Risk Information

1.Risks Associated with Changes in the International and Economic Conditions

The Group operates businesses in Japan and various locations worldwide, and the businesses may be affected by political trends, economic trends and condition in each region. In addition to the current situation in Ukraine, the slowdown in the global economy due to political or economic factors in foreign countries, and changes in the form of Japanese demographic trends, may lead to fluctuations in the demand for energy resources and products, as well as price volatility, which could potentially bring impact on our business performance.

2.Risks Associated with Changes in the External Environment Surrounding our Business

Product Market Risk

Petroleum Segment

The Group imports most of the crude oil required for petroleum product refinement. Crude oil prices have historically experienced significant fluctuations, and there are concerns that they will continue to fluctuate greatly in the future due to factors such as the current situation in Ukraine, changes in crude oil demand in Asia, political instability in oil-producing countries in the Middle East and Africa, trends in environmental regulations and taxation in oil-consuming countries including the United States, and speculative oil trading.
While the Group strives to secure margins by aligning petroleum product prices with domestic market prices, there is a possibility that our financial condition and operating results will be significantly affected in case of large fluctuations in crude oil prices or a sharp decline in domestic market prices due to intense competition.
Furthermore, the Group evaluates inventories using the gross average method. Generally, the gross average method becomes a factor for improving profit when crude oil prices rise, due to the impact of lower-cost inventories at the beginning of the period on cost of sales. Conversely, when crude oil prices decline, it becomes a factor for deteriorating profit due to the impact of higher-cost inventories at the beginning of the fiscal year on cost of sales.
It should be noted that a US dollar change in Dubai crude oil price per barrel may result in annual variation of approximately 3.5 billion yen in our operating profit.

Basic Chemicals Segment

1.Fluctuation in raw material costs

For naphtha, a raw material for Basic Chemicals, the group produces it at our refineries as well as procures it from the market. Naphtha prices can be affected by the following factors such as crude oil prices, the demand and price trends of gasoline and the increased demand brought by the construction of new petrochemical facilities in other countries including China. If we cannot appropriately pass on the fluctuations in cost of naphtha to product prices due to factors such as intense competition in the market, the Group's financial condition and operating results may be affected.

2. Fluctuation in product market conditions

The market of Basic Chemicals in Asia, including Japan, is characterized by intense competition　and is influenced by demand fluctuations and supply increase. While demand is expected to increase in accordance with economic growth in Asia, there has been a rapid increase in the construction of large-scale new plants for basic chemicals, mainly in China, leading to the possibility of oversupply in the Asian market and a decline in demand due to the economic slowdown in emerging countries. The intensified competition and weak demand in such markets may affect our group’s financial condition and operating results.

Power and Renewable Energy Segment

The group sells and procures electricity through the wholesale electricity trading market. If the trading prices are significantly affected by factors such as fuel prices, electricity demand trends, and renewable energy operating condition, it may affect our Group's financial condition and operating results.

Resources Segment

In Oil Exploration and Production business, we produce and sell oil and gas. Crude oil prices have fluctuated in the past, and if they were to decline in the future due to political and economic situations or other factors, it may affect our group’s financial condition and operations results.
In Coal business, we produce coal at our own mines in Australia and primarily sell it in Japanese and other Asian markets. However, if coal prices were to 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 depends on the Middle East region for a significant portion of our crude oil imports. For stable procurement of crude oil, we have long-term contracts for crude oil import with major oil-producing countries in the Middle East, aiming to diversify risk within the region. However, if there are political uncertainties, production adjustments, accidents at oil-related facilities, or other factors that restrict the import of crude oil over an extended period, it may have a significant impact on the Group's financial condition and operating results.

Country Risk

Basic Chemicals / Functional Materials Segment

The Group is actively expanding our business in the overseas market, mainly in Asia, in the sales of basic chemicals and lubricants. However, there is a possibility of market growth slowing down due to economic downturns, political factors and so on. Such a decline in demand may affect the Group's financial condition and operating results.

Resources Segment

The Group is working to acquire and discover resources interests that lead to commercial production. Currently, the confirmed resources and exploration activities held by our group are primarily focusing on Norway and Asian region such as Vietnam. The exploration and development by our group may be interrupted, and additional resource discoveries and the development of confirmed resources may not be possible due to political and economic situations in these regions. 
Additionally, the Group also produces coal at our own mines in Australia and primarily sells it in Japanese and other Asian 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 significant foreign currency-denominated transactions and holds foreign currency-denominated assets and liabilities. Therefore, fluctuations in exchange rates can affect the profits of foreign currency-denominated transactions and the yen conversion in financial statements.
Furthermore, as our crude oil imports are denominated in US dollars, crude oil procurement cost of crude oil are also affected by the exchange rate fluctuations between the Japanese yen and the US dollar. Additionally, inventory valuation in Petroleum segment is also affected. It should be noted that 1 yen change per US dollar may result in an annual variation of approximately 3 billion yen in our operating profit.

3. Risks Associated with Climate Change and Environmental Regulations

If efforts to reduce greenhouse gas emissions, which are considered as a cause of climate change, are accelerated worldwide in order to achieve the goals of the Paris Agreement, and if climate change policies are strengthened and changes or new introductions are made to environmental regulations, additional cost and investments may be incurred. This could lead to faster in demand for fossil fuels and raw materials handled by our company, as well as restrictions on financial institutions leading to fossil fuel businesses. As a result, the financial condition and operating results of the Group may be affected. Additionally, natural disasters or the effects of rising sea levels could cause damage to manufacturing bases located in coastal areas and adversely affect operations.
The Group operates under a wide range of environmental conservation and other legal regulations in Japan and other countries where we conduct businesses. For example, the Group may be subject to regulations regarding the emission of pollutants from refineries and facilities, as well as the treatment of waste, and may be subject to penalties for exceeding environmental pollution standards. Furthermore, there is a possibility of significant expenses due to the introduction of new regulations by authorities in Japan or other countries, as well as compliance with environmental regulations at present and in the future.

4. Risks Associated with Business Investments

The Group has large-scale business assets and requires significant investments in business activities in Japan and overseas, such as the maintenance and renewal of existing refineries, factories and sales facilities as well as acquisition of equity interests in oil fields and exploration and development activities. We plan to continue making certain investments to maintain the competitiveness of our existing businesses, such as oil, petrochemical and resources. On the other hand, we also plan to make strategic investments in new business expansions, such as shifting refineries and facilities to low-carbon, circular businesses, investing in the development of high-value-added products such as lubricants, advanced materials and performance chemicals, electronic materials, all-solid-state lithium batteries, and investing in renewable energy, in order to achieve carbon neutrality. However, there is a possibility of losing expected revenue opportunities as it may take some time to generate the expected cash flow for these investments. Additionally, these investments may not generate the expected returns due to economic conditions, political trends, delays in market expansion, competition with other companies in the development of new materials, etc. In such cases, there is also a possibility of recognizing impairment losses on fixed assets. Furthermore, in the decision-making process of investments, we strive to balance the reduction of investments, we strive to balance the reduction of in investment risks and speed of decision-making by designing an investment and finance committee based on the abundance of various risks, including investment amounts.
In addition, as a part of the overseas expansion of our oil and petrochemical businesses in the Asian market, the Group　established Nghi Son Refinery & Petrochemical LLC (hereinafter referred to as "NSRP") 　jointly with Kuwait Petroleum Europe B.V., Vietnam Oil and Gas Group and Mitsui Chemical Inc. (hereinafter referred to as "Sponsors") in the Nghi Son Economic Zone, Thanh Hoa Province, the Socialist Republic of Vietnam. NSRP operates a petroleum refining facility with a capacity of 200,000 barrels per day and a petrochemical complex that produces petrochemical products including paraxylene. 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 approximately 4 billion was funded by sponsors through equity investment and loans. With regard to the amount of the project finance and the equity investment and loans provided by sponsors, 35.1% equivalent to the Group's equity interest ratio in NSRP, 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, the financial condition and operating results of the Group may be affected.

5.Other Risks Associated with Overall Management

Risks Associated with Human Rights 

The Group believes that human rights form the basis of all decisions and actions and has established a basic policy to respect human rights internationally recognized human rights, as outlined in the Universal Declaration of Human Rights and the ILO Declaration. As the Group has business operations and suppliers across multiple countries, we maintain a high level of awareness regarding "business and human rights" based on the international standards and work to mitigate risks through human rights due diligence, while also requesting our business partners to understand and comply with our policy.
However, if human rights violations occur in our business activities, it may lead to a loss of stakeholder trust and potentially affect the financial condition and operating results of the Group.

Risks Associated with Compliance

Our group strives to strengthen compliance, including compliance with domestic and international laws and regulations, based on our compliance regulations. However, if the Group’s internal control systems fail to function effectively and compliance issues cannot be completely avoided, we may result in a loss of stakeholder trust, damage to the reputation of the Group, and potential impact on the financial condition and operating results of the Group.
Furthermore, while the Group manufactures products in accordance with a highly reliable quality management system, we handle risks through insurance to prepare for unforeseen circumstances such as large-scale recalls or lawsuits. However, there is a possibility of incurring legal liabilities or facing a decrease in brand image and reputation as a participant in the value chain, even without direct responsibility. This, in turn, may affect the financial condition and operating results of the Group.

Risks Associated with Intellectual Property

The Group utilizes intellectual property rights and licenses for the execution of our businesses, particularly for high-value-added products and services such as petroleum refining technology, lubricants, advanced materials and performance chemicals, electronic materials, agri-bio, and solar cells. We also register our brand trademarks. However, it is not guaranteed that the patents, trade secrets, and trademarks held by the Group are sufficient to protect our intellectual property.
Additionally, there is a possibility of inappropriate handling of the Group’s trade secrets by employees, business partners, and other related parties. The Group may not be able to renew technology licenses provided by third parties, or we may receive claims of intellectual property infringement, which could result in inabilities to use the technology. If the Group cannot protect or fully utilize the intellectual property rights necessary for business operations, it may have an impact on the Group's businesses and operating results.

Risks Associated with Natural Disasters and Accidents

The Group's businesses are exposed to risks such as natural disasters and accidents resulting in operational interruptions. Natural disasters include earthquakes, tsunamis, typhoons, and heavy rain and snow as well as the risk of fires, explosions, and large-scale oil spills at refineries and facilities located in earthquake-prone regions of Japan. Furthermore, transportation of crude oil and petroleum products, including large tankers owned by the Group, is exposed to risks such as piracy, capsizing due to adverse weather conditions, collisions, seizure by unfriendly countries, and sinking. Additionally, the Group is exposed to the risks such as system outages, information leakage, labor disputes, cyber terrorism, and widespread outbreak of infectious diseases such as COVID-19. 
In order to quickly recognize these risks as a company and prevent their expansion, we have established ''Crisis Response Rules'' that includes contact channels for sharing early signs of troubles, principles for prioritizing responses, setting crisis levels, and establishing response headquarters accordingly. Regarding “Business Continuity Plans” (BCPs), we have 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 our designation as "Designated Public Institution" by the Cabinet Office in FY2015, we created a "Disaster Prevention Operations Plan." We conduct 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, we regularly conduct disaster prevention trainings based on the respective crisis response procedures and through coordination among the sites.
While the Group utilizes a self-reinsurance subsidiary to procure appropriate insurance globally to cover significant losses expected from accidents and disasters, there is a possibility of incurring damages that are not necessarily fully covered.

Risks Associated with Personal Information Management

The Group handles a large amount of customers' personal information in our petroleum product sales, electricity retail, credit card businesses, etc. The Group 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, there is a possibility of incurring significant penalties, compensation payments, damage to the reputation of the Group, and claims or lawsuits, which may affect the businesses and operating results of the Group.

Risks Associated with the Outbreak of COVID-19