Risk Information

1.Risks Associated with Changes in the Global Situation and Economic Environments

The Group operates businesses in Japan and around the world, and may be affected by political trends, economic trends and condition of each region. In particular, the current situation in Ukraine and the slowdown in the global economy due to political or economic factors in overseas countries may affect the business performance. Also, instabilities in demand for energy resources and products and price fluctuations caused by changes in the demographic structure in Japan may do.

2.Risks Associated with Changes in the External Environment Surrounding the Businesses

Product Market Risk

Petroleum Segment

The Group imports most of the crude oil required for the production of petroleum products. Crude oil prices have fluctuated drastically in the past. There are concerns that prices may continue to vary considerably in the future due to factors, such as specifically the ongoing situation in Ukraine since the year before last, the trend in monetary policy in the United States and other countries, crude oil demand change in Asia, political unsteadiness in oil-producing countries in the Middle East and Africa, trends in environmental regulations and tax systems in the United States and other oil-consuming countries, and speculative oil trading.
The Group strives to secure margins by linking petroleum product prices to domestic market prices, but if there are large crude oil price changes or if domestic market prices fall due to fierce competition in the domestic oil market, the Group's financial position and business performance may be notably affected.
Additionally, the Group evaluates inventories using the weighted average method. In general, when crude oil prices rise, it improves profits by lowering cost of sales due to relatively inexpensive inventory at the beginning of the period. On the other hand, when crude oil prices fall, it worsens losses by raising cost of sales due to relatively expensive inventory at the beginning of the period.
Furthermore, an US$1 change in the Dubai crude oil price per barrel could increase or decrease the Company's operating profit for the year by 7 billion yen.

Basic Chemicals Segment

1.Raw material costs fluctuations

The Group produces naphtha, a raw material for basic chemicals, at its own refineries and also procures it from the market. Naphtha prices are subject to the changes of crude oil prices, gasoline demand and price trends, and increased demand due to the construction of new petrochemical facilities in China and other countries. If naphtha price rise cannot be appropriately passed on to product prices due to factors such as fierce competition in the market, the Group's financial position and business performance may be affected.

2.Product Market fluctuations

The basic chemicals market in Asia, including Japan, is highly competitive and is subject to change in demand and increases in supply. Demand is expected to increase in Asia with economic growth. However, in recent years, the number of large new plants manufacturing basic chemicals, mainly in China, has rapidly increased. This may cause an oversupply in the Asian market and also the economic slowdown in emerging countries may slump demand. If the competition is intensified or demand is sluggish in the markets, the Group's financial position and operating profits may be affected.

Power and Renewable Energy Segment

The Group sells and procures electricity through the wholesale electricity trading market. The transaction price fluctuates depending on fuel prices, electricity demand, and the operating status of power sources such as nuclear power, thermal power, and renewable energy. If it varies considerably due to these factors, the Group's financial position and business performance may be affected.

Resources Segment

In Oil Exploration and Production business, the Group produces and sells oil and gas. Crude oil prices have fluctuated in the past, and if they decline in the future due to political and economic situations or other factors, it may affect the Group’s financial condition and operating results.
In Coal business, the group produces coal at our own mines in Australia and primarily sells it in Japanese and other Asian markets. However, if coal prices decline due to political and economic situations or other factors, it may affect the Group's financial condition and operating results.

Procurement Risk

The Group relies on the Middle East for the majority of its crude oil imports. In order to secure crude oil, the Group has concluded long-term crude oil import contracts with major Middle Eastern oil-producing countries, and diversifies risk within the region. However, If crude oil imports are restricted for a long period of time due to political unsteadiness in these regions, crude oil production adjustments, accidents at oil-related facilities, or increased maritime transport risks on sea lanes, etc., the Group's financial position and business performance may be seriously affected.

Country Risk

Basic Chemicals / Functional Materials Segment

The Group sells basic chemicals, mainly in the Asian market, and operates globally in the field of lubricants. However, the market growth may slow due to economic downturns, political factors, and other factors. If demand falls, the Group's financial position and business performance may be affected.

Resources Segment

The Group strives to discover and acquire resources that will lead to commercial production. Currently, the Group's resource interests and exploration activities are mainly in Asia, such as Vietnam, and Norway. However, the Group's exploration and development activities may be suspended due to political and economic conditions in these regions, and additional resource discoveries and the development of confirmed resources may not be made.
Additionally, the Group also produces coal at our own mines in Australia and primarily sells it in the Japanese markets. The coal mining business may also be affected by political and economic situations, regulatory policies and other uncertainties.

Foreign Exchange Rate Risk 

The Group engages in a large amount of foreign currency-denominated transactions and has assets and liabilities in foreign currencies. Therefore, exchange rates fluctuations may affect the profits of foreign currency-denominated transactions and the yen conversion in financial statements.
Additionally, as crude oil is imported in US dollars, the cost of crude oil procurement is affected by the exchange rate of the yen against the US dollar as well as inventory valuation in Petroleum segment. Furthermore, a 1 yen to 1 US dollar fluctuation could cause the operating profit to increase or decrease by 4 billion yen per year.

3. Risks Associated with Climate Change

*For more information, please refer to the following web page.

4.Risks Associated with Environmental Regulations

The Group is regulated by extensive environmental protection and other legal regulations in Japan and other countries in which it operates. For example, the Group may be subject to penalties for causing environmental pollution that exceeds standards under regulations regarding the discharge of pollutants from refineries and factories and the disposal of waste.　In addition, the Group may incur significant expenditures in order to comply with current or future environmental regulations that authorities in Japan and other countries impose.

5.Risks Associated with Business Investments

The Group has large-scale business assets and requires large investments in domestic and overseas business activities, such as the maintenance and renewal of existing refineries, factories, and sales facilities, as well as the acquisition of oil field interests and exploration and development. It will continue to make a constant investment to maintain existing businesses competitiveness such as oil, petrochemical and resources. At the same time, the Group has a plan to make strategic investments to expand new businesses other than fossil fuels to achieve carbon neutrality. For example, these include investments to shift the functions of refineries and factories to low-carbon, circular businesses; investments in the development of high value-added products such as lubricants, functional chemicals, electronic materials, and lithium solid electrolytes; and investments in the development of new energy businesses such as hydrogen, ammonia, SAF, and synthetic fuels, as well as investments in renewable energy. However, it may miss expected profit opportunities because investments in such growth fields take a certain amount of time to generate the necessary cash flows. Furthermore, it could record impairment losses on fixed assets if these investments do not generate the planned profits due to economic and political conditions, delayed market expansion, or competition with other companies in the development of new materials. Nevertheless, the Group strives to reduce investment risk and speed up decision-making in the investment process by designing investment deliberations according to the magnitude of various risks, including the investment amount.
The Group has established Nghi Son Refinery and Petrochemical Limited (NSRP) in collaboration with Kuwait Petroleum International, Petrovietnam and Mitsui Chemicals Inc. (collectively, the "Sponsors") and operates it in Nghi Son Economic Zone, Thanh Hoa Province, Socialist Republic of Vietnam. NSRP has an oil refining facility with a capacity of 200,000 barrels per day and a facility for manufacturing petrochemical products such as paraxylene. This is a part of the overseas expansion of the oil and petrochemical business in the Asian market.
The total project cost is approximately 9 billion US dollars, of which 5 billion of fund was raised through project finance by a consortium of banks including the Japan Bank for International Cooperation (JBIC), and the remaining 4 billion was funded by the Sponsors through equity investment and loans. With regard to the amount of the project finance and the equity investment and loans provided by the Sponsors, the Group holds an investment stake of 35.1%. The Group's financial position and business performance may be affected if the project does not progress as planned due to changes in the political and economic situation, laws and regulations, and employment environment in Vietnam.

6.Other Risks Associated with Management

Human Rights risks

The Group believes that respect for human rights is an essential foundation of management and should be given top priority in all decisions and actions. It has therefore established a basic policy of respecting human rights as internationally recognized in the Universal Declaration of Human Rights and the ILO Declaration. The Group has business bases around the world and conducts business with suppliers in many countries. It sets a high level of awareness of "business and human rights" as international standards, works to reduce risks through human rights due diligence and asks its business partners to understand and comply with its policies.
However, if human rights violations occur in its business activities, the Group may lose the trust of our stakeholders, and the Group's financial position and business performance may be affected

Compliance Risks

The Group sets its compliance regulations and works to strengthen compliance including observance with domestic and international laws. However, if there is an incident in the group, which is unable to comply with laws, regulations and other rules, or if the internal control system does not function effectively and compliance issues cannot be completely avoided, the Group may lose the trust of stakeholders and damage its reputation and the Group's financial position and business performance may be affected
Besides, the Group manufactures products in accordance with a highly reliable quality management system. It also has insurance in place to prepare for the occurrence of large-scale recalls or lawsuits due to unforeseen circumstances. However, legal liability may arise as a result, and even if the Group does not bear direct responsibility, it may be unable to avoid a damage to the brand image and reputation as part of the value chain and the Group's financial position and business performance may be affected

Intellectual Property Risks 

The Group utilizes intellectual property rights and licenses to carry out its business. Patents and trade secrets are particularly important for high-value-added products and services, such as oil refining technology, solid electrolytes for lithium batteries, lubricants, functional chemicals, and electronic materials. The Group also has registered its brands as trademarks. However, the Group's intellectual property rights may be subject to disputes or may be invalidated.
In addition, the patents, trade secrets and trademarks held by the Group may not be sufficient to protect the Group's intellectual property. Furthermore, a third party may claim that the Group's products or services infringe their intellectual property rights. Moreover, a technology license granted to the Group by a third party may not be renewed. If the Group is unable to protect or fully utilize the intellectual property rights necessary to conduct its business, the Group's financial position and business performance may be affected.

Natural Disasters and Accidents Risks

The Group's business is subject to risks such as natural disasters, including earthquakes, tsunamis, typhoons, heavy rains and snows, and volcanic eruptions, as well as accidents at refineries and factories, including fires, explosions, and large-scale oil spills, which may result from these disasters. The transportation of crude oil and petroleum products, including shipping by the large tankers owned by the Group, is also exposed to the risk of capsizing or collision due to piracy or bad weather, and being seized or sunk by unfriendly countries. The Group is also exposed to the risk of system failures and information leaks due to labor disputes and cyber-attacks, as well as business interruption due to a large-scale outbreak of infectious diseases. 
In order to quickly recognize these risks as a company and prevent their expansion, the Group has established ''Crisis Response Rules'' that include contact channels for sharing early signs of troubles, priorities for response, setting crisis levels, and establishing response headquarters accordingly. Regarding “Business Continuity Plans” (BCP), the Group has developed versions specific to the Tokyo metropolitan area Earthquake in FY2006, the outbreak of avian influenza in FY2009, and Nankai Trough Mega Earthquake (expanded to include regional earthquake and tsunami in FY2021) in FY2010. Furthermore, following the designation as "Designated Public Institution" by the Cabinet Office in FY2015, the Group created a "Disaster Prevention Operations Plan." It conducts comprehensive disaster prevention trainings based on each BCP every year, extracting issues related to collaboration with each site and headquarters operations, including remote work, and striving to enhance their effectiveness while reflecting the revisions to the BCP. At refineries, complex, and other facilities, the Group regularly conducts disaster prevention trainings based on the respective crisis response procedures and through coordination among the sites.
The Group procures appropriate property and casualty insurance services on a global basis by utilizing its own reinsurance subsidiaries to cover the large losses expected from accidents and disasters.

Risks Associated with Personal Information Management

The Group handles a large amount of customers' personal information in the petroleum product sales, electricity retail, credit card businesses, etc. It may incur significant expenses to address management deficiencies, unauthorized exploitation from external sources, and problems arising from them. Moreover, due to inadequate or insufficient responses to the expansion and strengthening of laws and regulations for personal information protection, including recent ones in Japan and Europe, the Group may incur considerable penalties, compensation payments, damage to the reputation, and claims or lawsuits and the Group's financial position and business performance may be affected.

7.Business and Other Risk Management

Climate change-related risks are one of the management risks. The Group has developed long-term business environment scenarios covering the period up to 2050, and based on the output of the scenarios, it identifies risks (transition risks and physical risks) and opportunities, and clarifies and implements the necessary measures for the Group.

*For more information, please refer to the following web page.