Risk Information

Risk information includes major items that may have an impact on the JAPEX Group's operating results and financial status. Recognizing the possibility of the occurrence of these risks, we strive to avoid their occurrence and to take appropriate measures in the event of their occurrence.

JAPEX manages risks through the Management Risk Committee and other various internal committees.

The following risks are determined by JAPEX as major risks after discussions at the Management Risk Committee and the Board of Directors meetings. The business results and financial position of the Group may be affected by risks that are not listed below. Also, the forward-looking statements are based on the judgment of the Company as of June 27, 2023.

1. Risks Related to Commodity Prices and Exchange Rates

(1) Fluctuation risks in crude oil and natural gas prices

The JAPEX Group is engaged in the E&P business in Japan and overseas and the Infrastructure/Utilities business in Japan. The net sales and operating profit of these businesses are significantly affected by fluctuations in crude oil and natural gas prices.

For example, our operating profit for the fiscal year ending March 31, 2024 is estimated to increase or decrease by 470 million yen when the oil price increases or decreases by 1 USD per barrel. This increase or decrease includes the impact of changes in the procurement cost of LNG, which is linked to the price of crude oil, and resulting changes in sales prices of domestic natural gas and electricity. However, actual operating profit will be affected by a variety of factors other than those mentioned above.

If the carrying amount of business assets at that point in time is not expected to be recovered from future profits due to a reduction in the estimated medium - to long-term sales price of crude oil, natural gas, etc., an impairment loss will be recorded for the assets, which may have a negative impact on the financial position and operating results of the JAPEX Group.

(2) Exchange rate fluctuation risks

Fluctuations in the exchange rate between the U.S. dollar and Japanese yen have an impact on net sales and operating profit, etc., because the JAPEX Group sells crude oil and natural gas produced in Japan in yen-denominated terms that refer to the customs clearance price (CIF price) of crude oil and LNG. Such fluctuations will also affect the domestic sales price of natural gas made from imported LNG and electricity fueled by imported LNG and will affect the purchase price as well.

Our operating profit for the fiscal year ending March 31, 2024 is estimated to increase or decrease by 570 million yen when the exchange rate increases or decreases by 1 yen/US dollar.

2. Risks Related to Business

[E&P Business]

(1) Risks related to E&P business investment (exploration and development investment)

The general characteristics of our E&P businesses include the following investment-related risks.

(i) Risks related to exploration investment

In exploration activities, we first identify the geological structure of the target area by analyzing the geological conditions, strata, and geophysical exploration. If the area is evaluated as promising, we conduct exploratory drilling to confirm the extent of the oil and gas reservoirs and the amount of resources. However, geological uncertainty cannot be eliminated even with the recent development of exploration technology. It is not always possible to discover crude oil and natural gas on the expected scale. Therefore, due to the failure of exploration activities, we may not be able to recover the expenditures previously invested, and we may incur investment losses.

(ii) Risks related to development investment

When moving onto the development of oil and gas fields, we strive to make rational final investment decisions based on a variety of information and assumptions obtained at that time, such as the estimated amount of resources obtained through exploration activities, the construction and operating costs of wells, production and transportation facilities, and the estimated sales prices of products.

However, we may not be able to make a final investment decision due to a variety of factors, including changes in equipment specifications as a result of subsequent detailed technical studies, price hikes in materials and services required for development, delays in government approval procedures and drilling work, new geological problems in the production stage, and declines in crude oil and natural gas prices. In addition, due to the same factors above, the profitability of the business may become lower than expected at the time of the final investment decision. As a result, investment losses may be incurred due to the inability to recover expenditures previously invested.

(iii) Risks related to future mine closure

The JAPEX Group's current production wells and fields need to be abandoned after the end of production. The Group records the present value of the costs in relation to abandonments of wells and fields based on current estimates as asset retirement obligations.

In the future, if the estimated amount is expected to be insufficient due to changes in the abandonment plan, tightening of regulations, or soaring prices of materials and equipment, it may be necessary to increase the amount of asset retirement obligations, which may have an adverse impact on the financial position and operating results of the JAPEX Group.

(iv) Risks due to long investment payback period

The E&P businesses require a long period of time and substantial investment in exploration phase, from the initial basic survey to the discovery of resources through drilling, and in the development phase, which involves drilling of development wells and construction of production and transportation facilities after the discovery of resources.

Therefore, it usually takes a long lead time from the start of a business to the recovery of investment and the contribution to profits. During this period, changes in the business environment may result in an increase in investment (including those resulting from delays in development schedules), a decrease in demand, a decline in sales prices, an increase in operating costs, and fluctuations in foreign exchange rates, which may lower the profitability of the business. Such changes also may prevent the recovery of expenditures previously incurred and result in investment losses.

(v) Risks related to reserves and production volume

In order to maintain and develop the E&P businesses, it is necessary to compensate for and expand reserves and production, which will decrease in line with production activities, in the medium to long term through continuous acquisition of mineral rights, exploration and development efforts. However, due to the existence of the risks listed in "(i) Risks related to exploration investment" through "(iv) Risks related to long investment payback period" above, as well as the risks related to overseas E&P businesses and risks related to climate change as described below, if such operations are not successful, the amount of reserves and production may decrease in the future, which may adversely affect the JAPEX Group's operating results.

Reserves are evaluated based on the quantity of oil and gas in surface form that is estimated to be economically and operationally extractable from known oil and gas reservoirs at the time of evaluation based on geological and engineering data. The quantity may be revised upward or downward according to review based on new data to be obtained in the future, changes in economic conditions, and changes in internationally recognized reserve definitions.

(2) Risks specific to overseas E&P business investment

In addition to the "(1) Risks related to E&P business investment (exploration and development investment)" above, the overseas E&P businesses have the following risks as a general trend.

(i) Country risk

Some of overseas E&P businesses are conducted in regions with relatively high country risk. Political, economic, and social turmoil (including significant deterioration in public safety), changes in legislation, taxation systems, or policies in these countries may adversely affect the smooth execution of the Group's overseas business.

(ii) Partner risk

When a large amount of investment is required to carry out the business, or when there are high risks in terms of technology, etc., we engage in joint business with other companies as partners, rather than with ourselves, in order to diversify funds and risks.

In making decisions regarding joint ventures, each partner is generally granted voting rights according to the amount of interests held, and we have no controlling authority in joint ventures in which we hold only a minor share. As a result, our intentions are not necessarily reflected in decisions on exploration and development plans, etc., and if such decisions are made in a manner that is not in line with our interests, we may not be able to obtain expected profits. In addition, if some partners withdraw from projects, smooth operation of the projects may be interfered with.

The major overseas E&P businesses in production that require a considerable amount of funds are as described in "(3) Risks related to major individual projects in overseas E&P businesses" below.

(3) Risks related to major individual projects in overseas E&P businesses

(i) Iraq Garraf Oil Field Development Project

JAPEX has been participating in the development and production project in Garraf Oil Field located in the southern part of the Republic of Iraq through its investment in a consolidated subsidiary JAPEX Garraf Ltd. (investment ratio at the end of the fiscal year ending March 2023: 55.00%), which holds 30% working interest in the project and provides 40% of funding. JAPEX has been promoting development business jointly with the operator, PETRONAS Carigali Iraq Holding B.V. (the subsidiary of PETRONAS).

The production volume, sales volume, and net sales and operating profit of the project may decrease due to the deterioration of the political, social, and security situation in the country and the agreement of the OPEC to reduce production. In addition, in the event of an increase in costs, delays in development schedules, or a decrease in production, there may be a shortage of crude oil sales revenue to fund capital expenditures, resulting in an increase in JAPEX's financial burden.

(ii) Russia Sakhalin-1 Project

JAPEX has been participating in the development of crude oil and natural gas off the coast of Sakhalin Island, Russia (RussiaSakhalin-1 Project) through its investment in Sakhalin Oil and Gas Development Co., Ltd. (investment ratio at the end of the fiscal year ended March 31, 2023: 15.29%).

As for the production and sales of crude oil and gas in the Russia Sakhalin-1 Project, its operating profit is significantly affected by fluctuations in crude oil and natural gas prices, as described in "1. Risks related to commodity prices and exchange rates, (1) Fluctuation risks in crude oil and natural gas prices" above.

Sakhalin Oil and Gas Development Co., Ltd. is an important associate of JAPEX. If profit of Sakhalin Oil and Gas Development Co., Ltd. significantly decreases due to such factors, the JAPEX Group's operating results may be adversely affected.

Under the strained situation in Ukraine, a new company was formed by the government of the Russian Federation and succeeded to all rights and obligations under the production sharing agreement. Sakhalin Oil and Gas Development Co., Ltd. has been approved by the government of the Russian Federation to subscribe for a proprietary equity in the new company in proportion to its participating interest. The operating results of the JAPEX Group may be adversely affected if our business activities will be restrained for a long period due to the impact of the economic sanction against Russia.

[Infrastructure and Utilities Business]

(1) Risks related to natural gas sales

From the perspective of mitigating the impact of various risks in our E&P businesses, JAPEX is working to expand the volume of natural gas we handle as part of our infrastructure and utilities business. We are actively engaged in the development of demand by utilizing existing natural gas pipelines and supplying LNG from satellite terminals using tankers and other vehicles for areas outside the pipelines reach. However, the Group's operating results may be adversely affected by factors such as a decline in the current handling volume of natural gas (including the volume of transportation service for third parties), a failure to develop new demand, or a decline in unit sales prices. These factors may be caused by a decrease in population due to the declining birthrate and aging population, a decline in the utilization rate of customers' facilities, and intensifying competition with peer companies.

We are striving to procure LNG that will be required based on future sales volume projections by combining long-term contracts with spot contracts to ensure both stability in procurement and flexibility in response to demand fluctuations. However, in the event of an unexpected decrease in demand, we may not be able to cope with the situation by simply adjusting the amount of LNG procured through spot contracts, and may incur a payment under the take or pay clause in a long-term contract for untaken LNG volumes or resell the LNG at a lower price.

Although we have taken measures such as appropriately transferring fluctuations in LNG procurement prices to sales prices, we may not be able to transfer such fluctuations to sales prices sufficiently if the LNG procurement prices rise in a short period of time. In such a case, there is a possibility that the JAPEX Group's financial position and operating results may be adversely affected.

(2) Risks related to natural gas thermal power generation business

JAPEX has invested in Fukushima Gas Power Co., Ltd., the main promoter of the natural gas-fired power generation business at Soma Port in Fukushima prefecture (investment ratio at the end of the fiscal year ended March31, 2023: 33.30%), where we are engaged in the power generation business using the power generation capacity equivalent to the investment ratio.

We have concluded long-term sales contracts with several customers, mainly retailers, for a significant portion of the electricity we take. However, the JAPEX Group's operating results may be adversely affected in the event that a decrease in electricity sales volume or sales unit price occurs in the future due to procurement of alternative power sources required for dealing with power plant equipment trouble or intensified completion among power sources.

[Overall Business]

(1) Risks related to accidents and disasters

The JAPEX Group strives to maintain the integrity of its facilities (such as natural gas pipelines) and develop emergency response measures including security systems and Business Continuity Plans (BCPs) for operations such as well drilling, production and transportation of crude oil and natural gas, and storage, regasification, and transportation of LNG. However, we cannot completely prevent the risk of human and property damage or the inability to operate oil and gas fields due to operational accidents and disasters (including abnormal weather, earthquakes, and other natural disasters), the spread of epidemics (pandemics), crime, and terrorism (including cybersecurity-related ones). In such an event, not all of the damage is covered by insurance. In addition to direct damage, it could result in secondary damage such as loss of income due to interruption of sales, compensation for damage to customers to whom we are obligated to supply, compensation for damage due to environmental pollution such as soil, air, water, and ocean, administrative punishment, and loss of public trust.

(2) Risks related to COVID-19

While we regard that COVID-19 now has a lesser impact on economic activities in and outside Japan, the spread of any infectious disease like COVID-19 or a new infectious disease that requires measures to be taken, such as urban blockades, declaration of a state of emergency, and priority measures to prevent the spread thereof, may reduce demand for oil, natural gas, and electricity and, furthermore, may cause a decline in the prices of crude oil, natural gas, and electricity.

(3) Risks related to climate change

Following the adoption of the Paris Agreement, efforts have been made worldwide to reduce greenhouse gases, which are considered to be the cause of climate change and global warming, and the movement toward the realization of a low-carbon society is accelerating.

Recognizing the importance of responding to climate change, JAPEX has been implementing necessary measures in such areas as governance, business strategies, risk management, and emissions management based on the TCFD recommendations. Of the risks related to climate change, risks associated with the transition to a low-carbon and decarbonized society (policy and regulatory risks, technology risks, market risks, etc.) and physical risks due to natural disasters (acute risks caused by sudden meteorological events including typhoons and chronic risks associated with long-term climate change including sea level rise) may become apparent in the medium to long term. As a result, if climate change policies are strengthened in various countries and environmental laws and regulations, including carbon taxes, are revised or newly introduced, there is a possibility that the JAPEX's business value will be damaged due to a decrease in domestic and overseas demand for oil and natural gas, a prolonged slump in sales prices, and additional costs.

(4) Risks related to acquisition of new projects and establishment of new businesses

JAPEX announced the "JAPEX2050" in May 2021. It outlines our responsibilities and issues to be addressed to realize a carbon-neutral society, as well as our future actions and direction for our business development. Also, in March 2022, JAPEX announced the "JAPEX Management Plan 2022-2030" as the medium- to long- term management plan with the aim of transforming into the business structure set forth in "JAPEX2050." The "JAPEX2050" and "JAPEX Management Plan 2022-2030" state that we will work on the E&P field; Infrastructure/Utility field with a focus on the supply of renewable energy; and other areas related to CCS (capture and storage of CO2) and CCUS (capture, utilization, and storage of CO2) as our business foundation. However, if these efforts do not lead to the acquisition of new projects or the establishment of new businesses, it may adversely affect the JAPEX Group's operating results.

3. Specific Laws and Regulations

(1) Laws and regulations related to gas and electric utilities

As part of retail liberalization aimed at introducing the principle of competition in the Japanese gas and power industries, the business acts have been revised repeatedly and new revisions of systems may be made in future. If such revision of legal systems is made, it may bring an opportunity for the JAPEX Group to expand its business due to factors such as market revitalization, but at the same time have an adverse effect on our business performance due to additional obligations to be borne or an intensified competition.

(2) Other laws and regulations specific to the JAPEX Group's business

Due to the nature of the Group's business, the Group's operations may impose various environmental burdens. The JAPEX Group therefore has taken all necessary procedures, including the acquisition of licenses and approvals from regulatory authorities, submission of notifications, and provision of product information to customers, in accordance with the Mine Safety Act, High Pressure Gas Safety Act, and other relevant laws and regulations, in a legal and appropriate manner, and no serious problems have occurred to date.

However, if the current laws and regulations are strengthened in line with increasing global environmental awareness, an increase in costs related to additional facilities and operational measures could have a negative impact on the Group's business performance.

4. Risks Associated with the Variation in INPEX CORPORATION's Stock Price

As of the end of the fiscal year ended March 31, 2023, JAPEX held 4.09% of the shares of INPEX CORPORATION. As of the end of the fiscal year ended March 31, 2023, the balance of investment securities of the JAPEX Group was 115,940 million yen, of which 74,664 million yen was for the shares of INPEX CORPORATION. If the stock price of the company fluctuates, it may affect the financial position of the JAPEX Group.

5. JAPEX's Shares Held by the Government

In December 2003, JAPEX listed its shares on the First Section of the Tokyo Stock Exchange through a secondary offering of some of the shares held by the then Japan National Oil Corporation(JNOC). As a result, the percentage of shares held by the JNOC declined from 65.74% to 49.94%.

With the abolition of JNOC, the remaining shares of JAPEX held by JNOC were transferred to the government (Minister of Economy, Trade and Industry) on April 1, 2005 and then an equivalent of 15.94% of the shares were sold with a transfer date of June 15, 2007. As a result, the percentage of shares held by the Minister was reduced to 34.00%. Thereafter, JAPEX acquired treasury shares from November 2021 to August 2022 and canceled its treasury shares in September 2022, which resulted in the percentage of shares held by the Minister being increased to 35.79% as of March 31, 2023.

The shares held by the Minister may be sold in the future, and timing, method, and quantity of such sale may have an impact on the JAPEX's stock price.

6. Compliance

The JAPEX Group must fulfill the following social responsibilities in conducting business in Japan and overseas.

(1) Compliance with laws and regulations

Comply with laws and regulations including the Companies Act, the Tax Act, the Financial Instruments and Exchange Act, the Anti-Monopoly Act, the Labor Standards Act, environment-related laws, information security-related laws, anti-bribery laws, the Mining Act, the Gas Business Act, and other business laws.

(2) Implementation of information security measures

Appropriately manage confidential information, including collected personal information, so as not to be leaked or used for other purposes in the course of business.

(3) Blocking unfair trade

Do not engage in unfair transactions such as bribery or giving benefits to anti-social forces.

(4) Respect for human rights

Do not engage in or participate in human rights violations throughout the supply chain, including discrimination, harassment, forced or child labor, and unfair interference with the rights of indigenous peoples.

In order to fulfill these social responsibilities, the JAPEX Group strives to raise awareness of compliance and human rights among its officers and employees through in-house training and other means. In addition to establishing internal rules and committees, we have established internal control systems for internal audits and financial reporting. However, if JAPEX Group's officers and employees conduct any illegal or improper activities, it may cause tangible damage, such as suspension of oil and gas production operations and the incurrence of legal expenses, as well as intangible damage, such as loss of public trust, which may have a negative impact on the JAPEX Group's operating results.