-value-added products Showa Shell supplies to

customers attain even-higher performance by utilizing a

synthesized base oil for lubricants manufactured by the Shell

Group using gas-to-liquids (GTL)*7 technologies.

High-Value-Added Asphalt ProductsAsphalt is used for a wide variety of applications, such as for

roadway paving materials and building materials. Different

applications require different levels of durability and safety as well

as environmental performance. As Japan’s only integrated

manufacturer of asphalt, Showa Shell is devoted to developing

high-value-added asphalt products that provide the functionality

required for various applications.

Showa Shell has developed an asphalt product that can

be applied at lower temperatures, effectively reducing the

amount of time needed to open roads and cutting CO2

emissions during asphalt production. This asphalt is being used

in expressways and other applications. We are also working to

commercialize colorable asphalt, which will enable pavements

to be made to better match the surrounding scenery.

Furthermore, the Company has developed an asphalt

recycling technology that can create recycled asphalt with

performance equivalent to regular asphalt, and we are

promoting use of this recycled asphalt on standard roads.

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

Pavement using colorable asphalt (Todaiji Temple)

R&D Activities in the Oil BusinessR&D activities in the Oil Business are based out of our Central

Research Laboratory, located in Kanagawa Prefecture, where we

conduct research and development geared toward creating

products that match customer needs and cultivating innovation for

future growth.

Creation of Products Matched to Customer NeedsShowa Shell is developing systems for creating cutting-edge

products by exchanging human resources and conducting joint-

development with Shell Group R&D centers in the United States, the

Netherlands, and Germany. While pursuing coordination between

refi ning, supply, distribution, and sales divisions, the Company is

fully leveraging the technologies it has created through collaboration

with the Shell Group to develop and commercialize fuel, lubricant,

grease, and asphalt products that respond to customer needs and

provide superior environmental performance.

Central Research Laboratory


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Cultivation of New Innovation for Future GrowthWe are actively allocating management resources to R&D ventures

aimed at developing next-generation energy sources and new

materials. In these ventures, emphasis is being placed on social

issues, such as those related to the environment, and the future needs

of customers. In the fi eld of next-generation energy sources, we are

collaborating with universities and exchanging information with the

Shell Group with the goal of developing a technology for using non-

edible biomass to manufacture low-cost biofuel that emits minimal

amounts of CO2. In regard to new materials, the Company is

advancing joint research with universities in the fi eld of artifi cial

photosynthesis, which involves technologies for effectively utilizing

CO2. Artifi cial photosynthesis is a clean process that uses sunlight to

create benefi cial chemical substances from water and CO2. Moving

ahead, Showa Shell will push forward with the development of new

materials that contribute to higher energy conversion effi ciency.

High-Value-Added Products Utilizing CIS Thin-Film

Solar Module TechnologiesCIS thin-fi lm solar modules differ from crystalline silicon modules in

terms of their structure and production process. As a result, CIS solar

module technologies can be adapted to various applications that

are diffi cult to achieve with crystalline silicon modules.

One such application can be seen in the slim, lightweight

“Solacis neo” modules launched in 2013. One of the advantages

of thin-fi lm over crystalline silicon is its fl ex-resistance. This enables

CIS modules to be built without a metal frame. We also launched the

Cross One mounting system, a new mounting method that simplifi es

the installation processes while ensuring durability. Combined with

the Cross One mounting system, Solacis neo can be installed on

roofs with strict weight or structural limitations that would otherwise

have been diffi cult to address. Due to the benefi ts of these slim,

lightweight modules, Solacis neo is being utilized by housing

developers, and can be found embedded in newly built homes.

We are now working to develop light-permeable CIS thin-

fi lm modules as well as modules that can be installed on curved

surfaces. By raising the value of solar modules in this way, we aim

to expand the potential for solar power system installation to create

new demand.

Highly Economical New TechnologyThe Company will continue to drive forward R&D ventures focused

on CIS technologies in the future. At the same time, we will also

develop new technologies that contribute to the further adoption of

solar power from a long-term perspective.

In 2010, Solar Frontier, IBM Corporation, and Tokyo Ohka

Kogyo Co., Ltd. commenced joint research and development on

CZTS (copper, zinc, tin, sulfur, and selenium) thin-fi lm solar modules.

These modules do not use rare metals. Conversely, they are made

from materials that are both affordable and easy to obtain. By fusing

IBM’s CZTS thin-fi lm solar module technologies and Solar Frontier’s

thin-fi lm solar module manufacturing technologies, we will work to

develop modules with superb levels of cost competitiveness.

In August 2012, a conversion effi ciency of 11.1% was

successfully achieved, setting a new world record for CZTS thin-fi lm

solar panels, and this record was rewritten in December 2013 with

an effi ciency of 12.6%. In this manner, we are steadily generating

results that are moving us forward on the path to bringing CZTS thin-

fi lm solar modules to practical application.

Photoelectrode Reducing electrode

Sunlight

O2, etc. H2, hydrocarbons, etc.

H2O CO2

R&D Activities in the Energy Solutions Business (Solar Business)In addition to developing technologies for existing product lines, the

Atsugi Research Center is working to create CIS thin-fi lm solar

modules with increased levels of value as well as next-generation

solar modules that utilize more-affordable materials.

Atsugi Research Center


Community and Social Contribution Activities

Showa Shell conducts environmental preservation and international community support

activities with an emphasis on supporting the education of children and youths who will

eventually be responsible for shaping the future of society. Through these efforts, we are

working to provide a different type of “energy” to local communities and society as a

whole. Based on this policy, we conducted a robust program of community and social

contribution activities in 2014. Corporate Report 2015 describes some of our initiatives

for supporting the education of the next generation.

Shell Art Award 2014In 1956, there were almost no independent art awards aside from

those associated with group exhibitions. At that time, a non-Japanese

executive expressed their desire to provide young artists with the

opportunity to display their works. This led to the development of the

Shell Art Award, which is offered through a fully open application

system. The spirit of this award lives on today, as we continue to

accept applications from aspiring artists aged up to 40.

Shell Art Award 2014 was the 43rd time this event has been

held since its inception, and a total of 815 works were submitted by

654 artists. Of these, 52 works were selected for awards, and these

works were displayed at the Shell Art Award 2014 exhibition at the

National Art Center, Tokyo in Roppongi. A total of 6,109 people

visited the exhibition over its 13-day run during December 2014.

To offer ongoing support to aspiring artists, in conjunction with

the standard exhibition, we also displayed the Showa Shell Art Award

Artist Selection, which featured several works from four previous

award winners. In addition, a number of new initiatives are being

implemented with the hopes of increasing connections between artists

and potential patrons, such as providing an area at exhibitions where

visitors can view the art portfolios of award winners. Furthermore, in

2014, we presented a special Audience Award chosen based on

votes from people attending the exhibition.

We hope to continue holding this annual event to contribute to

the development of cultural arts in Japan.

Support education for

next generation

Environmental Environmental preservation preservation

activitiesactivities

International International communitycommunity

supportsupportactivitiesactivities


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Energy Education Program for ChildrenAs one effort to support the education of the next generation of

children, we hold Energy Education Programs for elementary school

students. Through this educational program we help deepen children’s

understanding of global climate change issues, the importance of

energy conservation, and renewable energy. These classes are held

at elementary schools near our head offi ce in Daiba, Tokyo, and at a

training facility neighboring the Niigata Yukigunigata Megasolar

Power Plant in Niigata Prefecture. In 2014, a total of 403 students

participated in this program.

In addition, we now hold Energy Education Programs at other

Showa Shell Group facilities, such as those of Solar Frontier and the

Yokkaichi Refi nery of Showa Yokkaichi Sekiyu Co., Ltd.

Going forward, the Showa Shell Group will continue to conduct

unique energy-related classes and otherwise utilize our resources to

provide children with opportunities to think about the environment and

the energy that surrounds their daily lives.

As a Company

Together with our customers

Together with our business partners

Together with our employees

Together with communities and society

Together with our shareholders and

investors

Corporate governance

ISO 26000 Comparison Table

CSR Book 2015, available on the Company’s

website, contains detailed non-fi nancial data

and information on the CSR activities conducted

for the benefi t of Showa Shell’s various

stakeholders, some of which are not included in

Corporate Report 2015. Please refer to the

Company’s website for

details.

Principal Contents of CSR Book 2015

HSSE

HSSE Promotion and Management

System

Health

Safety

Security

The Environment

Medium-Term Environmental Action Plan

(2013–2015)

Status of ISO Certifi cation

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

CSR Book 2015

Information on other community and social contribution activities conducted in 2014 can be found in the Together with Communities and

Society section of CSR Book 2015, which is available on the Company’s website.

10th “Things to Preserve and Correct around Our Town” environmental photo contest

Supporteducation for next

generation

Environmentalpreservation

activities

Jointly held Energy Sustainability Forum


activities

Teruha no Mori Ongaeshiforest support project

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


generation

Participation in TABLE FOR TWO cafeteria charity program

International community support

activities


generation

Provision of offi ce space to Refugees International Japan

International community support

activities


activities

CSR Book 2015

Photograph provided by TABLE FOR TWO International


Showa Shell aims to realize sustained growth and maximize

corporate value by promoting the separation of management

oversight and business execution functions to improve the transparency

and effi ciency of management as well as by practicing the timely

disclosure of accurate information. We also aim to earn trust from our

shareholders by treating them fairly and impartially. We actively

incorporate objectivity into management decisions through outside

opinions, while developing the optimal governance systems matched

to the Company’s goals and attributes as well as to the changing

social and legal environments. We also regularly verify that these

systems work in practice, and make improvements if necessary.

Basic Policy for Corporate Governance

1997 Number of directors reduced from 26 to 22

1999 Number of directors reduced from 18 to 11, executive offi cer system introduced

2003Executive offi cer system revised, Management Executive Committee established, number of outside directors increased by 1

2005 Number of outside directors increased by 1

2007 Retirement allowance system for directors abolished

2013

Number of outside directors increased by 1 (5 of 8 directors became outside directors)Directors’ term shortened from 2 years to 1 yearCompensation Advisory Committee established

2015 Positions of chief executive offi cer (Group CEO) and chairman of the Board of Directors separated

Efforts to Build a Corporate Governance System

Corporate Governance

Showa Shell’s corporate governance systems aim to realize sustained growth and maximize corporate value by

improving the transparency and effi ciency of management and helping the Company’s business function effectively in

changing environments.


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Representative Director,President, Group CEOEnergy Solutions Business COO A Tsuyoshi Kameoka

Representative Director,Group CFOB Douglas Wood Group Functions(Finance & Control, Credit & Financial RiskManagement, Procurement, IT Planning and Corporate Planning (including Corporate Governance))

DirectorsC Minoru Takeda*1

(Chairman of the Board of Directors)

D Yukio Masuda*1*2

E Takashi Nakamura*1*2

F Ahmed M. Alkhunaini*1

G Nabil A. Al-Nuaim*1

H Christopher K. Gunner

*1. Outside director*2. Independent director/Audit & Supervisory

Board member

Audit & Supervisory Board MembersI Kiyotaka YamadaJ Misao HamamotoK Midori Miyazaki*2*3

L Kenji Yamagishi*2*3

*3. External Audit & Supervisory Board member

Board of Directors and Audit & Supervisory Board Members (As of June 1, 2015)

In June 2015, the Company introduced a new, more sophisticated

operating framework for the Board of Directors by separating the

position of Group CEO, the highest authority for business execution,

from the position of chairman of the Board of Directors, which entails

responsibility for supervising management. This change will allow

for more-effective oversight coupled with more-timely business

execution. Recognizing the role the chairman of the Board of

Directors must play in supervising management, Minoru Takeda was

selected for this position because, as an outside director, he does not

take part in business execution. In addition, as part of its efforts to

further strengthen corporate governance systems, the Company

began examining the possibility of establishing a nominating

committee to function alongside the Compensation Advisory

Committee formed in 2013. The Board of Directors currently has

eight members, including fi ve outside directors as well as one

internal director that does not have business execution

responsibilities. The fi ve outside directors and one non-executive

director effectively fulfi l their role of providing supervisory functions

for management. In addition, these directors offer suggestions and

advice for maximizing corporate value from their varied and

objective standpoints. Grounded in rich global experience and

expertise in a variety of fi elds, the global perspective of the outside

directors provides invaluable guidance as we develop the Oil

Business and the Energy Solutions Business. Furthermore, two of the

fi ve outside directors are independent directors, ensuring that

management remains objective and that the interests of general

shareholders are protected.

To ensure that outside directors and other directors can fully

participate in discussions at meetings of the Board of Directors,

materials used at these meetings are distributed in advance and

pre-meeting briefi ngs conducted.

Directors and Board of Directors

Reports

Auditing

Instructions Instructions

Auditing Reports

Corporate Governance System and Internal Control System

General Shareholders’ Meeting

Compensation Advisory

Committee

[Management Supervision]Chairman of the Board of Directors

Outside Directors

[Business Execution]Representative Director,

Group CEO, Executive Directors

[Business Execution]

Information Disclosure Sub-Committee

VOPinternal

consulting service

VOPexternal

consulting service

AuditCommittee

Accounting Auditor

Audit &Supervisory Board

Board of Directors Audit &Supervisory

Board Members

Nominations Nominations NominationsReports

Reports

Reports Reports Reports

Reports

ReportsReports Notice Notice Notice

Reports

Advice

Reports

Reports

Reports

Reports

Reports

Reports

Coordi-nation

Coordination

Planning approval

Audit-ing

Auditing

Auditing

Auditing

Group Executive Committee

Group CEO

Group CFO

Compliance Committee

Showa Shell Group HSSE Conference

Business Divisions and Affi liated Companies

Executive Offi cer, Oil

Business COO

Oil BusinessExecutive Offi cers

Executive Offi cer, Energy

Solutions Business COO

Energy Solutions BusinessExecutive Offi cers

Risk Management Committee

The CEO directly supervises the Internal Audit Division and takes charge in general business principles.

G C

I

D

K L

E

J

F H

A B

Internal Audit Division

Harassment consulting service


Interview with Takashi Nakamura, Outside Director

We asked Takashi Nakamura, who has been serving as an outside director

(independent director) since March 2014, what he thought of Showa Shell’s

corporate governance systems and what further improvements can be made.

When I fi rst assumed this position, I was very impressed with Showa Shell’s dedication toward providing a stable supply of energy, and how the Company was attempting to evolve into a comprehensive energy provider that deals in renewable energy in addition to oil. I believe that for a company to grow sustainably, rather than simply pursuing higher earnings, it must provide value to a diverse range of stakeholders, including shareholders, customers, employees, and society as a whole. Showa Shell is the type of company that can grow in this way. Showa Shell’s corporate governance systems rank among the best at listed Japanese companies. The Company was quick to appoint several outside directors, including independent directors, and has also adopted an executive offi cer system and established a Compensation Advisory Committee. This is representative of a well-thought-out and highly advanced governance system. Furthermore, discussions at meetings of the Board of Directors are quite active, with both directors and Audit & Supervisory Board members voicing opinions from their unique standpoints.

I believe that the Corporate Governance Code is not what a company must respond to, but what it should make the best use of an effective tool for improving upon its own corporate governance systems, as well as for communicating information about a company’s management policies and strategies. From this perspective, I felt that Showa Shell needed to more clearly separate the authority and responsibility for management supervision and business execution. In June 2015, the role of Group CEO was split from that of chairman of the Board of Directors, and I believe that this was a great step forward. The Company has also begun examining the possibility of establishing a nominating committee, and I think such a committee should be created as soon as possible. Right now, a large amount of time at meetings of the Board of Directors is being used to discuss detailed business-level execution matters. However, I believe that a greater quantity of time should be devoted to discussing fundamental management policies and long-term management strategies. Showa Shell will be able to further increase management effi ciency by delegating business execution decisions to operating divisions, encouraging quicker decisions, and rapidly putting those decisions into practice.

The oil industry has a long history of regulation, and you could say that this has protected the entire industry from the type of fi erce competition seen in other industries. In the future, however, Showa Shell will have to win out in the energy industry, under increasingly fi erce competition. To stand as a winner in this arena, the Company will need to continue creating new value, and this will require it to create more innovation while also effi ciently implementing strategies and utilizing management resources. In this endeavor, it will be important for Showa Shell to pay even more attention to its customers, while also promoting diversity in human resources, particularly in empowering female employees. Currently, Showa Shell has child-care-related work-life balance support systems in place, and I feel that female employees are playing an active role in the Company’s business. In the future, more women will need to be promoted to management and executive management positions. For this reason, I think Showa Shell should strive to develop a better understanding of the opinions and perspectives of its female employees, and create a workplace environment in which these employees can continue to fully utilize their skills. At the same time, the Company needs to cultivate more employees capable of competing on the global stage in English. My own experience has made it clear how potent English is as a business communication tool. Going forward, Showa Shell will start dealing in a wider range of energy types while serving more regions and a broader scope of customers. With such expansion, improvements in the areas I spoke of will come to play an important part in boosting corporate value. As the new management structure comes into effect, it will be more important than ever to communicate about management policies and other matters across the Group. It is my hope that Showa Shell will become an even stronger company that is capable of leading the energy industry and at which all employees go about their tasks with a sense of doing it “for the Company.” I will work to fulfi ll my capacity as an outside director and as a member of the Showa Shell Group.

Looking back at your fi rst

year as an outside

director, what has been

your impression of Showa

Shell and its governance

systems

Takashi NakamuraAppointed to the position of outside director in March 2014Mr. Nakamura worked for many years as a director at Ricoh Company, Ltd., where he was responsible for HR, and also

served as president of one of its European subsidiaries.

Q

What do you think Showa

Shell needs to do to

improve corporate value

Q

How do you think Showa

Shell should improve its

corporate governance

systems in light of Japan’s

new Corporate Governance

Code

Q


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Kenji YamagishiAppointed to the position of external Audit & Supervisory Board member in March 2008Mr. Yamagishi is a lawyer employed at the

Risolute Law Offi ce, and served as President of the Japan Federation of Bar Associations from May

2012 to March 2014.

Interview with Kenji Yamagishi, External Audit &Supervisory Board Member

We asked Kenji Yamagishi, who has served as an external

Audit & Supervisory Board member (independent auditor)

since March 2008, what he thought of Showa Shell’s

corporate governance systems and what further

improvements can be made.

In my seven years with Showa Shell, the business environment for energy, including oil, has changed substantially. At the same time, Showa Shell’s business has broadened into new fi elds, such as solar modules and electricity, and has become more global. In considering how to make its corporate governance systems responsive to such changes, the Company has worked to incorporate outside perspectives and values. This led to the appointment of independent outside directors with substantial professional experience, expertise, and networks. These directors have proven to be a great asset, particularly when taking new steps that carry risks. The support from outside directors, particularly independent directors, has been important not just in monitoring and supervising management, but also in ensuring the validity and speediness of management decisions. These directors have helped ensure that opportunities for improving corporate value are not missed and that the Company’s business operations are taking advantage of the times.

Energy is extremely important to Japan and its people and therefore receives a great deal of attention. Showa Shell deals in oil, which is essential to our everyday lives, and renewable energy, which will be crucial in resolving environmental issues in the future. For this reason, it would not be too much to say that Showa Shell bears a great responsibility for the future of Japan. It is important to carefully monitor global trends related to energy resources and changes in government energy policy around the world. At the same time, the Company must turn its attention toward various other issues, such as the need to advance technologies or boost profi tability, and it will need to make appropriate decisions on these fronts while conquering the challenges placed before it. The oil industry in particular requires concrete measures for rationalizing and reorganizing operations. We are currently at a turning point that will determine the future, not only of the Company but also the energy industry as a whole. For this reason, the Board of Directors will need to conduct even-more in-depth discussions in order to properly function and fulfi ll its role. Forums that complement the Board of Directors, such as pre-meeting briefi ngs and discussions outside of Board of Directors meetings, can help to install this extra element of depth into discussions. I believe that expanding the range of issues handled at these forums would be most effective.

I focus on installing internal controls and promoting thorough compliance. But beyond that I also am well aware of my monitoring and supervisory role. In this respect, I pay particular attention to making sure that decisions made at meetings of the Board of Directors—through frank exchanges of opinion between directors with diverse backgrounds—are in the best interests of the Company in terms of strengthening competitiveness. When reducing costs, for example, it is important to strike a balance among cost cuts, safety, and employee motivation. I try to make sure these factors are considered. In the future, I hope to continue supporting the rapid progress of management by limiting exposure to unforeseen risks.

The business environment is currently challenging, and shows potential for dynamic changes, such as rationalization measures or industry reorganization. It is therefore important that Showa Shell’s employees work together more closely with contract dealers and other business partners to improve corporate value. To accomplish this, Showa Shell will need to communicate its vision for the future in an easy-to-understand way. It will also have to periodically review its corporate governance systems to ensure that management can always make the best decisions to enhance corporate value. Furthermore, as the Company enters into new business fi elds and expands its operations into new regions, it will become more exposed to new legal risks. Accordingly, accuracy and timing will be more important than ever in collecting, sharing, and analyzing information, and deciding responses based on this information.

How do you assess Showa

Shell’s corporate

governance systems

Q

The operating environment for

Showa Shell is undergoing

even greater change. What

issues do you think this

environment presents for

Showa Shell

Q

What do you focus on in

your duties as an external

Audit & Supervisory Board

member

Q

What do you think Showa

Shell needs to do to improve

its corporate value

Q


Showa Shell has introduced an audit system comprised of two

standing Audit & Supervisory Board members and two highly

independent external Audit & Supervisory Board members who sit

on the Audit & Supervisory Board. External Audit & Supervisory

Board members in particular are selected for their broad-based

knowledge and independence, as well as the objectivity, neutrality,

and specialized expertise that the auditing process requires. Audit &

Supervisory Board members provide a supervisory function for the

management team.

Audit & Supervisory Board members attend meetings of the

Board of Directors and other important meetings; receive reports on

the status of operations from directors and executive offi cers; and

audit divisions, offi ces, subsidiaries, and other organizations.

Audit & Supervisory Board members also receive reports from the

accounting auditor with regard to the progress of the fulfi llment of its

duties. In this manner, they conduct business audits related to

business execution by directors as well as accounting audits.

In addition, materials for Board of Directors meeting and

materials pertaining to key issues at other important meetings are

distributed to Audit & Supervisory Board members ahead of time.

If necessary, such materials are explained to Audit & Supervisory

Board members before and after such meetings. This support system

helps ensure the effectiveness of supervisory functions.

The Company has not developed any particular standards or

policies with regard to the independence of outside directors or

external Audit & Supervisory Board members. However, we do

make reference to the independence-related items for which the

Tokyo Stock Exchange requires disclosure.

Audit & Supervisory Board and its Members

Outside Directors and External Audit & Supervisory Board Members

Outside Directors (As of June 1, 2015)Name Position / background Reason for appointment

Minoru Takeda Resigned from positions of president and representative director of Shell Japan K.K. and representative director of Shell Chemicals Japan Ltd. in May 2015

Mr. Takeda was selected for the wealth of knowledge and the extensive network he developed when working at oil companies in Japan and around the world, with the expectation that his appointment would strengthen the management supervisory function.

Yukio Masuda Independent DirectorAdvisor, Mitsubishi Corporation

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

Takashi Nakamura Independent DirectorFormer Director and Deputy President,Ricoh Company, Ltd. (resigned in June 2012)

With many years of experience in managing human resource divisions as a director at Ricoh Company and experience managing a European subsidiary of this company, Mr. Nakamura was selected for his extensive knowledge of global management effortsof a Japanese company, with the expectation that his appointment would strengthen the management supervisory function.

Ahmed M. Alkhunaini Representative Director,Aramco Asia Japan K.K.

Mr. Alkhunaini was selected for his wealth of knowledge relating to the global oil market and his management experience in terms of strategic planning and operation of oil businesses in the United States, Saudi Arabia, and Japan, with the expectation that his appointment would strengthen the management supervisory function.

Nabil A. Al-Nuaim Manager, Environmental Protection Department, Saudi Arabian Oil Co. (Saudi Arabia)

Mr. Al-Nuaim was selected for his knowledge in a wide range of fi elds, including business analysis, strategic planning, and operation of oil refi ning, power generation projects and other areas of energy businesses, as well as his expertise in managing corporate transformation projects, with the expectation that his appointment would strengthen the management supervisory function.

Summary of Liability Limitation AgreementOutside directors (Minoru Takeda, Yukio Masuda, Takashi Nakamura, Ahmed M. Alkhunaini, and Nabil A. Al-Nuaim) and external Audit & Supervisory Board members(Midori Miyazaki and Kenji Yamagishi) entered into a liability limitation agreement with the Company in relation to the limitation of liability specifi ed in Clause 1, Article 423, of the Companies Act. Amounts of liability under this agreement shall be the higher amount of ¥10 million and the amount designated by the Companies Act.

Audit & Supervisory Board Members (External) (As of June 1, 2015)Name Position / background Reason for appointment

Midori Miyazaki Independent AuditorProfessor and DeanFaculty of Global Studies, Chiba University of Commerce

Ms. Miyazaki was selected for her multifaceted involvement at Chiba University of Commerce as a professor and in policy making as a member of a tax system research commission as well as for her broad-ranging insight, with the expectation that her perspective from outside of the oil industry would help strengthen the auditing function.

Kenji Yamagishi Independent Audit & Supervisory Board MemberAttorney

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

The Company has introduced the executive offi cer system and has

established the Group Executive Committee to serve as the highest

decision-making body for business execution. This committee is

composed of executive directors, the COOs of both businesses, and

executive offi cers. In addition to approving business execution policies

for each business, the committee serves to expedite the making of

decisions geared toward generating inter-business synergies and

maximizing the corporate value of the Showa Shell Group.

Executive Offi cers and Group Executive Committee


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The Compensation Advisory Committee*, comprised of independent

offi cers and specialists, and others, was established in 2013. Based

on reports by this committee, the objective, transparent, and

performance-based Basic Policy for Directors Compensation was

formulated. This policy was adopted following approval by the

Board of Directors at a meeting held on November 5, 2013. This

policy called for the portion of director remuneration linked to

business performance to be increased and the fi xed payment portion

to be reduced in order to clearly link director performance with

remuneration.

In accordance with this basic policy, the upper limit for total

fi xed remuneration paid to directors was reduced from ¥65 million

to ¥45 million per month by a resolution at the General

Shareholders’ Meeting held on March 27, 2014. Within the limit of

the total amount, monthly base remuneration to each director is

determined using a remuneration table by rank, except for Douglas

Wood, for whom base remuneration is determined by a secondment

contract with the Shell Group. Performance-linked bonuses for

directors are to be determined each year by resolution at the

General Shareholders’ Meeting in consideration of the operating

environment and performance during the applicable fi scal year.

The total remuneration to all Audit & Supervisory Board

members decided by the resolution of the General Shareholders’

Meeting held on March 28, 2008, was ¥10 million or less per

month. Within the limit of the total amount, remuneration to each

auditor is determined by the mutual agreement among all Audit &

Supervisory Board members. Bonuses for Audit & Supervisory Board

members were abolished in 2013.

Retirement allowances to directors and Audit & Supervisory

Board members were abolished as of the General Shareholders’

Meeting held on March 29, 2007.

Director and Audit & Supervisory Board Member Remuneration

Director and Audit & Supervisory Board Member Remuneration (Year Ended December 31, 2014)

Executive category Total remuneration(Yen million)

Total remuneration by category (Yen million)

Number of executives subject to bonuses(People)

Fixed remuneration

Bonuses

Directors (excluding outside directors) 315 241 74 3

Audit & Supervisory Board members (excluding external Audit & Supervisory Board members)

72 72 — 3

Outside directors and Audit & Supervisory Board members 59 58 1 10

* Compensation Advisory Committee: The Compensation Advisory Committee consists of a majority of external specialists and outside directors and external Audit & Supervisory Board members, including independent directors and auditors. The committee meets four times a year to discuss all matters regarding performance-linked remuneration, and issues needing improvement are reported to the Board of Directors. Executive directors do not take part in deciding the content of reports.

The Company has appointed PricewaterhouseCoopers Aarata as its

accounting auditor, which performs audits and is paid compensation

for these audits.

Accounting Auditor

Showa Shell(Yen million)

Consolidatedsubsidiaries(Yen million)

Compensation based on audit certifi cation activities 120 53

Compensation based on non-audit activities 3 —

Audit Compensation (Year Ended December 31, 2014)

The Company has stipulated its Code of Conduct to provide

universally applicable guidelines for the development of corporate

activities. This code expects all employees to contribute to society

with a high degree of ethics.

In May 2015, a partial revision was instituted to the

Companies Act of Japan. Based on the revision, the Company

revised the Basic Policy on Internal Control to strengthen

management of subsidiaries and improve the effectiveness of audits.

In accordance with the revised policy, we developed a Group

internal control system for subsidiaries, and this system is being

operated effectively to enhance governance at both the Company

and its subsidiaries.

ComplianceThe Showa Shell Group recognizes that compliance among all its

employees is paramount to fulfi lling its social responsibility as it

goes about its business activities. Accordingly, the Group continues

working to entrench compliance throughout all areas of the Group.

The Group has formulated a variety of compliance-related

regulations, including the Compliance Rules for the Antitrust Law,

Government Anticorruption Rules, Insider Trading Control Rule,

Environmental Preservation Guidelines, and Export Control Rule.

We have also established the General Rule for Procurement to

ensure that our procurement activities are fair, transparent, and

based on consideration for social and environmental facets,

including compliance with laws and corporate ethics, resource

protection, and environmental preservation. We also offer the

Procurement Guidelines to business partners to facilitate their

understanding of our considerations regarding procurement.

We conduct compliance training to ensure that employees

understand the importance of compliance and put into practice.

We distribute our Compliance Book, which explains policies on

specifi c actions, and also conduct e-learning programs on these

policies two times each year. In addition, we operate the Room of

Internal Control System


Compliance intranet site, which enables employees to easily search

for relevant case studies and laws with regard to specifi c areas of

compliance. This site is available to employees of both the

Company and its subsidiaries. Furthermore, we conduct rank-based

training for new employees, executives, managers, and general

employees that incorporates a curriculum employing actual case

studies and includes e-learning programs. Through these efforts, we

are taking a practical approach toward promoting compliance

throughout the organization.

As a whistle-blowing system, we have introduced an

employee consultation service, Voice of People (VOP), which

encourages employees to raise compliance concerns and to offer

constructive proposals for improvement measures; this system

enables employee input both within and outside the Company. We

have formulated Rules of the Group Companies’ Help Line, “Voice

of People,” covering the system’s operation, and systems are in

place to protect the confi dentiality of people undergoing

consultation and to prevent them from adverse impacts. We have

extended the application of these systems beyond our own

employees to include employees at Group companies. In October

2014, we began posting overviews of compliance violations

occurring within the Group on the Room of Compliance intranet site

to raise awareness and prevent reoccurrence.

Showa Shell’s policy with regard to criminal organizations is

to handle them through a Company-wide approach. The

departments in charge of related matters have been designated,

and contact is maintained with the police and other external

specialist institutions.

Risk ManagementThe Company has established the Risk Management Committee as

a body for governing all corporate risks the Company faces,

including those related to internal control and HSSE. This committee

is led by the Group CEO and helps solidify corporate risk

management foundations. The results of deliberations by this

committee are reported to the Board of Directors as needed.

With regard to risks that need to be checked from a

Company-wide perspective, such as the compliance and HSSE

promotion structures and the business control structure, we have

established business control checklists to enable comprehensive

monitoring. Using these checklists, relevant executives and

division heads evaluate the risk management systems of their

divisions on a yearly basis, implementing improvement measures

as necessary. The results of these efforts are reported to the Risk

Management Committee.

For the risks that specifi c divisions face, and on an overall

corporate level, each year Showa Shell prepares a business control

matrix. We use this matrix to identify the risks associated with

business targets and ascertain the level of impact and control status

of these risks. Measures are formulated in response to identifi ed

risks, and a review of measures implemented in the previous fi scal

year is reported to the Risk Management Committee together with a

plan for measures in the current fi scal year.

The Company has formulated the Basic Policy for Information

Disclosure. Based on this policy, to promote an understanding and

fair evaluation of the Group among various stakeholders, we work

to ensure that important information is disclosed equitably, accurately,

and in a timely manner. We have set up the Information Disclosure

Sub-Committee as the body in charge of managing this process and

making judgments on the handling of information to be disclosed. To

comply with timely disclosure regulations, we publicize information via

the system for transmitting disclosure information in a timely manner

provided by the Tokyo Stock Exchange (TDnet), as well as on our

website. We also work to disclose other information quickly and

proactively, based on the judgment of the Information Disclosure

Sub-Committee.

Our investor relations (IR) activities targeting shareholders and

other investors include large meetings or telephone conferences for

securities analysts and institutional investors in Japan at every

quarterly performance announcement. We distribute presentation

materials for performance results and audio data from these

presentations (audio data available in Japanese only) on our

website. In addition to maintaining communication with institutional

investors in Japan and overseas through investor visits and

conferences, we provide individual investors with information chiefl y

via our website as we aim to enhance the range of information

available with regard to our business and business environment.

For shareholders, we distribute convocation notices for annual

shareholder meetings at an early date and have in place a system

whereby shareholders can exercise their voting rights over the

Internet. We also launched a voting rights exercise platform for

institutional investors in 2015, further improving convenience.

Furthermore, we publish a business report booklet for shareholders

(in Japanese only) and issue shareholder questionnaires in order to

enhance communication with shareholders.

Information Disclosure

For details on HSSE risk management, please refer to pages

46~47.


Financial Section and Corporate Data

64 Twelve-Year Summary of Selected Financial Data

66 Business Risks

68 Consolidated Financial Statements

73 Notes to the Consolidated Financial Statements

88 Independent Auditor’s Report

89 Operations Data

90 Network

92 Major Subsidiaries and Affi liates

93 Investor Information

For an explanation of business performance and fi nancial strategies by the

Group CFO, please refer to page 18.


Twelve-Year Summary of Selected Financial Data

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

2014 2013 2012 2011For the year:

Net sales ¥2,997,984 ¥2,953,808 ¥2,629,261 ¥2,771,418 Oil Business 2,850,218 2,803,041 2,539,754 2,695,278Energy Solutions Business 138,610 141,210 78,262 65,799Other 9,156 9,556 11,245 10,339

Cost of sales 2,890,430 2,744,530 2,481,144 2,582,339 Gross profi t 107,554 209,278 148,117 189,078 Selling, general and administrative expenses 125,611 133,847 133,419 128,790 Operating income (loss) (18,057) 75,430 14,697 60,288

Oil Business (37,391) 56,114 28,128 87,267CCS operating income (Oil Business)*1 13,839 21,742 26,678 55,479Energy Solutions Business 17,691 17,553 (15,435) (28,895)Other and adjustments 1,642 1,763 2,004 1,917

Ordinary income (loss) (16,723) 76,204 12,674 61,807 CCS ordinary income (loss)*1 34,507 41,832 11,224 30,020Net income (loss) after taxes (9,703) 60,295 1,013 23,110

At year-end:Total shareholders’ equity*2 ¥ 272,052 ¥ 300,618 ¥ 249,826 ¥ 255,865 Total assets 1,176,282 1,295,831 1,233,193 1,208,442Net interest-bearing debt*3 164,417 192,358 247,552 262,800 Depreciation and amortization 41,361 40,601 43,620 43,329 Capital expenditures 29,313 25,011 20,987 39,559 Capital employed*4 481,551 521,612 515,554 534,228

Cash fl ows:Cash fl ows from operating activities ¥ 72,733 ¥ 95,133 ¥ 41,922 ¥ 50,551 Cash fl ows from investing activities (28,151) (27,534) (17,747) (24,560)Free cash fl ow*5 44,581 67,598 24,174 25,991 Cash fl ows from fi nancing activities (28,148) (57,193) (21,391) (31,159)

Per share data:Net income (loss) after taxes per share (yen) ¥ (25.76) ¥ 160.09 ¥ 2.69 ¥ 61.36 Total shareholders’ equity per share (yen) 722.33 798.17 663.33 679.37 Dividends per share (yen) 38 36 18 18 Payout ratio (%)*6 — 38.3 224.9 310.3

Performance and fi nancial indicators:Return on sales (operating profi t basis) (%) (0.6)% 2.6% 0.6% 2.2%Return on sales (net income basis) (%) (0.3) 2.0 0.0 0.8 Return on assets (%) (0.8) 4.8 0.1 1.9 Return on equity (%)*2, 7 (3.4) 21.9 0.4 9.3Shareholders’ equity ratio (%)*2, 8 23.1 23.2 20.3 21.2 Current ratio (%)*9 100.1 107.0 104.3 103.2Gearing ratio (%)*10 37.7 39.0 49.8 50.7 Number of shares outstanding at year-end (thousand shares)*11 376,634 376,637 376,623 376,624

* 1. CCS ordinary income (ordinary income on a Current Cost of Supply basis): Ordinary income based on costs excluding inventory valuation effects* 2. The defi nition of “shareholders’ equity” was revised under the new Corporation Law in 2006, and “shareholders’ equity” under the new law excludes minority interests. Please note referred numbers

above are based on the new defi nition of “shareholders’ equity,” not including minority interests. “Return on equity” and “Shareholders’ equity ratio” are also calculated using these numbers.* 3. Net interest-bearing debt = Interest-bearing debt – Cash and deposits* 4. Capital employed = Total shareholders’ equity + Interest-bearing debt* 5. Free cash fl ow = Cash fl ows from operating activities + Cash fl ows from investing activities* 6. Payout ratio = Dividends per share/Net income per share (non-consolidated)* 7. Return on equity = Net income/Average total shareholders’ equity* 8. Shareholders’ equity ratio = Total shareholders’ equity/Total assets* 9. Current ratio = Total current assets/Total current liabilities*10. Gearing ratio = (Interest-bearing debt – Cash and deposits)/(Capital employed – Cash and deposits)*11. Treasury stock is excluded. The amount of treasury stock includes Showa Shell Sekiyu stock held by affi liates accounted for by the equity method.


Yen Million

2010 2009 2008 2007 2006 2005 2004 2003

¥2,346,081 ¥2,022,520 ¥3,272,801 ¥3,082,641 ¥2,921,287 ¥2,268,488 ¥1,839,445 ¥1,726,917 2,304,019 — — — — — — —

28,863 — — — — — — —13,198 — — — — — — —

2,183,535 1,956,623 3,161,950 2,874,422 2,728,137 2,056,023 1,665,978 1,570,155 162,545 65,896 110,851 208,219 193,149 212,465 173,466 156,761 125,844 123,038 123,134 119,405 118,847 114,084 113,280 120,787 36,701 (57,142) (12,283) 88,813 74,301 98,381 60,185 35,974 45,569 — — — — — — —37,707 — — — — — — —(11,581) — — — — — — —

2,713 — — — — — — —42,148 (56,455) (10,065) 92,709 77,675 100,497 61,927 38,188 34,286 (11,691) 45,697 44,271 58,074 53,279 40,426 36,33615,956 (57,619) (16,221) 43,729 46,249 58,370 2,362 21,000

¥ 240,204 ¥ 235,517 ¥ 306,813 ¥ 338,933 ¥ 309,411 ¥ 275,232 ¥ 226,955 ¥ 234,773 1,193,149 1,172,739 1,209,956 1,339,114 1,195,015 1,145,191 905,823 882,299

280,108 275,837 206,363 166,655 173,881 162,180 106,229 105,568 33,949 35,277 31,239 26,708 27,329 23,979 24,653 25,138 81,733 49,933 37,606 23,617 32,540 17,442 12,408 11,574

541,256 533,590 586,290 522,068 499,939 467,063 341,738 355,725

¥ 89,836 ¥ (7,395) ¥ 26,631 ¥ 44,796 ¥ 29,312 ¥ 25,806 ¥ 29,598 ¥ 54,704 (82,510) (47,761) (42,932) (25,687) (28,883) (28,548) (19,194) (7,874)

7,325 (55,156) (16,301) 19,108 429 (2,742) 10,403 46,830 (8,671) 4,371 72,337 (21,029) (13,712) 20,725 (17,700) (39,167)

¥ 42.37 ¥ (152.99) ¥ (43.07) ¥ 116.12 ¥ 122.95 ¥ 155.31 ¥ 6.14 ¥ 55.96 637.78 625.33 814.63 899.90 822.20 732.08 605.25 627.07

18 36 36 36 36 35 30 25 30.3 — — 29.8 32.4 24.5 355.5 46.9

1.6% (2.8)% (0.4)% 2.9% 2.5% 4.4% 3.3% 2.1%0.7 (2.8) (0.5) 1.4 1.6 2.6 0.1 1.2 1.3 (4.9) (1.3) 3.3 3.9 5.1 0.3 2.4 6.7 (21.2) (5.0) 13.5 15.8 23.2 1.0 9.2

20.1 20.1 25.4 25.3 25.9 24.0 25.1 26.6 90.2 83.0 95.4 102.3 95.9 91.0 83.8 80.5 53.8 53.9 40.2 33.0 36.0 37.1 31.9 31.0

376,625 376,627 376,630 376,633 376,323 375,863 374,868 374,303

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Domestic demand for oil products is affected by, and changes with, factors such as the economic

situation in Japan and domestic energy supply and demand. Moreover, Japan’s domestic oil product

market is affected by factors such as the demand trend, price competition with other companies in the

industry, overseas prices for oil products, and comparative price competition with other forms of energy.

The solar module market is also affected by factors such as the balance between supply and demand

as well as price competition with other companies in the industry. These fl uctuating factors also exert an

infl uence on the quantities and prices of products that the Showa Shell Group sells, and can therefore

cause changes to the Group’s earnings.

A) Impact on sales margin and working capital

Because the cost of sales on a yen basis of oil products the Group sells domestically is affected by

changes in crude oil prices and foreign exchange rates, the basic policy is to refl ect these infl uences in its

sales prices. The cost of sales on a yen basis of solar modules is also affected by changes in raw material

prices and foreign exchange rates. The basic policy is to refl ect these infl uences in its sales prices.

However, when it is diffi cult to refl ect these changes, which result from factors such as trends in the

global market environment and in sales prices, the changes will cause fl uctuations in Group earnings.

In addition, there is a possibility that the amount of required working capital will increase because of

a rise in crude oil prices or raw material prices or a drastic fl uctuation in foreign exchange rates.

B) Impact of inventory valuation

The Group mainly uses the weighted-average method to value inventories. When prices for crude oil,

raw materials, and products have declined, the Group’s cost of sales will increase by the effect of

inventory valuation that is relatively expensive at the beginning of the period, which will be a negative

factor for earnings. When prices for crude oil, raw materials, and products have risen, on the other

hand, the cost of sales will be reduced by the effect of inventory valuation that is relatively inexpensive

at the beginning of the period, which will be a positive factor for earnings.

As this illustrates, there is a possibility that changes in prices of crude oil, raw materials, and

products will affect the Group’s operating results.

The Group procures crude oil from overseas, mainly countries in the Middle East. There is a possibility

that the fi nancial position and operating results of the Group will be affected by obstacles to its supply,

such as events in which the international political climate, primarily the political climate of oil-producing

countries, is impacted, and an appropriate alternative supply source cannot be ensured. There is also a

possibility that the fi nancial position and operating results of the Group will be affected in the event that

obstacles arise impacting the procurement of the rare metals used in solar modules, for reasons such as

an unexpected event in the supplying region.

The Group is exposed to tough competition with other oil companies due to refi nery overcapacity and

excess number of service stations in addition to declining domestic oil demand. With rapid technical

innovation in the solar business, change in technical standards and our cost-competitive edge will affect

global competition. Although the Group will make efforts to maintain and improve competitiveness, there

is a possibility that its fi nancial position and business performance will be affected should effective

operation not be accomplished adequately under such a competitive environment.

The Showa Shell Group has created a system to monitor and manage business risk, and endeavors to mitigate the risks it identifi es.

The following risks are considered important risks related to the businesses of the Showa Shell Group and its fi nancial position that

might have a material effect on the decisions of investors. The risks described below are the risks evaluated to be material by the

Showa Shell Group (on a consolidated basis) at the end of the fi nancial year under review. This list is not meant to be, and should not

be construed as, a comprehensive list of every risk affecting the Group. Furthermore, the matters discussed below concerning future

circumstances are those evaluated by the Showa Shell Group at the end of the fi nancial year under review.

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

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

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

Business Risks

4. RISKS CONCERNING COMPETITION WITH OTHER COMPANIESOR TECHNICALINNOVATION


In the event that new environmental regulations regarding carbon dioxide emissions or fossil fuel

consumption are introduced in the future in Japan, there is a possibility that the fi nancial position and

operating results of the Group will be affected because additional capital expenditures or incremental

costs might become necessary. Regarding the solar business, there is a possibility that the fi nancial

position and operating results of the Group will be affected in the event that changes in governmental

subsidy policies in certain countries or regions might infl uence domestic and global demand trends for

solar modules.

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

(environment) based on HSSE management rules, and strives to ensure safe operations and minimize risks

that arise in the event of a disaster or the spread of contagious diseases such as a new strain of infl uenza,

through the use of appropriate insurance, including property and casualty insurance, as well as formulation

of a risk control plan and a business continuity plan with its related discipline. There is a possibility,

however, that each offi ce and facility of the Group, including its refi neries and plants for producing solar

modules, could face obstacles beyond the anticipated scope of risk events, which might affect the Group’s

fi nancial position and operating results. There is also a possibility of being similarly affected by the

termination or restriction of its business activities as the result of an occurrence such as a serious industrial

injury, equipment accident, or information system fault.

The Group strives to enhance compliance by the means of the appointment of directors in charge of the

Code of Conduct, implementation of compliance rules for the antitrust law, establishment and operation

of risk management systems, implementation of internal audits, etc. However, when the established

internal control system does not function effectively and the Group is not able to avoid compliance risks

completely, the trust of stakeholders will be lost. Therefore, there is a possibility that the fi nancial position

and business performance of the Group will be affected.

In addition to competition in technological development, intellectual property rights strategies have

become more important. We established a dedicated department in order to strengthen the management

system for intellectual property rights, know-how, and defensive measures, but there is still a risk that

disputes over violations of intellectual property rights or the leakage of know-how will occur if inadequacies

arise in this system. Such circumstances may have an impact on the fi nancial position and business

performance of the Group.

The Group manufactures products based on strict quality control standards and obtains product liability

insurance in case a product defect occurs. However, there is a possibility that the fi nancial position and

operating results of the Group will be affected in the event that legal liability is incurred or brand image

is decreased due to an unexpected large-scale recall or lawsuit.

The Group obtains and uses personal data, including information on its customers, in relation to its

businesses such as product sales, and has created in-house management systems for the administration of

this data. Although the Group strives to protect such information with extreme caution, there is a possibility

of legal liability being incurred or the Group brand image being decreased and subsequently fi nancial

position and business performance being negatively affected if such data is disclosed outside the Group

and misused for some reason.

The Group’s pension benefi t obligations and costs are computed by actuarial calculation, and basic

rates such as the discount rate and the long-term expected rate of return on pension plan assets have

been set as actuarial assumptions. In the event that the actual numerical values concerning the basic

rates differ from these assumptions, or in the event that the assumptions are revised, these changes will

affect the amount of the pension benefi t obligation and the costs recognized in the future because the

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

7. RISKS RELATED TO THE ESTABLISHMENT OF INTERNAL CONTROL SYSTEMS

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

8. RISKS RELATED TO INTELLECTUAL PROPERTY RIGHTS

9. RISKS RELATED TO PRODUCT LIABILITY

5. RISKS RELATED TO ENVIRONMENTAL REGULATIONS AND TAX LEVIES

10. RISKS RELATED TO CONTROL OF PERSONAL DATA

11. RISKS RELATED TO RETIREMENT BENEFITS

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Consolidated Balance Sheets

Showa Shell Sekiyu K.K. and Consolidated SubsidiariesAs of December 31, 2014 and 2013

Yen Million

2014 2013

ASSETS

Current assets

Cash and deposits (Notes 11 and 15) ¥ 45,081 ¥ 28,635

Notes and accounts receivable–trade (Notes 11, 15 and 18) 300,564 391,257

Merchandise and fi nished goods 137,486 158,640

Work in process 2,968 1,622

Raw materials and supplies (Note 15) 121,871 163,347

Deferred tax assets (Note 8) 10,237 13,540

Other current assets (Notes 11 and 12) 44,129 30,683

Allowance for doubtful accounts (224) (452)

Total current assets 662,114 787,274

Noncurrent assets

Property, plant and equipment

Buildings and structures 95,161 99,767

Tanks 10,436 10,833

Machinery, equipment and vehicles 117,186 133,758

Land 154,660 155,911

Construction in progress 11,368 3,847

Other property, plant and equipment 6,848 6,973

Total property, plant and equipment (Notes 6, 14 and 15) 395,661 411,092

Intangible assets

Goodwill 1,431 1,448

Leasehold rights 3,808 3,987

Software 5,556 5,485

Other intangible assets 237 238

Total intangible assets 11,033 11,160

Investments and other assets

Investment securities (Notes 5 and 11) 40,444 40,139

Long-term loans receivable 8,888 7,255

Deferred tax assets (Note 8) 38,149 20,411

Asset for retirement benefi ts (Note 9) 115 —

Other investments and other assets 20,407 19,137

Allowance for doubtful accounts (532) (640)

Total investments and other assets 107,472 86,303

Total noncurrent assets 514,167 508,556

Total assets ¥1,176,282 ¥1,295,831

The accompanying notes are an integral part of these fi nancial statements.


Yen Million

2014 2013LIABILITIES Current liabilities Notes and accounts payable–trade (Notes 11 and 18) ¥ 284,944 ¥ 384,965 Short-term loans payable (Notes 7, 11 and 15) 109,673 89,298 Current portion of bonds (Notes 7 and 11) — 10,000 Accounts payable–other (Notes 11 and 15) 204,142 173,149 Income taxes payable 2,713 18,153 Accrued expenses 9,472 10,060 Provision for employees’ bonuses 2,202 2,146 Provision for directors’ bonuses 84 60 Other current liabilities (Notes 7 and 11) 48,374 47,746 Total current liabilities 661,607 735,580

Noncurrent liabilities Bonds payable (Notes 7 and 11) 20,000 10,000 Long-term loans payable (Notes 7, 11 and 15) 79,825 111,696 Deferred tax liabilities (Note 8) 3,669 3,055 Provision for employees’ retirement benefi ts (Note 9) — 73,005 Provision for special repairs 11,597 15,033 Liability for retirement benefi ts (Note 9) 82,097 — Other noncurrent liabilities (Notes 6 and 10) 21,168 22,107 Total noncurrent liabilities 218,357 234,897 Total liabilities 879,964 970,478

NET ASSETS Shareholders’ equity Capital stock Authorized 440,000,000 shares Issued 376,850,400 shares in 2014 and 2013 34,197 34,197 Capital surplus 22,123 22,123 Retained earnings 219,740 243,374 Treasury stock 216,116 shares as of December 31, 2014 and 213,372 shares as of December 31, 2013 (182) (180) Total shareholders’ equity 275,878 299,515 Accumulated other comprehensive income Unrealized holding gain (loss) on securities 2,093 1,613 Unrealized gain (loss) from hedging instruments 289 (510) Retirement benefi ts liability adjustment (6,209) — Total accumulated other comprehensive income (3,826) 1,102 Minority interests 24,264 24,733 Total net assets 296,317 325,352Total liabilities and net assets ¥1,176,282 ¥1,295,831

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Consolidated Statements of Income

Consolidated Statements of Comprehensive Income

Showa Shell Sekiyu K.K. and Consolidated SubsidiariesYears ended December 31, 2014 and 2013

Yen Million

2014 2013Net sales (Notes 18 and 19) ¥2,997,984 ¥2,953,808 Cost of sales (Notes 9, 18 and 19) 2,890,430 2,744,530Gross profi t 107,554 209,278Selling, general and administrative expenses (Notes 9 and 13) 125,611 133,847Operating income (loss) (18,057) 75,430 Non-operating income Interest income 139 148 Dividends income 570 531 Foreign exchange gains 708 700 Reversal of allowance for doubtful accounts 259 100 Equity in earnings of affi liates (Note 19) 873 1,496 Gain on investments in silent partnerships 1,336 1,616 Fiduciary obligation fee 687 — Other 1,880 1,314

6,456 5,909Non-operating expenses Interest expense 1,697 1,931 Sales discounts 1,665 2,065 Fiduciary obligation cost 667 — Other 1,092 1,138

5,121 5,136Ordinary income (loss) (16,723) 76,204Extraordinary income Gain on sales of property, plant and equipment 3,666 1,231 Gain on sales of investment securities and others (Note 5) 5 47 Subsidies 3,177 4,301 Other 638 883

7,487 6,462Extraordinary loss Loss on disposal of property, plant and equipment 2,053 2,623 Loss on valuation of investment securities 288 920 Impairment loss (Notes 14 and 19) 1,575 1,780 Litigation settlement 828 — Other 1,366 537

6,112 5,861Income (loss) before income taxes and minority interests (15,347) 76,805Income taxes (Note 8) Current 4,020 21,483 Deferred (10,686) (6,233)Total income taxes (6,665) 15,250Income (loss) before minority interests (8,682) 61,555Minority interests in income 1,021 1,260Net income (loss) ¥ (9,703) ¥ 60,295

Yen

2014 2013Per share data Net income (loss)–primary ¥ (25.76) ¥160.09

Net income (loss)–diluted Not prepared due to having no dilutive shares

Not prepared due to having no dilutive shares

Dividends 38.00 36.00 Net assets 722.33 798.17



Yen Million

2014 2013Income (loss) before minority interests ¥(8,682) ¥61,555Other comprehensive income Unrealized holding gain (loss) on securities 570 1,127 Unrealized gain (loss) from hedging instruments 800 (635) Share of other comprehensive income in affi liates (77) 204 Total other comprehensive income (Note 17) 1,293 696Comprehensive income (7,388) 62,251Total comprehensive income attributable to: Owners of the parent (8,423) 60,947 Minority interests ¥ 1,034 ¥ 1,303




Yen Million

2014 2013Shareholders' equity Capital stock Balance at the beginning of current period ¥ 34,197 ¥ 34,197 Changes of items during the period Total changes of items during the period — — Balance at the end of current period 34,197 34,197 Capital surplus Balance at the beginning of current period 22,123 22,113 Changes of items during the period Disposal of treasury stock 0 10 Total changes of items during the period 0 10 Balance at the end of current period 22,123 22,123 Retained earnings Balance at the beginning of current period 243,374 193,250 Changes of items during the period Dividends from surplus (13,937) (10,170) Net income (loss) (9,703) 60,295 Change in scope of consolidation 1 — Changes due to merger 5 — Total changes of items during the period (23,634) 50,124 Balance at the end of current period 219,740 243,374 Treasury stock Balance at the beginning of current period (180) (184) Changes of items during the period Purchase of treasury stock (2) (1) Disposal of treasury stock 0 6 Total changes of items during the period (2) 4 Balance at the end of current period (182) (180) Total shareholders' equity Balance at the beginning of current period 299,515 249,375 Changes of items during the period Dividends from surplus (13,937) (10,170) Net income (loss) (9,703) 60,295 Purchase of treasury stock (2) (1) Disposal of treasury stock 0 17 Change in scope of consolidation 1 — Changes due to merger 5 — Total changes of items during the period (23,636) 50,139 Balance at the end of current period 275,878 299,515Accumulated other comprehensive income Unrealized holding gain (loss) on securities Balance at the beginning of current period 1,613 325 Changes of items during the period Net changes of items other than shareholders' equity 480 1,288 Total changes of items during the period 480 1,288 Balance at the end of current period 2,093 1,613 Unrealized gain (loss) from hedging instruments Balance at the beginning of current period (510) 125 Changes of items during the period Net changes of items other than shareholders' equity 800 (635) Total changes of items during the period 800 (635) Balance at the end of current period 289 (510) Retirement benefi ts liability adjustments Balance at the beginning of current period — — Changes of items during the period Net changes of items other than shareholders' equity (6,209) — Total changes of items during the period (6,209) — Balance at the end of current period (6,209) — Total accumulated other comprehensive income Balance at the beginning of current period 1,102 450 Changes of items during the period Net changes of items other than shareholders' equity (4,929) 652 Total changes of items during the period (4,929) 652 Balance at the end of current period (3,826) 1,102Minority interests Balance at the beginning of current period 24,733 23,957 Changes of items during the period Purchase of shares of consolidated subsidiaries — 65 Net changes of items other than shareholders' equity (468) 711 Total changes of items during the period (468) 776 Balance at the end of current period 24,264 24,733Total net assets Balance at the beginning of current period 325,352 273,783 Changes of items during the period Dividends from surplus (13,937) (10,170) Net income (loss) (9,703) 60,295 Purchase of treasury stock (2) (1) Disposal of treasury stock 0 17 Change in scope of consolidation 1 — Changes due to merger 5 — Purchase of shares of consolidated subsidiaries — 65 Net changes of items other than shareholders' equity (5,398) 1,363 Total changes of items during the period (29,035) 51,568 Balance at the end of current period ¥296,317 ¥325,352

Consolidated Statements of Changes in Net Assets

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Yen Million

2014 2013Net cash provided by (used in) operating activities Income (loss) before income taxes and minority interests ¥(15,347) ¥ 76,805 Depreciation and amortization 41,361 40,601 Impairment loss 1,575 1,780 Loss (gain) on disposal of property, plant and equipment 2,053 2,623 Loss (gain) on sales of property, plant and equipment (3,666) (1,231) Loss (gain) on valuation of investment securities 288 920 Increase (decrease) in allowance for doubtful accounts (330) (174) Increase (decrease) in provision for employees' retirement benefi ts — (1,491) Increase (decrease) in liability for retirement benefi ts (1,657) — Decrease (increase) in asset for retirement benefi ts (32) — Increase (decrease) in provision for special repairs (3,436) (857) Interest and dividends income (709) (680) Interest expense and sales discounts 3,362 3,997 Decrease (increase) in notes and accounts receivable–trade 91,532 (13,482) Decrease (increase) in inventories 61,299 (46,069) Increase (decrease) in notes and accounts payable (91,459) 45,957 Other, net 10,725 653 Sub-total 95,559 109,353 Interest and dividends income 855 681 Interest expense paid (3,489) (3,997) Income taxes (paid) refunded (20,191) (10,904) Net cash provided by (used in) operating activities 72,733 95,133Net cash provided by (used in) investing activities Purchase of property, plant and equipment (26,950) (25,028) Purchase of intangible assets (2,358) (2,842) Proceeds from sales of property, plant and equipment 4,920 2,421 Purchase of investment securities (9) (136) Proceeds from sales of investment securities 49 109 Net decrease (increase) in short-term loans receivable 1,287 2,809 Payments for long-term loans receivable (2,389) (2,506) Collection of long-term loans receivable 8 2 Other, net (2,710) (2,365) Net cash provided by (used in) investing activities (28,151) (27,534)Net cash provided by (used in) fi nancing activities Net increase (decrease) in short-term loans payable (2,135) (2,399) Net increase (decrease) in commercial paper — (26,000) Proceeds from long-term loans payable 15,000 1,300 Repayments of long-term loans payable (24,360) (2,795) Proceeds from bonds 10,000 — Redemption of bonds (10,000) (15,000) Purchase of treasury stock (2) (1) Proceeds from sales of treasury stock 0 17 Repayments of lease obligations (1,526) (1,551) Cash dividends paid (13,937) (10,170) Cash dividends paid to minority shareholders (683) (592) Other, net (502) — Net cash provided by (used in) fi nancing activities (28,148) (57,193)Net increase (decrease) in cash and cash equivalents 16,433 10,405Cash and cash equivalents at beginning of period 27,428 16,979Increase due to inclusion in consolidation 1 —Increase (decrease) in cash and cash equivalents resulting from merger of subsidiaries 13 43Cash and cash equivalents at end of period ¥ 43,877 ¥ 27,428

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

Yen Million

2014 2013Cash and deposits on the balance sheets ¥ 45,081 ¥ 28,635Time deposit exceeding 3 months (1,204) (1,206)Cash and cash equivalents ¥ 43,877 ¥ 27,428

Consolidated Statements of Cash Flows


Notes to the Consolidated Financial Statements

1. BASIS OF PRESENTATION

The accompanying consolidated fi nancial statements of Showa Shell

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

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

provisions set forth in the Financial Instruments and Exchange Act of

Japan and its related accounting regulations, and in conformity with

accounting principles and practices generally accepted in Japan,

which are different in certain respects from the application and

disclosure requirements of International Financial Reporting Standards.

As permitted by the Financial Instruments and Exchange Act of

Japan, fractions below ¥1 million are rounded off. This causes certain

totals in the fi nancial statements to not be equivalent to the sums of

each item.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(1) POLICIES OF CONSOLIDATIONa) Consolidated subsidiaries as of December 31, 2014 (30 companies)

Showa Yokkaichi Sekiyu Co., Ltd. K.K. Rising SunNippon Grease Co., Ltd. Genex Co., Ltd.Leef Energy K.K. Showa Shell Business & IT Solutions Ltd.Wakamatsu Gas K.K. Showa Shell Sempaku K.K.Nissho Koyu K.K. Heiwa Kisen Kaisha, Ltd.Nagase Oil Ltd. Chuo Shell Sekiyu Hanbai K.K.Jonen Co. Tokyo Shell Pack K.K.Toa Oil Co., Ltd. Hayashi-Bussan Co., Ltd.Shoseki Kako Co., Ltd. Shoseki Engineering & Petro Star Kansai Co., Ltd. Construction Co., Ltd.Nakagawa Oil Co., Ltd. Solar Frontier K.K.

Enessance Holdings Co., Ltd.Other 8 companies

Showa Shell Business & IT Solutions Ltd. is newly included in the scope of

consolidation, because Showa Shell Business & IT Solutions has become

signifi cant for the Company as a whole.

Sun Road and On Site Power, which were consolidated subsidiaries

in the previous year, are excluded from the scope of consolidation.

Because the Company sold shares of Sun Road and On Site Power was

determined to be dissolved and commenced liquidation procedures, they

have therefore been excluded from consolidated subsidiaries.

Certain subsidiaries, such as Rekisei Kagaku K.K., are excluded

from consolidation because their infl uence is immaterial to the

consolidated fi nancial statements.

b) The end of accounting periodThe end of accounting period of the consolidated subsidiaries are as

follows.

Account closing date Number of subsidiaries

September 30 6

October 31 1

December 31 23

The consolidated fi nancial statements have been prepared by

using the accounts of the Company and other subsidiaries as of their

respective fi scal year end. Signifi cant transactions between their

respective fi scal year end and the consolidated balance sheet date are

adjusted for consolidation.

(2) EQUITY-METHOD AFFILIATESEquity-method affi liates as of December 31, 2014: (12 companies)

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

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

K.K., are excluded from equity-method affi liates because their infl uence

is immaterial to the consolidated fi nancial statements.

(3) VALUATION METHOD FOR MAJOR ASSETSa) SecuritiesMarketable securities are carried at fair value with changes in

unrealized holding gain or loss, net of the applicable income taxes,

included directly in net assets.

Non-marketable securities are stated at cost, determined by the

moving average method. Cost of securities sold is calculated primarily

by the moving average method.

b) Derivatives and hedging activitiesThe Company and certain consolidated subsidiaries enter into various

derivative transactions in order to manage certain risks arising from

adverse fl uctuations in foreign currency exchange rates, interest rates,

and commodity prices. Derivative fi nancial instruments are carried at

fair value with changes in unrealized gain or loss charged or credited

to operations, except for those which meet the criteria for deferral hedge

accounting under which unrealized gain or loss is deferred as a

component of net assets.

Deferral hedge accounting is adopted for derivatives which qualify

as hedges, under which unrealized gain or loss is deferred. Hedging

instruments are derivative transactions and hedged items are primarily

forecast sales denominated in foreign currencies, and receivables and

payables denominated in foreign currencies. Hedge effectiveness is not

assessed if the substantial terms and conditions of the hedge instruments

and the hedged forecasted transactions are the same.

The interest rate swaps which qualify for hedge accounting and

meet specifi c matching criteria are not remeasured at fair value but the

differential paid or received under the swap agreements are recognized

and included in interest expense or income.

The Companies manage their derivative transactions in accordance

with the internal management policies.

c) InventoriesInventories are stated principally at the lower of cost or market, cost

being determined by the weighted average method.

(4) DEPRECIATION AND AMORTIZATION OF MAJOR ASSETSa) Property, plant and equipment (Excluding lease assets)The straight-line method has been adopted. The same standard as

stipulated in the Corporate Tax Law is applied to the useful economic

lives and the residual values. The main refi ning facilities at the Yokkaichi

Refi nery of Showa Yokkaichi Sekiyu Co., Ltd., are depreciated with

estimated useful economic lives of 20 years.

b) Intangible assets (Excluding lease assets)The straight-line method has been adopted. Software for in-house use is

amortized by the straight-line method over the expected useful economic

life of 5 years.

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c) Lease assetsLease assets are depreciated using the straight-line method over the

lease terms without the residual value.

Financial lease transactions that do not transfer ownership and

whose commencement day falls prior to December 31, 2008, are

accounted for in a similar manner with ordinary rental transactions.

(5) BASIS OF PROVISIONSa) Allowance for doubtful accountsAllowance for doubtful debts are calculated based on an estimate of

the collectability of receivables from companies in fi nancial diffi culty.

For normal receivables, provisions are calculated based on the actual

ratio of the past doubtful debt losses.

b) Provision for employees’ bonusesProvision for employees’ bonuses is provided based on the estimated

bonuses to be paid in respect of service rendered by employees in the

current fi scal year.

c) Provision for directors’ bonusesProvision for directors’ bonuses is calculated based on the estimated

bonuses to be paid in respect of service rendered by directors in the


d ) Provision for special repairsEstimated accrued expenses on inspections and maintenance on refi ning

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

are required under the Fire Service Act.

(6) ACCOUNTING METHOD RELATED TO RETIREMENT BENEFITS

Accrued retirement benefi ts for employees have been recorded mainly

at the amount calculated based on the retirement benefi t obligation and

the fair value of the pension plan assets as of balance sheet date.

The retirement benefi t obligation for employees is attributed to each

period by the straight-line method over the estimated years of service of

the eligible employees.

Actuarial gain or loss is amortized in the year following the year

in which the gain or loss is recognized primarily by the straight-line

method over periods (mainly 10 years through 14 years), which are

shorter than the average remaining years of service of the employees.

Prior service cost is being amortized as incurred by the straight-line

method over periods (mainly 10 years through 14 years), which are


Transition differences due to accounting changes are amortized as

incurred by the straight-line methods over period (15 years), which are


(7) CONSUMPTION TAXTransactions subject to consumption taxes are recorded at amounts

exclusive of consumption taxes.

(8) AMORTIZATION OF GOODWILLGoodwill is amortized by the straight-line method over periods not

exceeding 20 years, which is determined in consideration of its causes.

Immaterial amount of goodwill is charged in the year of acquisition.

(9) APPROPRIATION OF RETAINED EARNINGSUnder the Companies Act of Japan, the appropriation of retained

earnings in the current fi scal year is determined by resolution of the

shareholders’ meeting held after the fi scal year-end. Therefore, the

appropriation of the retained earnings for the current fi scal year is

not refl ected in these fi nancial statements.

(10) CASH AND CASH EQUIVALENTSCash and cash equivalents in the consolidated statements of cash fl ows

consists of cash on hand, cash in banks which can be withdrawn at

any time, and short-term investments with a maturity of 3 months or less

when purchased which can easily be converted to cash and are

subject to little risk of change in value.

(11) RECLASSIFICATIONCertain comparative accounts in the consolidated fi nancial statements

for the year ended December 31, 2013 have been classifi ed to conform

to the 2014 presentation.

3. ACCOUNTING CHANGES

The Company adopted “Accounting Standard for Retirement Benefi ts”

(ASBJ Statement No.26 of May17, 2012) and “Guidance on

Accounting Standard for Retirement Benefi ts” (ASBJ Guidance No.25 of

May17, 2012) (except for certain provisions described in the main

clause of Section 35 of the standard and in the main clause of Section

67 of the guidance) as of the end of the fi scal year ended December

31, 2014. These accounting standards require entities to apply a

revised method for recording the retirement benefi t obligation, after

deducting pension plan assets, as a liability for retirement benefi ts. In

addition, unrecognized actuarial differences and unrecognized prior

service costs are recorded as a liability for retirement benefi ts.

Concerning the application of the Accounting Standard for

Retirement Benefi ts, based on the provisional treatment set out in Clause

37 of the standard, the effects of such changes in the current fi scal year

have been recorded in retirement benefi ts liability adjustments through

accumulated other comprehensive income.

As a result of this change, a liability for retirement benefi ts was

recognized in the amount of ¥82,097 million and accumulated other

comprehensive income decreased by ¥6,209 million as of December

31, 2014. In addition, net assets per share decreased by ¥16.49.

4. STANDARDS ISSUED BUT NOT YET EFFECTIVE

Accounting standards for retirement benefi tsOn May 17, 2012, the ASBJ issued “Accounting Standard for

Retirement Benefi ts“ (ASBJ Statement No.26) and “Guidance on

Accounting Standard for Retirement Benefi ts“ (ASBJ Guidance No.25),

which replaced the Accounting Standard for Retirement Benefi ts that

had been issued by the Business Accounting Council in 1998 with an

effective date of April 1, 2000 and the other related practical

guidance, being followed by partial amendments from time to time

through 2009.

(1) OVERVIEWThe standard provides guidance for the accounting for unrecognized



5. SECURITIES

(1) INVESTMENT SECURITIESYen Million

2014 2013

Investment securities ¥ 9,516 ¥ 8,828Investment in unconsolidated subsidiaries and affi liates 30,927 31,310

¥40,444 ¥40,139

(2) MARKETABLE SECURITIESYen Million

2014

Acquisition cost Carrying amount Unrealized gain (loss)

Securities whose carrying value exceeds their acquisition cost: Equity securities ¥3,188 ¥6,187 ¥2,999Securities whose carrying value does not exceed their acquisition cost: Equity securities 1 1 (0)

Yen Million

2013

Acquisition cost Carrying amount Unrealized gain (loss)

Securities whose carrying value exceeds their acquisition cost: Equity securities ¥1,414 ¥3,630 ¥2,215Securities whose carrying value does not exceed their acquisition cost: Equity securities 1,811 1,803 (7)

(3) SECURITIES SOLDYen Million

2014 2013

Proceeds from sales of securities during the year ¥49 ¥47Realized gains 5 21Realized losses 4 0

(4) NON-MARKETABLE SECURITIESYen Million

2014 2013

Securities for which it is extremely diffi cult to determine the fair value: Unlisted securities ¥3,326 ¥3,395

6. INVESTMENT AND RENTAL PROPERTY

The Company and certain subsidiaries own some rental properties,

such as offi ce buildings and commercial facilities including land in

Tokyo and other areas. The net of rental income and operating

expenses for those rental properties for the years ended December 31,

2014 and 2013 were ¥1,293 million and ¥1,379 million, and the

net gains (loss) on sales and disposal of those properties for the years

ended December 31, 2014 and 2013 were ¥2,836 million and

¥849 million, respectively. An impairment loss for the years ended

December 31, 2014 and 2013 were ¥149 million and ¥115

million, respectively.

actuarial differences and unrecognized prior service costs, the calculation

methods for retirement benefi t obligation and service costs, and

enhancement of disclosures taking into consideration improvements to

fi nancial reporting and international trends.

(2) SCHEDULED DATE OF ADOPTION The revised accounting standard and guidance were adopted as of the

end of the fi scal year ended December 31, 2014. However, revisions

to the calculation methods for the retirement benefi t obligation and

service costs are scheduled to be adopted from the beginning of the

fi scal year ending December 31, 2015. (3) IMPACT OF ADOPTING REVISED ACCOUNTING

STANDARD AND GUIDANCEThe Companies are currently in the process of determining the effects of

the revised standard on the consolidated fi nancial statements.

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The carrying amounts, changes in such balances, and fair values of such properties are as follows.Yen Million

Carrying amount Fair valueDecember 31, 2013 Increase (Decrease) December 31, 2014 December 31, 2014

¥24,713 ¥(926) ¥23,786 ¥47,325

Yen Million

Carrying amount Fair valueDecember 31, 2012 Increase (Decrease) December 31, 2013 December 31, 2013

¥24,736 ¥(23) ¥24,713 ¥64,116

Notes: 1. The carrying amount recognized in the balance sheet is net of accumulated depreciation and accumulated impairment losses, if any. 2. The increase during the fi scal year ended December 31, 2014 primarily represents the properties becoming idle of ¥2,640 million, and the decrease primarily represents sales and

disposals of ¥2,400 million and depreciation of ¥966 million and impairment loss of ¥149 million. 3. The increase during the fi scal year ended December 31, 2013 primarily represents properties becoming idle of ¥2,300 million, and the decrease primarily represents sales and disposals

of ¥1,859 million, depreciation of ¥348 million and impairment loss of ¥115 million. 4. The fair value of properties is measured by the Company based mainly on real estate appraisal standards.

7. SHORT-TERM AND LONG-TERM DEBTS

(1) SHORT-TERM DEBTSYen Million

2014 2013

Short-term loans payable ¥58,862 ¥60,997Short-term lease obligations 1,119 1,355

¥59,981 ¥62,353

Note: The weighted average interest rates on short-term loans payable at the year-end were as follows;

%

2014 2013

Short-term loans payable 0.10 0.13

(2) LONG-TERM DEBTSYen Million

2014 2013

Loans from banks, other fi nancial institutions, etc. ¥130,636 ¥139,996Long-term lease obligations 2,105 2,2560.52 percent unsecured straight bond due in 2014 — 10,0000.97 percent unsecured straight bond due in 2017 10,000 10,0000.29 percent unsecured straight bond due in 2019 10,000 —

¥152,741 ¥162,253Less: Long-term bonds due within one year — 10,000Less: Long-term loans due within one year 50,811 28,300

¥101,930 ¥123,952

Note: The weighted average interest rates on long-term loans payable (excluding the balance due within 1 year) as of December 31, 2014 and 2013 were 1.14% and 1.06%, respectively.

Annual maturities of bondsYen Million

2014 2013

Within one year — ¥10,000More than one year and less than two years — —More than two years and less than three years ¥10,000 —More than three years and less than four years — 10,000More than four years and less than fi ve years 10,000 —More than fi ve years — —

¥20,000 ¥20,000

Annual maturities of long-term debts (Excluding bonds)Yen Million

2014 2013

Within one year ¥ 50,811 ¥ 28,300More than one year and less than two years 1,444 51,737More than two years and less than three years 9,178 1,231More than three years and less than four years 31,077 8,977More than four years and less than fi ve years 40,158 21,947More than fi ve years 71 30,058

¥132,741 ¥142,253



(3) COMMITMENT-LINE CONTRACTSThe Company maintains a revolving credit contract available up to ¥150 billion with a banking syndicate and an overdraft contract up to ¥10 billion

with Mizuho Bank Ltd.

There was no balance as of December 31, 2014 under these contracts.

8. DEFERRED TAXATION

(1) SIGNIFICANT COMPONENTS OF DEFERRED TAX ASSETS AND DEFERRED TAX LIABILITIESYen Million

2014 2013

Deferred tax assets: Provision for employees’ retirement benefi ts — ¥ 26,374 Liability for retirement benefi ts ¥ 25,584 — Impairment loss 14,753 16,718 Loss on liquidation of business 2,111 2,380 Loss on valuation of investment securities 1,114 1,066 Allowance for doubtful accounts 496 399 Net loss carried forward 29,813 18,958 Other 16,062 13,145 Sub-total 89,936 79,044 Valuation allowance (29,132) (33,798) Total deferred tax assets ¥ 60,804 ¥ 45,246 Deferred tax liabilities: Reserve for advanced depreciation on property, plant and equipment transaction ¥ (11,077) ¥(10,057) Unrealized gain (loss) on securities (933) (711) Other (4,077) (3,582) Total deferred tax liabilities (16,087) (14,351) Net deferred tax assets (liabilities) ¥ 44,716 ¥ 30,895

(2) RECONCILIATION BETWEEN THE EFFECTIVE STATUTORY TAX RATE AND THE ACTUAL TAX RATE%

2014 2013

Effective statutory tax rate 38.0(Adjustments)Entertainment expense and others that are not deductible permanently 1.0Dividends income and others that are not taxable permanently (Note) (0.3)Changes in valuation allowance (17.6)Inhabitant tax on per capita basis 0.2Other (1.4)Actual tax rate 19.9Note: Disclosures are abbreviated because loss before income taxes was recorded for the year ended December 2014.

(3) AMENDMENTS TO DEFERRED TAX ASSETS AND DEFERRED TAX LIABILITIES DUE TO THE CHANGE IN THE RATE OF CORPORATION TAX AND OTHERS

In accordance with the Act for Partial Amendment of the Income Tax Act

(Act No.10, 2014) promulgated on March 31, 2014, the Special

Reconstruction Corporation Tax will not be imposed, effective from the

fi scal year beginning on or after April 1, 2014. Accordingly, the

effective statutory tax rate used for calculating deferred tax assets and

liabilities, has been changed from 38.0% for the previous fi scal year to

35.6% for the temporary differences to be eliminated in the fi scal year

beginning on January 1, 2015.

This tax rate change results in a decrease of ¥3,832 million in

deferred tax assets (after deducting deferred tax liabilities), and an

increase of the same amount in income tax-deferred recognized in the


9. RETIREMENT BENEFITS

The Companies have both defi ned benefi t plans (including defi ned

benefi t corporate pensions, corporate pension fund and lump-sum

retirement plans) and defi ned contribution plans (defi ned contribution

corporate pensions, Smaller Enterprise Retirement Allowance Mutual Aid

System, and specifi c mutual aid) included as part of the total retirement

allowance.

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For the year ended December 31, 2014

1. Defi ned benefi t plan

(1) The changes in the retirement benefi t obligation during the year ended December 31, 2014 (except for subsidiaries adopting a simplifi ed method) Yen Million

Retirement benefi t obligation at January 1, 2014 ¥102,113 Service cost 1,707 Interest cost 1,509 Actuarial loss 982 Retirement benefi t paid (6,429)Retirement benefi t obligation at December 31, 2014 ¥ 99,884

(2) The changes in plan assets during the year ended December 31, 2014 (except for subsidiaries adopting a simplifi ed method)Yen Million

Plan assets at January 1, 2014 ¥18,674 Expected return on plan assets 871 Actuarial loss 491 Contributions by the Company 1,194 Retirement benefi ts paid (1,439)Plan assets at December 31, 2014 ¥19,791

(3) The changes in liabilities for retirement benefi ts adopting a simplifi ed method during the year ended December 2014Yen Million

Liabilities for retirement benefi ts at January 1, 2014 ¥1,529 Retirement benefi t expenses 415 Retirement benefi ts paid (111) Contributions by the Company (383) Increase due to new consolidation 439Liabilities for retirement benefi ts at December 31, 2014 ¥1,890

(4) The funded status of the plans and the amounts recognized in the consolidated balance sheet as of December 31, 2014Yen Million

Funded retirement benefi t obligation ¥103,418Plan assets at fair value (22,349)

81,069Unfunded retirement benefi t obligation 912Net liability for retirement benefi ts in the balance sheet 81,982Liability for retirement benefi ts 82,097Asset for retirement benefi ts (115)Net liability for retirement benefi ts in the balance sheet ¥ 81,982

(5) The components of retirement benefi t expense for the year ended December 31, 2014Yen Million

Service cost ¥1,707Interest cost 1,509Expected return on plan assets (871)Amortization of actuarial loss 2,238Amortization of prior service cost (118)Amortization of transition difference due to accounting changes 117Retirement benefi t expense adopting a simplifi ed method 415Retirement benefi t expense for defi ned benefi t plan ¥4,999

(6) The components of retirement benefi ts liability adjustments (before tax effect) for the year ended December 31, 2014Yen Million

Unrecognized actuarial loss ¥11,126Unrecognized prior service cost (801)Unrecognized transition difference due to accounting changes 29Total ¥10,354

(7) Plan assets

(i) The fair value of plan assets, by major category, as a percentage of total plan assets as of December 31, 2014 is as follows:Securities 64%Stocks 27%General account 1%Cash on hand and in banks 3%Others 5%Total 100%

(ii) Method for determining the long-term expected return on plan assets

The long-term expected return on plan assets has been estimated based on the present and anticipated allocation to each asset class and the expected

long-term return on assets held in each category.



(8) The assumptions used in accounting for the above plans are as follows:Discount rates Principally 1.5%Expected long-term rates of return on plan assets Principally 3.7%

2. Defi ned contribution plan

Contributions by the Companies totalled ¥68 million for the year ended December 31, 2014.


(1) PROVISION FOR EMPLOYEES’ RETIREMENT BENEFITSYen Million

2013

Retirement benefi t obligations ¥(106,025)Pension assets 21,004Unfunded retirement benefi t obligations (85,021)Unrecognized actuarial loss 12,872Unrecognized prior service cost (reduction in obligations) (919)Unrecognized transition differences due to accounting changes 146Sub-total (72,922)Prepaid pension expenses 83Provision for employees’ retirement benefi ts ¥ (73,005)

Notes: 1. The discount rate determined using the yield of bonds at the end of the current fi nancial year. 2. The Company’s retirement benefi t scheme includes two consolidated subsidiaries. 3. Except for the Company and three of the consolidated subsidiaries, a simplifi ed method is applied for calculating retirement benefi t obligations. 4. Corporate pension fund plans are mainly those in which employees retiring at retirement age or voluntarily at above the age of 55 contribute 50% of their retirement benefi ts to their

company, which then pays it out over 180 months or until the death of the pensioners. 5. The Company has introduced a retirement benefi t system in which employees choose from a scheme for advance cash payment of retirement allowance and pension (full payment

of retirement allowance and pension equivalent amount included in salary), and a lump-sum retirement benefi t scheme; the benefi t obligations of employees choosing the lump-sum retirement scheme are also included.

6. An employee pension trust has been set.

(2) THE NET PERIODIC PENSION EXPENSE RELATED TO THE RETIREMENT BENEFITSYen Million

2013

Service cost (Note 1) ¥1,783 Interest cost 1,925 Expected return on pension assets (727)Amortization of unrecognized actuarial loss 1,943Amortization of unrecognized prior service costs (118)Amortization of unrecognized transition differences due to accounting changes 117 Other (Note 2) 266

¥5,190

Notes: 1. The retirement benefi t costs of the consolidated subsidiaries that use a simplifi ed method are included in “Service cost.” 2. This amount mainly represents payments for defi ned contribution pension plans.

(3) ASSUMPTIONS USED IN CALCULATION OF THE ABOVE INFORMATIONAs of December 31, 2013

Allocation method for retirement benefi t expenses Periodical straight lineDiscount rate 1.5%Expected rate of return 3.7%Period for amortization of prior service cost 10–14 yearsPeriod for amortization of actuarial loss 10–14 yearsPeriod for amortization of transition differences due to accounting changes 15 years

Note: The calculation of the discount rate is based on yield rates at the end of the fi scal year.

10. ASSET RETIREMENT OBLIGATIONS

(1) OVERVIEW OF ASSET RETIREMENT OBLIGATIONSThe Companies estimate obligations of restoration under the lease agreements of real estate in connection with land for service station facilities

and offi ces.

(2) CALCULATION METHOD OF ASSET RETIREMENT OBLIGATIONSThe discount rates used for calculating asset retirement obligations range from 0.648% to 1.94%, corresponding with estimated useful lives of

10 to 50 years from the acquisition date.

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(3) CHANGES IN THE TOTAL AMOUNT OF ASSET RETIREMENT OBLIGATIONSYen Million

2014 2013

Balance at beginning of year ¥3,636 ¥3,586Additional provisions associated with the acquisition of property, plant and equipment 190 101Reconciliation associated with passage of time 58 57Increase due to changes in estimation 22 —Reduction associated with settlement of asset retirement obligations (86) (107)Balance at end of year ¥3,821 ¥3,636

11. FINANCIAL INSTRUMENTS AND RELATED DISCLOSURES

(1) GROUP POLICY FOR FINANCIAL INSTRUMENTSThe Companies, based on their capital investment plans, raise necessary

funds through bank loans, issues of corporate bonds, and other sources.

In addition, to obtain short-term working capital, the Companies raise

funds through bank loans, issues of commercial paper (CP), and other

sources. The Companies use derivatives to reduce the risk of fl uctuations

in commodity prices, foreign exchange rates, and interest rates.

Derivatives are not used for speculative purposes.

(2) NATURE AND EXTENT OF RISKS ARISING FROM FINANCIAL INSTRUMENTS

Receivables, such as trade notes and trade accounts, are exposed to

customer credit risk. Investment securities are mainly equity instruments

of customers and suppliers of the Companies.

Payment terms of payables, such as trade notes and trade accounts,

are less than three months. Moreover, payables in foreign currencies

are exposed to the market risk of fl uctuation in foreign currency

exchange rates.

Maturities of bank loans, commercial paper, and bonds, which

are for the purpose of capital investment and working capital, are less

than seven years after the balance sheet date. Moreover, variable

interest rate debt is exposed to market risks from changes in variable

interest rates.

In addition to foreign currency forward contracts and interest rate

swaps, derivatives mainly include options, which are used to hedge

foreign exchange risk associated with receivables and payables in

foreign currencies, and swaps, which are used to hedge market price

fl uctuations risk associated with crude oil and petrochemical products.

(3) RISK MANAGEMENT FOR FINANCIAL INSTRUMENTSCredit risk management Credit risk is the risk of economic loss arising from a counterparty’s

failure to repay or service debt according to the contractual terms.

The Companies manage their credit risk from receivables by

monitoring of payment terms and balances of each customer and

recognizing credit standing of major customers to identify the default

risk of customers at an early stage.

Market risk management (Foreign exchange risk and interest rate risk) Foreign currency trade payables are exposed to market risk resulting from

fl uctuations in foreign currency exchange rates. Such foreign exchange

risk is hedged principally by foreign currency forward contracts.

Interest rate swaps are used to manage exposure to market risks

from changes in interest rates of loan payables. Investment securities

are managed by monitoring the market values and fi nancial positions

of issuers on a regular basis. To manage the risk of derivatives, the

Companies have prepared a set of internal rules and implemented them

in line with only real demand.

(4) SUPPLEMENTARY EXPLANATION OF THE ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of fi nancial instruments is based on their quoted market

prices, if available. When there is no quoted market price available,

fair value is reasonably estimated. Since various assumptions and

factors are refl ected in estimating the fair value, different assumptions

and factors could result in different fair value. In addition, the notional

amounts of derivatives in Note 12, Derivatives – Supplemental

Explanation on Quantitative Information, are not necessarily indicative

of the actual market risk involved in derivative transactions.

(5) FAIR VALUES OF FINANCIAL INSTRUMENTSFair values of fi nancial instruments are based on the quoted price in active markets. If the quoted price is not available, other rational valuation

techniques are used.

(a) Fair value of fi nancial instrumentsYen Million

December 31, 2014 Carrying amount Fair value Unrealized gain (loss)

Cash and deposits ¥ 45,081 ¥ 45,081 ¥ —Notes and accounts receivable-trade 300,564 300,564 —Investment securities 6,189 6,189 —Total assets ¥351,835 ¥351,835 ¥ —Notes and accounts payable-trade ¥284,944 ¥284,944 ¥ —Accounts payable-other 204,142 204,142 —Short-term loans payable (Note 1) 58,862 58,862 —Bonds payable (Note 2) 20,000 20,299 299Long-term loans payable (Note 1) 130,636 133,232 2,596Total Liabilities ¥698,585 ¥701,481 ¥2,895Derivative transactions (Note 3) ¥ 307 ¥ 307 ¥ —

Notes: 1. Current portion of long-term loans payable is included in long-term loans payable. 2. Current portion of bonds is included in bonds payable. 3. The value of assets and liabilities arising from derivatives is shown at net value, and with the amount in parentheses representing liability position.



Yen MillionDecember 31, 2013 Carrying amount Fair value Unrealized gain (loss)

Cash and deposits ¥ 28,635 ¥ 28,635 ¥ —Notes and accounts receivable–trade 391,257 391,257 —Investment securities 5,434 5,434 —Total ¥425,326 ¥425,326 ¥ —Notes and accounts payable–trade ¥384,965 ¥384,965 ¥ —Accounts payable–other 173,149 173,149 —Short-term loans payable (Note 1) 60,997 60,997 —Bonds payable (Note 2) 20,000 20,186 186 Long-term loans payable (Note 1) 139,996 142,426 2,430 Total ¥779,109 ¥781,726 ¥2,616 Derivatives (Note 3) ¥ 84 ¥ 84 ¥ —

Notes: 1. Current portion of long-term loans payable is included in long-term loans payable. 2. Current portion of bonds payable is included in bonds payable. 3. The value of assets and liabilities arising from derivatives is shown at net value, and with the amount in parentheses representing liability position.

ASSETSCash and deposits and Notes and accountsreceivable-tradeTheir carrying values approximate fair value because of their short

maturities.

Investment securitiesThe fair value of investment stocks is measured at their quoted market

price of the stock exchange for the equity instruments. The information

of the fair value for the investment securities by classifi cation is included

in Note 5.

LIABILITIESNotes and accounts payable-trade, Accounts payable-other, and Short-term loans payable Their carrying values approximate fair value because of their short

maturities.

Bonds payableThe fair value of bonds payable is based on the present value of

principal and interest discounted by the interest rates determined taking

into account the remaining period of each bond and current credit risk.

Long-term loans payableThe fair value of long-term loans payable is based on the present value

of the total of principal and interest discounted by the interest rates to

be applied if similar new borrowings were entered into.

DERIVATIVESThe information of the fair value for derivatives is included in Note 12.

(b) Financial instruments whose fair value cannot be reliably determined Yen Million

2014 2013

Investments in equity instruments that do not have a quoted market price in an active market ¥34,254 ¥34,705

(6) MATURITY ANALYSIS FOR FINANCIAL ASSETS Yen Million

December 31, 2014 Due in one year or lessDue after one year through fi ve years

Due after fi ve years through ten years Due after ten years

Cash and deposits ¥ 45,081 ¥— ¥— ¥—Notes and accounts receivable-trade 300,564 — — —Total ¥345,646 ¥— ¥— ¥—

Yen Million

December 31, 2013 Due in one year or lessDue after one year through fi ve years

Due after fi ve years through ten years Due after ten years

Cash and deposits ¥ 28,635 ¥— ¥— ¥—Notes and accounts receivable–trade 391,257 — — —Total ¥419,892 ¥— ¥— ¥—

Please see Note 7 for annual maturities of long-term debts and obligations under leases, respectively.

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12. DERIVATIVES

(1) CONDITIONS OF TRANSACTIONSIn the normal course of business, the Companies use derivatives to manage their exposures to market risks in compliance with their internal policies. The Companies do not use derivatives for speculative purposes. These instruments include foreign exchange contracts, foreign currency options, interest rate swaps, futures, forward contracts, and options of crude oil and oil products. All such derivatives involve risks, including the credit risk of nonperformance by counterparties. In order to minimize the credit risk of nonperformance by counterparties, the Companies enter into derivative contracts with major fi nancial institutions and trading companies that have a high credit rating.

(2) SUPPLEMENTAL EXPLANATION ON QUANTITATIVE INFORMATION

The fair value and unrealized gain or loss on derivative transactions are estimates considered appropriate based on the market at the balance sheet date and, thus, fair value isnot necessarily indicative of the actual amounts that may be realized or settled in the future. The notional amounts of the swaps are not direct measures of the Company’s risk exposure in connection with its swap transactions.

(3) CURRENT VALUE OF DERIVATIVESDerivative transactions to which hedge accounting is not applied as of December 31, 2014 and 2013

Yen Million

December 31, 2014

Notional amountNotional amount due

after one year Fair value Unrealized gain (loss)

Foreign currency forward contracts To buy (US$) ¥46,942 ¥ — ¥303 ¥303 To sell (US$) 7,269 — (82) (82)

¥221 ¥221Commodity-related transactions—Crude oil futures contracts To sell 427 — 87 87Commodity-related transactions—Oil products futures contracts To buy ¥ 537 ¥ — (84) (84)

¥ 3 ¥ 3

Yen Million

December 31, 2013

Notional amountNotional amount

due after one year Fair value Unrealized gain (loss)

Foreign currency forward contracts To buy (US$) ¥79,432 ¥ — ¥1,076 ¥1,076 To sell (US$) 4,331 — (94) (94)

¥ 982 ¥ 982Commodity-related transactions—Crude oil futures contracts To buy ¥ 495 ¥ — ¥ 20 ¥ 20 To sell 478 — (22) (22)Commodity-related transactions—Oil products futures contracts To buy ¥ 564 ¥ — ¥ 29 ¥ 29 To sell 582 — (19) (19)

¥ 8 ¥ 8



Derivative transactions to which hedge accounting is applied as of December 31, 2014Yen Million

December 31, 2014 Hedge accounting method Hedged item Notional amountNotional amount due

after one year Fair value

Foreign currency forward contractsTo buy (US$) Deferral hedge

accounting Foreign forecasted transactions

¥ 8,213 ¥ — ¥ 221

To sell (US$) Deferral hedge accounting

Foreign forecasted transactions

23,108 — (626)

¥ (405)Interest rate swap (fi xed rate payment, fl oating rate receipt)

Special hedge accounting treatment

Interest of long-term loans payable

¥11,000 ¥7,000 ¥ (57)

¥ (57)Commodity-related transactions—Crude oil forward contracts To buy Deferral hedge

accounting Crude oil ¥ 9,787 ¥ — ¥(1,011)

To sell Deferral hedge accounting

Crude oil 3,879 — 524

Commodity-related transactions—Oil products forward contracts To sell Deferral hedge

accounting Oil products ¥11,506 ¥ — ¥ 975

¥ 488

Derivative transactions to which hedge accounting is applied as of December 31, 2013Yen Million

December 31, 2013 Hedge accounting method Hedged item Notional amountNotional amount due

after one year Fair value

Foreign currency forward contracts To buy (US$) Deferral hedge

accounting Foreign forecasted transactions

¥12,027 ¥ — ¥ 406


Foreign forecasted transactions

15,101 ¥ — (491)

¥ (84)Interest rate swap (fi xed rate payment, fl oating rate receipt)

Special hedge accounting treatment

Interest of long-term loans payable

¥16,000 ¥16,000 ¥ (64)

¥ (64)Commodity-related transactions—Crude oil forward contracts To buy Deferral hedge

accounting Crude oil ¥24,903 ¥ — ¥ 916


Crude oil 20,438 — (740)

Commodity-related transactions—Oil products forward contracts To buy Deferral hedge

accounting Oil products ¥ 1,601 ¥ — ¥ 46


Oil products 30,067 — (1,043)

¥ (820)

13. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Major elements of selling, general and administrative expenses for the years ended December 31, 2014 and 2013Yen Million

2014 2013

Transportation ¥ 37,473 ¥ 40,373Salaries 34,142 34,972Rents 5,403 5,286Depreciation 6,658 6,847Research and development expenses 4,632 4,374Other 37,301 41,992

¥125,611 ¥133,847

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14. IMPAIRMENT LOSS

As a minimum unit for generating cash fl ows, service stations were

assessed for impairment individually, and other property, plant and

equipment were grouped by segments of management accounting.

Assets used for rent and idle assets were assessed individually.

Recoverable value was assessed by comparing the net realizable

value and value in use. The realizable value was mainly adopted for

idle assets and value in use for other assets.

Material assets were estimated in accordance with real estate

appraisal standards.

To calculate value in use, future cash fl ows were discounted by

6.0% (4.0% in 2013).

Impairment loss was recorded at the amount by which the carrying

amount of each asset group exceeded its recoverable value.

For the year ended December 31, 2014, the Companies recognized

an impairment loss of ¥1,575 million on 71 groups (¥1,780 million

on 54 groups in 2013) of impaired property, plant and equipment,

which was accounted for as an extraordinary loss. Impairment loss

recorded primarily related to the signifi cant decrease in the market

value of the Companies’ land as well as to the overall deterioration

of their business environment. Impaired asset groups consisted of the

following:

Yen Million

2014Land Others Total

Service stations (65 groups) ¥ 64 ¥1,295 ¥1,360Idle assets (6 groups) 129 85 214

¥1,575

Yen Million

2013Land Others Total

Service stations (27 groups) ¥845 ¥103 ¥ 948Idle assets (27 groups) 465 365 831

¥1,780

15. COLLATERAL ASSETS

(1) COLLATERAL ASSETSYen Million

2014 2013

Cash and deposits ¥ 3,396 ¥ 4,988Notes and accounts receivable–trade 1,640 1,496Raw materials and supplies 89 85Buildings and structures 12,749 13,379Tanks 4,701 4,812Machinery, equipment and vehicles 41,996 48,489Land 23,154 21,394Other 12 26

¥87,740 ¥94,672

(2) SECURED DEBTSYen Million

2014 2013

Long-term loans payable ¥ 1,749 ¥ 3,603Short-term loans payable 1,457 1,188Accounts payable–other 65,625 53,066

¥68,831 ¥57,858

16. CONTINGENT LIABILITIES

The Companies had the following contingent liabilities as of December 31, 2014 and 2013.Yen Million

2014 2013

Guarantees for: Non-consolidated subsidiaries, affi liates, and other companies ¥2,782 ¥2,422 Employees (housing loan) 515 590

¥3,298 ¥3,013



The Company is subject to legal proceedings claims and liabilities

which arise in the ordinary course of business. In the opinion of

management, the amount of the ultimate liability with respect to those

actions will not materially affect the Companies’ fi nancial position or

results of operations and cash fl ows.

17. COMPREHENSIVE INCOME

The components of other comprehensive income for the year ended December 31, 2014 and 2013 were as follows:Yen Million

2014 2013

Unrealized gain (loss) on securities: Amount arising during the year ¥ 789 ¥ 639 Reclassifi cation adjustments for gains and losses included in net income 2 761 Amount before tax effect 791 1,400 Tax effect (221) (274) Total ¥ 570 ¥1,127Unrealized gain (loss) from hedging instruments: Amount arising during the year ¥ 449 ¥ (823) Reclassifi cation adjustments for gains and losses included in net income 823 (201) Amount before tax effect 1,273 (1,025) Tax effects (473) 389 Total ¥ 800 ¥ (635) Share of other comprehensive income in affi liates Amount arising during the year ¥ (77) ¥ 213 Reclassifi cation adjustments for gains and losses included in net income 0 (9) Total ¥ (77) ¥ 204Total other comprehensive income ¥1,293 ¥ 696

18. RELATED PARTY TRANSACTIONS

When transactions of the Company with its related parties are more

than 10% of the consolidated sales proceeds, or 10% of the total

amount of the consolidated cost of sales and selling, general and

administrative expenses, they are disclosed.

The Company discloses material balances and transactions with

related parties when such balances and transactions represent more

than 1% of the consolidated total assets.

(1) RELATED PARTIES–CORPORATIONSFor the year ended December 31, 2014

Capital (Million)

Voting right share owing (Shares owned)

Yen Million

Name Transactions Closing balances

Saudi Arabian Oil Co., Ltd. ¥ — (Indirect 15.0%) Purchases of crude oil and oil products

¥946,770 Accounts payable (trade) ¥50,273

Seibu Oil Co., Ltd. ¥8,000 Direct 38.0% Purchase of oil products 571,378 Accounts payable (trade) 53,283Advanced purchase of crude oil

— Accounts receivable (trade) 13,992

Marubeni Energy Corporation ¥2,350 Direct 33.4% Sale of oil products 169,680 Accounts receivable (trade) 14,870Shell Chemicals Japan Ltd. ¥ 250 NA Sales of oil products and

petrochemicals266,179 Accounts receivable (trade) 22,715

Shell Eastern Trading (Pte) Ltd. US$714 NA Purchases of crude oil and oil products

247,684 Accounts payable (trade) 11,719


Capital (Million)

Voting right share owing (Shares owned)

Yen Million

Name Transactions Closing balances

Saudi Arabian Oil Co., Ltd. ¥ — (Indirect 15.0%) Purchases of crude oil and oil products

¥954,614 Accounts payable (trade) ¥63,499

Seibu Oil Co., Ltd. ¥8,000 Direct 38.0% Purchase of oil products 583,723 Accounts payable (trade) 57,816Advanced purchase of crude oil

— Accounts receivable (trade) 36,345

Marubeni Energy Corporation ¥2,350 Direct 33.4% Sale of oil products 162,471 Accounts receivable (trade) 19,896Shell Chemicals Japan Ltd. ¥ 250 NA Sales of oil products and

petrochemicals234,899 Accounts receivable (trade) 26,049

Shell Eastern Trading (Pte) Ltd. US$714 NA Purchases of crude oil and oil products

224,030 Accounts payable (trade) 25,329

(2) RELATED PARTIES–INDIVIDUALSThere are no material transactions and balances of the Companies with related individuals, including shareholders and directors, representing more

than ¥10 million for the years ended December 31, 2014 and 2013.

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(3) INFORMATION ABOUT SALES, PROFIT (LOSS), ASSETS, LIABILITIES, AND OTHER ITEMSFor the year ended December 31, 2014

Yen Million

Reportable segment

Oil businessEnergy solutions

business Sub-total Other Total Adjustments Consolidated

Sales Sales to customers ¥2,850,218 ¥138,610 ¥2,988,828 ¥ 9,156 ¥2,997,984 ¥ — ¥2,997,984 Inter-segment sales and transfers 10,241 9,579 19,821 6,479 26,300 (26,300) — Total ¥2,860,460 ¥148,190 ¥3,008,650 ¥15,635 ¥3,024,285 ¥(26,300) ¥2,997,984Segment profi t (loss) (37,391) 17,691 (19,700) 1,619 (18,080) 22 (18,057)Segment assets ¥ 993,525 ¥159,435 ¥1,152,961 ¥35,832 ¥1,188,793 ¥(12,511) ¥1,176,282Other: Depreciation and amortization ¥ 23,585 ¥ 17,268 ¥ 40,854 ¥ 507 ¥ 41,361 — ¥ 41,361 Amortization of goodwill and

negative goodwill(162) (28) (191) 2 (188) — (188)

Equity in losses of affi liates 875 (2) 873 — 873 — 873 Impairment loss 1,575 — 1,575 — 1,575 — 1,575 Balance of goodwill (94) (28) (123) 107 (16) — (16) Capital expenditures 17,336 13,581 30,917 182 31,099 — 31,099

Notes: 1. The segment “Others” refers to the total of other business segments that are not included in the reportable segments, including real estate, construction works, sale of automobile accessories, etc. 2. The adjustment of segment profi t (loss) ¥22 million mainly represents elimination of inter-segment receivables. 3. The adjustment of segment assets of (¥12,511) million mainly represents elimination of inter-segment receivables. 4. Segment profi t (loss) is reconciled to operating income (loss) in the accompanying consolidated statements of income.

19. SEGMENT INFORMATION

(1) OVERVIEW OF REPORTABLE SEGMENTSThe Companies’ reportable segments are those for which separately

fi nancial information is available and the Board of Directors carries out

periodic review to allocate management resources and evaluate

business performance.

The Companies are mainly engaged in the manufacture and sale

of energy-related products including oil products, solar cells, and

electricity. The Company and its subsidiaries, serving as independent

management units of each business, create comprehensive strategies

and implement business activities about its products and services.

The Companies activities are composed of two reportable

segments, “Oil business” and “Energy solutions business,” each of

which is involved in the sale of products and services. The businesses

which are not included in reportable segments are shown in “Other.”

The “Oil business” manufactures and sells gasoline, naphtha,

kerosene, diesel oil, fuel oil, lubricants, LP gas, asphalt, and petrochemical

products. The “Energy solutions business” incorporates the manufacture

and sale of solar cells modules and wholesale supplies of electricity.

(2) METHODS OF MEASUREMENT FOR THE AMOUNTS OF SALES, PROFIT (LOSS), ASSETS, LIABILITIES, AND OTHER ITEMS FOR EACH REPORTABLE SEGMENT

The accounting policies of each operating segment are consistent with

those disclosed in Note 2, “SUMMARY OF SIGNIFICANT

ACCOUNTING POLICIES.”

Segment profi t (loss) is stated on an operating income basis. Inter-

segment sales and transfers are recorded at the same prices used in

transactions with third parties.



For the year ended December 31, 2013Yen Million

Reportable segment

Oil businessEnergy solutions

business Sub-total Other Total Adjustments Consolidated

Sales Sales to customers ¥2,803,041 ¥141,210 ¥2,944,252 ¥ 9,556 ¥2,953,808 ¥ — ¥2,953,808 Inter-segment sales and transfers 10,313 16,008 26,322 3,031 29,354 (29,354) — Total ¥2,813,355 ¥157,219 ¥2,970,574 ¥12,587 ¥2,983,162 ¥(29,354) ¥2,953,808 Segment profi t (loss) ¥ 56,114 ¥ 17,553 ¥ 73,667 ¥ 1,793 ¥ 75,461 (30) 75,430Segment assets ¥1,117,978 ¥156,375 ¥1,274,353 ¥34,902 ¥1,309,256 ¥(13,425) ¥1,295,831 Other: Depreciation and amortization ¥ 23,229 ¥ 16,952 ¥ 40,182 ¥ 419 ¥ 40,601 ¥ — ¥ 40,601 Amortization of goodwill and

negative goodwill 90 (28) 61 — 61 — 61 Equity in losses of affi liates 1,508 (11) 1,496 — 1,496 — 1,496 Impairment loss 1,780 — 1,780 — 1,780 — 1,780 Balance of goodwill (257) (57) (314) — (314) — (314) Capital expenditures 22,702 5,232 27,935 241 28,177 — 28,177

Notes: 1. The segment “Other” refers to the total of other business segments that are not included in the reportable segments, including real estate, construction works, sale of automobile accessories, etc. 2. The adjustments of segment profi t ¥(30) million mainly represents elimination of inter-segment transactions. 3. The adjustments of segment assets ¥(13,425) million mainly represents elimination of inter-segment receivables. 4. Segment profi t (loss) is reconciled to operating income (loss) in the accompanying consolidated statements of income.

(4) RELATED INFORMATIONa) Information for each product and serviceDisclosure of this information is not presented since similar information is included in segment information.

b) Geographic segment information1) Sales

Disclosure of this information is not presented since domestic sales make up more than 90% of consolidated sales.

2) Property, plant and equipment

Disclosure of this information is not presented since property, plant and equipment located in Japan makes up more than 90% of consolidated net

book value.

c) Information by major customerFor the years ended December 31, 2014 and 2013

Disclosure on this information is not presented since there were no customers that accounted for 10% or more of net sales to third parties recorded in the

consolidated statements of income.

20. BUSINESS COMBINATIONS

JOINT CONTROLLED ENTITYAbsorption-type Company Split regarding LP (Liquid Petroleum) gas import and wholesale operation:

On December 16, 2014, the Board of Directors has approved an absorption-type company split (“Company Split”), which caused Cosmo Petroleum

Gas Co., Ltd. (“Cosmo Petroleum Gas”) to succeed to the LP gas import and wholesale operations. The Company entered into an absorption-type

company split agreement with Cosmo Petroleum Gas as of December 18, 2014.

Overview of the Company Split:

a. Contents of the Business to Be Split:

The LP gas import and wholesales operations

b. Purpose of the Company Split:

The Company, the Cosmo Oil Co. Ltd., Sumitomo Corporation and Tonen General Sekiyu K.K. (the “Four Corporate Group”) concluded in the Busi-

ness Integration as to the LP gas import and wholesale operations as of August 5, 2014. The Four Corporate Group aimed to create one of Japan’s

top-class LP gas import and wholesale companies, by the integration of the LP gas import and wholesale operations, including the importing of LP

gas, the management of shipping, logistics and wholesales in domestic market, and overseas trading operation by four corporate groups.

The Company Split will be carried out as a part of the Business Integration.

c. Effective date:

April 1, 2015 (scheduled)

d. Company Split Method

This is as absorption-type split in which the Company is the splitting company and Cosmo Petroleum Gas is the successor company.

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Independent Auditor’s Report


Operations Data

Years ended December 31

2014 2013 2012 2011 2010

Refi nery data:

Crude oil refi ned (thousand kl)*1 22,182 21,782 21,053 26,212 25,168

Group refi nery capacity utilization rate (%)*1 86.6 94.6 91.6 93.2 84.2

Sales data:

Oil product sales volume (thousand kl)

Gasoline 8,694 8,952 9,060 9,494 9,089

Jet fuel 1,791 1,856 2,158 2,077 2,105

Kerosene 2,681 2,710 2,830 2,816 2,407

Diesel oil 5,395 5,264 4,999 4,952 4,377

Fuel oil A 1,836 1,720 1,634 1,610 1,433

Fuel oil C 1,263 1,325 1,928 1,769 1,424

Others*2 4,022 4,157 4,042 4,195 4,196

Domestic sales total 25,681 25,985 26,649 26,914 25,031

Exports 2,063 1,558 574 3,548 4,606

Total (thousand kl) 27,744 27,543 27,223 30,462 29,637

Gasoline market share (%)*3 16.1 15.6 15.5 15.5 15.0

High-octane gasoline market share (%)*3 18.3 16.9 16.6 16.6 16.4

Number of service stations 3,339 3,464 3,633 3,782 3,948

Number of self-service stations 993 990 978 963 960

*1. Total for Yokkaichi Refi nery, Keihin Refi nery, and Yamaguchi Refi nery*2. Includes naphtha, LPG, lubricants, asphalt, bitumen, and coal, excludes cargo trade*3. Source: Showa Shell

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Solar FrontierFirst Miyazaki PlantSecond Miyazaki PlantKunitomi Plant

Kyushu Branch

Yamaguchi Refi nery of Seibu Oil Co., Ltd.

Keihin Refi nery of Toa Oil Co., Ltd.Mizue Power Station of Genex Co., Ltd.Ohgishima Power Station of Ohgishima

Power Co., Ltd.

Head Offi ceMetropolitan BranchKanto BranchSolar Frontier K.K. Head Offi ce

Hokkaido Branch

Chugoku Branch

Kinki Branch

Central Research LaboratoryAtsugi Research Center

Ishioka Training Center

Yokkaichi Refi nery of Showa Yokkaichi Sekiyu Co., Ltd.

Chubu Branch

Niigata Petroleum Import TerminalNiigata Yukigunigata Megasolar Power Plant and

Niigata Second Megasolar Plant

Internal Audit DivisionTransformation TeamOil Business Center• Commercial Sales Division• Crude Oil & Marine Division• Distribution & Operations Division• Health, Safety, Security and Environment

(HSSE) Division• Lubricants & Bitumen Division• Manufacturing Division• Marketing Planning Division• New Business Promotion Division• Oil Products Division• Petro Chemical Business Promotion Team• Research & Development Division• Retail EPOCH Project Team• Retail Sales Division• Sales Division• Supply Division

Energy Solutions Business Center• Power Business Division• Solar Frontier K.K.

Group Functions• Credit & Financial

Risk Management Team• General Affairs Division• Integrated Corporate Planning

Division• Internal Control Promotion Division• IT Planning Department• Integrated Finance &

Control Division• Integrated Legal Division• Integrated Human Resources Division• Procurement Team• Public Affairs Division• Secretariat Department

(As of April 1, 2015)

Network

Head Offi ce

Solar Frontier Tohoku Plant

Tohoku Branch

1,8

10

9


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

Saudi Aramco(Saudi Arabia)

Solar Frontier Europe (Germany)

Royal Dutch Shell plc (Netherlands)

Abu Dhabi Representative Offi ce (UAE)

* Photographs: Provided by Royal Dutch Shell plc and Saudi Aramco

Refi neries, import terminals, and power plants

Offi ces, depots, and asphalt terminals

Head Offi ce, branches, R&D center, and other business locations*

*

• Kushiro Nishiko• Shiogama• Sado• Hiroshima• Karatsu

Ishioka Training Center

Central Research Laboratory

Branches• Hokkaido Branch• Tohoku Branch• Metropolitan Branch• Kanto Branch• Chubu Branch• Kinki Branch• Chugoku Branch• Kyushu Branch

Niigata Petroleum Import Terminal

Lubricants Blending Plants

• Yokohama• Kobe

Depots Solar Module Plants andResearch Center• Atsugi Research Center• First Miyazaki Plant• Second Miyazaki Plant• Kunitomi Plant• Tohoku Plant

Power Plants

• Mizue Power Station ofGenex Co., Ltd.

• Ohgishima Power Station of Ohgishima Power Co., Ltd.

• Niigata Yukigunigata Megasolar Power Plant and Niigata Second Megasolar Plant

Group Refi neries

• Yokkaichi Refi nery of Showa Yokkaichi Sekiyu Co., Ltd.

• Keihin Refi nery of Toa Oil Co., Ltd.• Yamaguchi Refi nery of Seibu Oil Co., Ltd.

Asphalt Terminals

• Yokohama• Takamatsu• Mie

8

9

10

91

Managem


ctivitiesM

anagement Resources

Corporate G


orporate Data



Company name Major businesses

Consolidated subsidiaries (30 companies)

Showa Yokkaichi Sekiyu Co., Ltd. Oil refi ning

Toa Oil Co., Ltd. Oil refi ning

Showa Shell Sempaku K.K. Domestic and international shipping operations

Heiwa Kisen Kaisha, Ltd. Depots operationShipping brokerage

Shoseki Engineering & Construction Co., Ltd. Design and construction of mainly oil-related industrial facilities and service stations

Nippon Grease Co., Ltd. Grease and lubricant sales

Solar Frontier K.K. Development, manufacture, and sales of solar panels and systems

Shoseki Kako Co., Ltd. Manufacture, sales, and installation of waterproofi ng materialsManufacture and sales of oil products and bitumen paving materials

K.K. Rising Sun Automobile parts salesEquipment leaseInsurance agent

Wakamatsu Gas K.K. Sales of oil productsCity gas business

Genex Co., Ltd. Power generation

Leef Energy K.K. Oil products sales

Jonen Co. Oil products sales

Hayashi-Bussan Co., Ltd. Oil products sales

Chuo Shell Sekiyu Hanbai K.K. Oil products sales

Tokyo Shell Pack K.K. Oil products sales

Nakagawa Oil Co., Ltd. Oil products sales

Petro Star Kansai Co., Ltd. Oil products sales

Nissho Koyu K.K. Oil products sales

Nagase Oil Ltd. Oil products sales

Enessance Holdings Co., Ltd. Sales of liquefi ed gasConstruction related to high-pressure gas and oilSales of residential and offi ce automation equipment

Showa Shell Business & IT Solutions Ltd. Provision of IT related services

8 other companies

Equity-method affi liates (12 companies)

Seibu Oil Co., Ltd. Oil refi ning

Japan Oil Network Co., Ltd. Storing

Niigata Joint Oil Stockpiling Co., Ltd. Stockpiling

Dia Shoseki Co., Ltd. Oil products sales

Shell Sekiyu Osaka Hatsubaisho K.K. Oil products sales

Central Sekiyu Gas Co., Ltd. Oil products sales

Mieseki Shoji K.K. Oil products sales

Shell Tokuhatsu K.K. Oil products sales

Joyo Shell Sekiyu Hanbai K.K. Oil products sales

Marubeni Energy Corporation Oil products sales

Toyotsu Petrotex Corporation Oil products sales

Ohgishima Power Co., Ltd. Power generation

(As of December 31, 2014)

Major Subsidiaries and Affi liates

93

Managem


ctivitiesM

anagement Resources

Corporate G


orporate Data


Date of Establishment: January 1,1985

Authorized Number of Shares: 440,000,000 shares

Number of Shares Issued: 376,850,400 shares

Paid-in Capital: ¥34,197,585,900

Number of Employees: 862

Total Number of Service Stations: 3,339

Number of Shareholders: 50,499

Securities Listing: Tokyo Stock Exchange

Ticker Code: 5002

Transfer Agent: Sumitomo Mitsui Trust Bank, Limited2-8-4, Izumi, Suginami-ku, Tokyo 168-0063, Japan

Independent Auditors: PricewaterhouseCoopers Aarata

General Shareholders’ Meeting: March

Major shareholders Number of shares heldPercentage of total common

shares outstanding

The Shell Petroleum Co., Ltd. 125,261.2 (Thousands) 33.24%

Aramco Overseas Company B.V. 56,380.0 14.96

The Master Trust Bank of Japan, Ltd. (Trust Account) 12,533.3 3.33

Japan Trustee Services Bank, Ltd. (Trust Account) 10,913.1 2.90

The Anglo-Saxon Petroleum Co., Ltd. 6,784.0 1.80

Trust & Custody Services Bank, Ltd. (Investment Trust Collateral Account) 4,360.1 1.16

Nomura Securities Co., Ltd. 4,355.0 1.16

BNP Paribas S.A. 4,100.0 1.09

Trust & Custody Services Bank, Ltd. (Securities Investment Trust Account) 2,494.3 0.66

STATE STREET BANK WEST CLIENT-TREATY 2,329.8 0.62

Total 229,510.8 60.90

Trading Volume

Stock Price Range Stock price (left) TOPIX (right)

(Thousand Shares)

(Month)

20111 2 3 4 5 6 7 8 9 10 1112

20121 2 3 4 5 6 7 8 9 10 1112

20131 2 3 4 5 6 7 8 9 10 1112

20141 2 3 4 5 6 7 8 9 10 1112

100,000

75,000

50,000

25,000

0

(As of December 31, 2014)

Investor Information

(Yen)

1,200

900

600

300

0

1,500

1,200

900

600

(Month)

20111 2 3 4 5 6 7 8 9 10 1112

20121 2 3 4 5 6 7 8 9 10 1112

20131 2 3 4 5 6 7 8 9 10 1112

20141 2 3 4 5 6 7 8 9 10 1112

This corporate report was printed using vegetable oil ink and a waterless printing process.

June 2015Printed in Japan

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

Inclusion in SRI Index (As of May 31, 2015)

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

Showa Shell Sekiyu K.K.Daiba Frontier Bldg., 2-3-2, Daiba, Minato-ku,

Tokyo 135-8074, Japan

Tel: +81-3-5531-5594

http://www.showa-shell.co.jp/english/

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