TEIKOKU OIL CO., LTD. INVESTORS’ GUIDE 2004

TEIKOKU OIL CO., LTD.
INVESTORS’ GUIDE2004

For the year ended December 31, 2004 ,Our Incessant Challenge >Printed in Japan

Company Overview(As of December 31, 2004)> During the approximate 60 years since its founding in 1941, Teikoku Oil Co., Ltd. has discovered
many oil and gas fields and has been instrumental in securing both domestic and international energy
resources as a pioneer of Japan’s oil development. As the result of pipeline expansion from 1996, theCompany's Minami Nagaoka gas field has over the years become a cash engine gas field with world-classmarket potential. In addition, Teikoku Oil has diversified overseas energy development operations in theCongo, Egypt, and Venezuela, in addition to other countries. Going forward, supported by the abundant
recoverable reserves of the Minami Nagaoka gas field, Teikoku Oil will continue expanding the recovery
and reproduction cycle of this field, while seeking to expand its business domain and establish a second
cash engine with a special geographical focus on Middle and South America and North Africa. At thesame time, Teikoku Oil will seek to maximize corporate value while achieving the most efficient
allocation of management resources in order to maintain a strong balance sheet.

Offices
Technical Research Center

Table of Contents
1

Financial Highlights

2

Letter to Shareholders

5

Review of Operations by Segment

12

Major Overseas Projects

14

Global Network

16

Research and Development

17

CSR (Corporate Social Responsibility)

18

Board of Directors and Auditors

19

Financial Section

49

Consolidated Group Companies

50

Investor Information

51

Company Overview

Company Name
Head Office
Phone
Fax
Date Established
Paid-in Capital
Shares of Common Stock Issued
Stock Listings
Transfer Agent for the Shares
URL
E-mailAkita District OfficeNiigata District Office
Chiba District OfficeLondon Representative Office
Houston Representative Office
Caracas Representative Office

Our IncessantChallenge >Teikoku Oil Co., Ltd.
31-10 Hatagaya 1-chome, Shibuya-ku, Tokyo 151-8565, Japan+81-3-3466-1242+81-3-3468-3511
September 1, 1941
¥19,579 million
306,130,000 shares
Tokyo, Osaka
UFJ Trust Bank Limited
http://www.teikokuoil.co.jp/
ir@teikokuoil.co.jp

23-30, Kita-Karasuyama 9-chome, Setagaya-ku, Tokyo 157-0061 Japan
Phone: +81-3-3300-5121 Fax: +81-3-3300-5129
2-1, Daido Higashi, Yabase, Akita City, Akita Pref. 010-0977 Japan
Phone: +81-18-862-4131 Fax: +81-18-862-4139
3-1, Higashi-Odori 1-chome, Niigata City, Niigata Pref. 950-8512 Japan
Phone: +81-25-247-2171 Fax: +81-25-247-5390
3319, Aza Hachimandai, Oaza Naruto, Naruto Town, Sanbu Gun, Chiba Pref.
289-1326 Japan
Phone: +81-475-82-0830 Fax: +81-475-82-0836
9 Berkeley Street, London W1J8DW, U.K.
Phone: +44-20-7495-8718 Fax: +44-20-7495-8697
Williams Tower 2800 Post Oak Blvd., #5200, Houston, TX 77056, U.S.A.
Phone: +1-713-850-8480 Fax: +1-713-850-0678
Av. Principal Eugenio Mendoza con Av. Jose Angel Lamas, Edif. Torre la Castellana,
Piso 4, Ofic.4-C y 4-D, Urb. La Castellana, Caracas Venezuela
Phone: +58-212-263-7031 Fax: +58-212-263-9141■ Cautionary Statement regarding Forward-Looking Statements

With the exception of historical facts, forward-looking statements such as present plans, strategies and forecasts made in this report are rational determinations by management based on
information that was currently available at the time of the report. These forward-looking statements may differ from actual results due to various factors, including potential risks anduncertainties that may affect performance, such as various social and economic factors—including but not limited to business conditions in the energy industry and natural gas markets,
crude oil prices, exchange rate fluctuations, and the results from as well as changes in domestic and international mining operations. As a result, these statements should not be relied on as
the sole source upon which to make investment decisions.
51 Teikoku Oil Co., Ltd. Investors’ Guide 2004

Financial Highlights
Teikoku Oil Co., Ltd. and Consolidated Subsidiaries
For the Fiscal Years Ended December 31

Millions of yen(except per share data)

Net Sales
Operating Income
Ordinary Income
Net Income for the Period
Gross Cash Flow*
Total Assets
Shareholder’s Equity
Return on Equity (ROE) (%)
Return on Assets (ROA) (%)
Per Share Indicators:
Net Income
Shareholder’s Equity

Millions of U.S. dollars(except per share data)

2004

2003

2002

2004

¥084,032
13,533
16,5239,276
19,436
240,513
165,9365.8
4.0¥078,498
8,739
11,158
6,796
16,749226,280
156,463
4.6
3.2¥073,630
7,296
10,744
5,233
13,753203,986
135,9113.9
2.6$0,808
130
159
89
187
2,313
1,596
5.8
4.0

¥030.22543.62¥022.09512.18¥017.11444.90$0.29
5.23

Notes: (1) Fiscal years from January 1 to December 31 of each year. Reference dollar amounts are calculated using a yen-U.S. dollar exchange rate of ¥104.00 as of the end of December 2004.
Notes: (2) Gross Cash Flow = Net income + Depreciation and amortization

Net Sales

Operating Income □Net Income for the Period ■(Millions of yen)

(Millions of yen)

Shareholder’s Equity □Total Assets □(Millions of yen)

(Millions of yen)

ROE

ROA

■

(%)

■

(%)
240,51384,03275,76771,36078,49873,630156,463

11,648 11,864
126,563
8,739
7,296
6,068

2000

2001

2002

2003

2004

2000

5,704

2001

9,276

5.8
5.1

6,796

2003

202,369 203,986
182,893

134,307 135,911

4.4

5,233

2002

2004

226,280

165,936

13,533

2000

2001

1 Teikoku Oil Co., Ltd. Investors’ Guide 2004

4.0
3.5

4.6

2002

3.2

3.0

3.9

2.6

2003

2004

2000

2001

2002

2003

2004

Letter to Shareholders

Creating
the Next
Cash Engine

Masatoshi Sugioka
President

Management Strategy That Has
Produced Significant Results> “A clear management strategy is the source of consistent results”. Looking back on Teikoku Oil’s
business results for fiscal 2004 to December 2004, I have reconfirmed my strong conviction in thesewords. In fiscal 2004, the business development strategy that the Teikoku Oil Group has been pursuing
produced a substantial improvement in business results, and it was a year in which our management
strategy was vindicated.
Based on a corporate philosophy that is committed to the creation of an abundant society through thestable, long-term supply of the energy that supports everyday living and industry, the Teikoku OilGroup’s wide-ranging business development encompasses the entire energy flow cycle of oil and natural
gas—from upstream areas such as exploration, development and production to downstream areas such as
distribution and marketing. As the source of the Group’s value-added is in upstream operations, our longterm vision places priority on first leveraging domestic gas reserves to establish a strong gas business basethat can provide a stable, long-term source of earnings, and then utilizing the cash flow generated fromthis business to invest in upstream businesses overseas, thereby creating both domestic and overseas
growth drivers. Over the past several years, we have been exerting every effort to further build our gas
business base in Japan, while rebuilding our overseas business strategy.

Fiscal 2004 Business Results(New Historical Highs in Earnings)> Before explaining the Group’s specific strategies, I would like to report on fiscal 2004 results forthe year to December 2004. The biggest accomplishment for the fiscal year was the new historical highrecorded in net income, which grew 36.5% for the year to ¥9,276 million. Growth in domestic natural
gas sales volumes and profits from overseas projects in particular significantly contributed to theseearnings. In addition, rising crude oil and petrochemical product prices supported 7.0% year-on-year
growth in net sales to ¥84,032 million, and 54.9% growth in operating income to ¥13,533 million.

2 Teikoku Oil Co., Ltd. Investors’ Guide 2004

> It goes without saying that the bedrock of the upstream businesses of the Teikoku Oil Group is its

High Market Potential of
the Minami Nagaoka Gas Field

holdings of oil and natural gas reserves. Furthermore, the key to sustainable growth is the cyclicalexpansion of the “process of using the cash flow generated from producing and selling existing reserves toinvest in exploration and purchases of oil fields to acquire new reserves”, or in other words, thecontinuation of the reserve expansion and reproduction cycle.
Presently, the cornerstone of our energy flow cycle is the Minami Nagaoka gas

Oil and Gas Upstream Companies
Growth Scenario

field located in Niigata prefecture. The Minami Nagaoka gas field is Japan’s largest
deposit of natural gas reserves, and it already has a 20-year history of production

Exploration Activities

operations. However, based on a technological reassessment of the various data on(Seismic Exploration)(Exploratory Well)

Further Exploration
Activities andOil Field Acquisition

Exploration Investment

the field accumulated so far, we have been able to confirm reserves in excess of 30
billion cubic meters in this field. Moreover, with the successful development of new(Near Minami Nagaoka,
Overseas)(Cost Accounting)Expansion ofReserves

technology that had been under development for the past 10 years, Teikoku Oil has

Investment of
Cash Flow in New Projects

been able to solve the problem of low productivity in the northern sector of the field
due to the properties of the gas reservoir. Consequently, we believe this will add

Oil andGas Field Discoveries
Acquisition of Reserves

Expanded
Production ofReserves(Minami Nagaoka
Gas Field, Others)

Production / Marketing
Activities(High Returns)

several billion cubic meters to the field’s total commercially recoverable reserves.
The efficient production of the abundant reserves of the Minami Nagaoka gas
field requires the development of equivalent demand. Given the close proximity of

Building Production andMarketing Facilities

Low Running Costs(Large-Scale Investments)

the field and the fact that the region represents substantial potential consumption,

Development Activities

we have been actively expanding its pipeline network in the Kanto Koshinetsu(Development Well)(Plant Construction)(Pipeline Construction)

region. As a result, the direct connection of this gas field with a huge natural gas
market via pipeline has dramatically increased the value of the field. Consequently,
the market potential of the field is one of the highest in the world.

Expanded Scale Makes
the Domestic Gas Businessa Stable Cash Engine> The first step of our long-term vision was to complete the construction of our domestic gas
business by strengthening natural gas supply capacity centering on the Minami Nagaoka gas field andexpanding our pipeline network to increase transmission capacity. Over the past several years, we haveworked to steadily create new demand by expanding and developing our gas business base, and havebalanced new investments with new demand development in an effort to efficiently expand the scale ofthe business. While the original goals of the Teikoku Oil Group’s original long-term vision will becompleted over the next two years following investment of over ¥140 billion to date, natural gas sales
have risen by 37% over the past five years, and we are confident we can achieve our domestic goal of 1
billion cubic meters in annual gas sales by fiscal 2006. Moreover, we have set a new goal of 1.2 billion
cubic meters in gas sales by 2010.
Following the completion of investments to build the basic infrastructure for the domestic gas
business, the scale merits of further expansion will multiply, as the incremental cost of increased
production will be limited. The net result will be enhanced price competitiveness, which is the strong
point of our natural gas business.
On the other hand, plans are under way to receive and store LNG (liquefied natural gas) supplied
from the Pacific Ocean side as a long-term supplement to the Minami Nagaoka gas field, and we areconstructing new pipelines in conjunction with this alternative supply. In the future, we aim to establish afirm natural gas supply system where domestic natural gas is produced from the Japan Sea side and LNG
is introduced from the Pacific Ocean side, thereby achieving dramatically enhanced supply stability. The
plan is to gradually begin introducing LNG from 2010 onward, while at the same time ensuring there isadequate infrastructure to further develop demand.

Overseas Business Blooms into
the Second Cash Engine> Overseas, we are leveraging our accumulated experience and achievements to date in rebuilding ourbusiness strategy, and we have actively pursued a core area strategy over the past several years in parallelwith the ongoing scale expansion of our domestic business.

3 Teikoku Oil Co., Ltd. Investors’ Guide 2004

Specifically, the regional focus has been narrowed to Middle/South America and North

Production Volume ofDomestic and Overseas Projects

Africa, where we are aiming for continuous business development of a combination of various
projects that involve service businesses and asset purchases in addition to exploration in an

Domestic ■Overseas □effort to consistently create a portfolio of upstream assets. This strategy is recently beginning to(BOE per day)
120,000

produce clear results, which demonstrates the effectiveness of the strategy.
In Middle/South America in particular, we are moving to a full-scale expansion of

100,000

production in Venezuela in response to growing domestic demand for natural gas. We are also
participating in a new gas project in Mexico and have been able to acquire large-scale

80,000participating interests in Ecuador. We believe these achievements are a reflection of the good

60,000reputation that we have earned among local governments and oil companies regarding ouroperating capabilities and technological level, which was demonstrated during the course of

40,000business development in these regions. This good reputation has led to better information
20,0000regarding new projects and more opportunities to participate. On the other hand, while2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Forecast※BOE = Barrels of Oil Equivalent (bbl equivalent)

production is proceeding smoothly in Egypt and Algeria in North Africa, more effort is needed
for the business base in North Africa to become as established as it is in Middle /SouthAmerica.
In 2004, the dissolution of the Japan National Oil Corporation resulted in the liquidation of thestock held by the corporation in overseas projects. Seeing this as an opportunity to expand our holdings ofvaluable assets, we purchased, after careful evaluation and selection, the stock in leading projects inselected overseas regions in which we are emphasizing, thereby ensuring enhanced profit potential ofexisting overseas projects.
Through such multi-dimensional efforts, we project that equity production of domestic and overseas
oil and gas projects will exceed to 100,000 BOE/day (Barrels of Oil Equivalent) in 2006. In other words,
the Teikoku Oil Group is well on its way toward establishing its overseas business as the future second
cash engine that will drive breakthrough growth.

Enhancing
Corporate Governance> The Teikoku Oil Group is striving to improve corporate value by earning the continued trustof shareholders, customers and society as a whole through enhanced management efficiency andtransparency, and because we consider thorough compliance to be an important management issue, areworking to strengthen our corporate governance.
In fiscal 2004, we created the “Teikoku Oil Charter of Corporate Behavior” which outlines our
corporate philosophy and code of conduct. In addition, we have established the “Compliance
Committee” to ensure thorough compliance with legal statutes and the corporate ethics, have alsoestablished the “Internal Audit Department” to strengthen the internal auditing function for the Group
as a whole, and have also recently set up an inquiry desk for compliance issues.
We are also working to maximize shareholder value through the most efficient allocation ofmanagement resources and the maintenance of a strong financial position. With regard to earnings
appropriation, our basic policy is to assure stable, long-term shareholder returns by maintaining stabledividends that are commensurate with earnings growth, while also investing in strengthening our businessbase in preparation for future growth.
Going forward, we solicit your understanding and support as the Teikoku Oil Group strives toachieve these goals.
March 2005

Masatoshi Sugioka
President

4 Teikoku Oil Co., Ltd. Investors’ Guide 2004

Review of Operations by Segment

Overseas
Operations¥9,945 million

11.8%

Overseas
Operations

Net Sales ●¥4,600 million

34.0%

FY 2004● Operating Income

Domestic Operations¥8,934 million

66.0%
Domestic Operations¥74,086 million

88.2%

Domestic Operations> Teikoku Oil is actively expanding production capacity at its main Minami Nagaoka gas field,
and in addition is working to develop new natural gas demand as it strengthens and expands its
pipeline network. As the result of proactive sales expansion and the development of new users, natural
gas sales volume increased 61 million cubic meters to 942 million cubic meters (including Offshore
Iwaki Petroleum Co., Ltd. sales). Total sales in Japan, including natural gas, LPG, crude oil, petroleum
products, iodine and other sales, reached ¥74,086 million, while operating income was ¥8,934 million.

Overseas Operations> Teikoku Oil is actively developing its overseas business focusing on Middle/South America andNorth Africa. In fiscal 2004, Teikoku Oil continued to expand its holdings of valuable overseas assets,purchasing additional shares that were sold as a result of the disposal of Japan National Oil
Corporation assets in The Egyptian Petroleum Development Co., Ltd., Teikoku Oil (Sanvi-Guere)
Co., Ltd., Teikoku Oil (Venezuela) Co., Ltd. and Teikoku Oil (D.R. Congo) Co., Ltd. As a result,overseas sales reached ¥9,945 million, while operating income was ¥4,600 million.

5 Teikoku Oil Co., Ltd. Investors’ Guide 2004

D o m e s t i c P r o d u c t i o n ■ Building a Reliable Supply Structure with Abundant Reserves

Reserves at the Minami Nagaoka Gas Field Ensure a Long-Term,
Stable Supply

Building
the Right
Production
Infrastructure> The main source of supply for the domestic natural gas business is the Minami
Nagaoka gas field. Production at the Koshijihara Plant began in 1984, and the field
has provided a steady supply ever since. Data acquired over many years of operations
along with geological assessments and other leading-edge reservoir evaluation
technologies have been used to reevaluate reserve capacity, revealing that the southern
region of the field contains total recoverable reserves of approximately 31 billion cubic
meters. This places the Minami Nagaoka field among the top natural gas fields in theworld, and even after subtracting the production volume extracted to this point, there
is enough remaining to allow us to continue production at current levels for nearly
30 years.

The northern region of the field contains a layer of gas with low productivity and so far has remained
untouched, but we are planning to develop it using new technologies called hydraulic fracturing. In thismethod, a fluid is injected at high pressure through a well, producing artificial fractures in the geologicalstratum surrounding the well, thereby enhancing productivity. By applying this technology to develop thenorthern region of the field we
expect to add several billions of cubic

Scale of Global Gas Field Reserves

meters of reserves.

Establishing a Structure for
Annual Production of 1 billion
Cubic Meters by 2006
Managing Director(President ofDomestic Operating Division)

more
than
2.5

LNG Scale

0.5〜
2.5

> We forecast that sales volumes

Minami Nagaoka Gas Fieldof natural gas will be 1 billion cubic
0.1〜
0.5

meters annually by 2006, and we areenhancing production capacity to

0.05〜
0.1

meet this target. We plan to expand
the gas processing line at the

less
than
0.05

Koshijihara Plant to handle anadditional daily output of 1.5 million

Small
Scale

cubic meters, combining this withthe plant’s existing capacity of 1.7
million cubic meters and the 1.5
million cubic meters from the

0

300

600

900

〜
〜 〜
〜

Keiji Yamashita(tcf )
Large
Scale

4,000
4,300
(Number of Gas Fields)(Notes:)1. Derived from Information Center for Petroleum Exploration and
Production data (January 2001)
2. Includes only constructive gas fields
3. Excluding U.S. and Canadian gas fields
4. 1tcf (trillion cubic feet) = 26.8 billion cubic meters

Oyazawa Plant, for a total daily
output of 4.7 million cubic meters.
Additional capacity for daily output of 1.6 million cubic meters is held in underground storage at the
nearby Sekihara gas field to provide natural gas in response to fluctuations in demand or in times of
emergency. This underground storage facility makes use of a depleted gas field, making it an efficient
backup system since it needs little capital investment and has low operating costs.
This series of production infrastructure enhancements will allow for the most efficient utilizationof capacity considering the size of current reserves at the Minami Nagaoka gas field and will provide
a production structure sufficient to support an expansion of sales to more than 1 billion cubic meters
annually.

6 Teikoku Oil Co., Ltd. Investors’ Guide 2004

A Steadily Expanding Pipeline Network> The expansion of the pipeline network that will drive the growth of natural gas sales is proceeding
steadily. We acquired the Ryomo pipeline in 2004 to exploit latent demand in the northern Kanto
region and began construction of an extension to the Shin Tokyo Line to enhance transport capacity tothat region. We also extended the Iruma Line in Saitama prefecture in response to growing demand inareas near the pipeline and began full-scale construction of the Shizuoka Line and Minamifuji Line thatwill carry LNG.
The extension to the Iruma Line is planned for completion in 2005, the Shizuoka Line andMinamifuji Line in 2006, and the extension to the Shin Tokyo Line in 2007.
This work will complete a pipeline network structure stretching a total of 1,300 kilometers, roughly
equivalent to the distance between Tokyo and Hakata, and is a step toward a reliable supply structure inwhich domestically produced natural gas is supplied from the Japan Sea side of the country and LNG
from the Pacific Ocean. This LNG will contribute to the diversification of gas sources and security of

Pipeline Network

supply. Introduction of LNG is planned from 2010.

(As of December 31, 2004)

Finally, the Niigata Chuetsu Earthquake in October 2004 did not affect our production facilities orpipeline, and we continue to produce and transport natural gas safely.

Sea ofJapan
Niigata Branch

Niigata Line
Sekihara
Underground Storage

Matsuzaki Gas Field
The Tokyo Electric Power Company,
Toyano Line
Hirono Power Plant
Minami-Aga Oil Field

Higashi-Kashiwazaki
Gas Field
Kashiwazaki Pipeline
Control Center

Offshore
Iwaki Line

Minami-Nagaoka Gas Field
Kashiwazaki Branch

Kubiki Branch

Nagaoka Line
Shin Nagaoka Line

Oumi Line

Shin Tokyo Line
Tokyo Line

Extension to
Shin Tokyo Line
(Planned)

Nagano Branch
Matsumoto Line

Iruma Line
Chino Branch
Minamifuji Line*(Under Construction)

Ryomo Line

Pacific
Ocean

Honjo Branch

Kofu Line

SodeshiLNG Terminal

Offshore
Iwaki Gas Field

Nihongi Line

Tokyo Branch
Naruto Line
Extension to
Iruma Line
(Under Construction)

Shizuoka Line
(Under Construction)

Naruto Gas Field
Hosokusa Line

Suruga Line #2(Shizuoka Gas)
＊Three Company Cooperative Pipeline(Teikoku Oil, Shizuoka Gas, Tokyo Gas)

7 Teikoku Oil Co., Ltd. Investors’ Guide 2004

D o m e s t i c M a r k e t i n g ■ Efficient and Effective Growth in Sales for Industrial Applications

A Strong
CompetitivenessDriven Marketing
Strategy

Greater Competitiveness through Expansion of
the Natural Gas Business> Natural gas is a clean form of energy that burns with less ofan environmental burden than other types of fuel, driving growing
demand for both the household gas that is indispensable to modern
life and for use as an industrial fuel.
Approximately 3% of all natural gas used in Japan is produced
domestically, while the remainder is imported in the form ofliquefied natural gas (LNG). As a result, the price of natural gas
fluctuates in proportion to the market price of imported LNG.
Teikoku Oil’s principal source of gas is the natural gas it

produces domestically rather than imported LNG, so any increases in production made to support
business expansion generates a significant rise in cost competitiveness. Exploiting this advantage, we
actively stepped up sales activity, raising annual production volume from 640 million cubic meters in1999 to 880 million cubic meters in 2004.

Emphasizing the Superior Environmental
Advantages of Natural Gas

Network Expansion and
Solid Sales Expansion
Natural Gas Sales Volume □Pipeline Extensions> Competition in the natural gas market has
increased with deregulation that allowed the entry
of companies from other industries, while■(Kilometers)(Millions of Cubic Meters)

1,600

1,200

1,200

900

800

600

400

300

expectations for environmentally friendly natural
gas continue to rise.

Hisatake Matsuno

With the implementation of the Kyoto

Executive Vice President(President ofMarketing Division)

Protocol in February 2005 that sets targets for
reductions in greenhouse gases, and the ongoingdebate over environmental taxes, greater pressure is
being placed on companies to implement solidmeasures to address environmental problems.
Curbing emissions of carbon dioxide—therepresentative greenhouse gas—is a particular area0

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Planned0where aggressive measures are necessary.
Because our domestically produced natural gas does not require liquefaction, marine transport orregasification, in terms of its life cycle assessment (LCA, a quantitative measure of the total environmental
burden of a product from production to consumption) it generates a lower volume of carbon dioxide than
LNG. Emphasizing this advantage has helped to increase sales. The Japanese government also offers
subsidies and other measures to promote the use of natural gas, which has added a significant incentive.

Cooperation with Gas Companies Promotes Sales Growth> The cornerstone of natural gas demand is the consumer, and the volume of natural gas used perhousehold has been rising as a result of sales promotion activities by gas companies, especially initiatives
to encourage greater adoption of bathroom and under-floor heaters. We support these activities bycontinually providing a stable supply of economical domestic natural gas.

8 Teikoku Oil Co., Ltd. Investors’ Guide 2004

The principal driver for growth in demand for natural gas, however, is industrial applications, and theuse of cogeneration systems that allow efficient energy in buildings and factories is rapidly increasing.
Electric and gas companies are also developing a business for these systems, but as we are able to holdrepeated discussions with companies interested in adopting such systems, we are able to clarify thedifferences from other companies and can offer a more efficient system. These proposals also emphasize
our close relationships with gas companies. By employing a collaborative approach with the gas
companies that has created strong relationships and a deep level of trust with local companies, we are able
to generate synergies from the gas companies’ networks and enhance our ability to offer proposals forlarge-scale industrial systems.

New Target for Sales Expansion Is 1.2 billion Cubic Meters by 2010
> The rising price of crude oil, which reached record levels in 2004, has been a significant factor in
driving up the import price of LNG. The price of natural gas in Japan has been declining, however, on
account of greater competition in the energy market in general. We have managed to stay ahead of thecompetition as a result of our cost competitiveness and overall ability to provide solutions, and as a result
we have consistently achieved our forecasts for sales expansion.
The previous domestic goal of annual sales volume of 1 billion cubic meters by 2006 has nearly beenachieved. Consequently, we have set a new goal of 1.2 billion cubic meters by 2010 and will further
enhance our sales activity to meet this goal.

Targeted Sales Expansion(Teikoku Oil parent only)
Industrial Use ■Consumer Use, Commercial Use □(100 million cubic meters)
12

10

New Target
1.2 billion m3
by 2010

8

6

4

2

0

2004 2005 20062010

9 Teikoku Oil Co., Ltd. Investors’ Guide 2004

O v e r s e a s O p e r a t i o n s ■ Creating the Optimal Portfolio Centered on Core Areas

A Portfolio
Strategy for
OptimalRisk/Return

Concentration of Management Resources in Two Core Areas> The Teikoku Oil Group is focusing on Middle/South America and North Africa as ameans of optimizing management resources and is seeking sustained business developmentin those regions while combining businesses with varied risk profiles, such as exploration,
development and services. Moreover, in April 2005 the organizational structure wasreorganized to create an International Projects Division / Domestic Offshore Division,
providing a responsive business development structure.
Several projects are under way in Middle/South America. In Venezuela, we are theoperator for two types of projects—production and exploration—while in Mexico we areparticipating in a gas development project. We are also pursuing active business developmentin Ecuador, acquiring interests in early 2005 in oilfields that are currently in the production
and development stages.

In North Africa, the Group has maintained steady production in the Ohanet region of Algeria since2003. This project marks the first time that a Japanese company has participated in a large-scale gas
development business in Algeria, which possesses some of the best natural gas reserves in the world. In
onshore Egypt, we have been producing crude oil for more than 20 years since 1980, and we areparticipating in a new offshore exploration project as well.
We also began commercial production of natural gas in the offshore Sarawak project in Malaysia
in 2003.

Overseas Projects Generate a Steady Stream of Successes> The offshore D.R. Congo project in West Africa has been a long-term contributor to earnings. We
first became involved in the project after the first oil shock of 1975 and have since developed nine

Masaharu Sanooilfields. In 2003—the 27th year since production first began—cumulative production volume reachedManaging Director(President ofInternational Projects Division /Domestic Offshore Division)

200 million barrels, and the area is currently producing approximately 20,000 barrels a day.
In Venezuela, more than a decade has passed since operations began in 1992, with the Teikoku OilGroup being the first Japanese company to enter into the upstream business in Venezuela. Since thattime, production volume in the region has nearly tripled. With demand for natural gas rising in
Venezuela, we are increasing production capacity by building new natural gas pipelines and adding new
wells in expectation of a sharp rise in the natural gas business in the region.

Area

Overseas Project Company Name

Middle /South America

Teikoku Oil (Venezuela) Co., Ltd. / Teikoku Oil (Sanvi-Guere) Co., Ltd.
Teikoku Gas Venezuela, C.A.
Teikoku Oil de Burgos S.A. de C.V.
Teikoku Oil Ecuador
Japan Ohanet Oil & Gas Co., Ltd.
Teikoku Oil Algeria (El Ouar) Co., Ltd.
The Egyptian Petroleum Development Co., Ltd.
Teikoku Oil Suez SEJ Co., Ltd.
Teikoku Oil (D.R. Congo) Co., Ltd.
Nippon Oil Exploration (Malaysia), Ltd. / Nippon Oil Exploration (Sarawak), Ltd.
Teikoku Oil (Con Son) Co., Ltd.

North Africa

Others※1 ● represents the current phase, while ▲ the phase that is also proceeding in parallel.
※2 Teikoku Oil Algeria (El Ouar) is currently studying moving to development.

10 Teikoku Oil Co., Ltd. Investors’ Guide 2004

CountryName
Venezuela
Venezuela
MexicoEcuador
Algeria
Algeria
Egypt
Egypt
D.R. Congo
Malaysia
Vietnam

Exploration
Phase

Development Production
Phase
Phase

B18
B31

In Ecuador, we have acquired fields currently in production from which returns can be promptly
realized, along with fields currently being developed that promise additional reserves through exploration.
Opportunities such as these have won the Teikoku Oil Group acclaim for its initiatives in Middle/SouthAmerica, and we expect these will be a driving force for the growth of our business in the region.
Political and other uncertainties in the oil producing nations in Middle/South America and North
Africa present a degree of country risk compared to Europe or the U.S. However, these countries place
great importance on the oil industry as the real support for their economies. In addition, the Teikoku OilGroup through its continuous business development has successfully gained the trust of the local
governments and parties concerned and built cooperative relationships with oil developers in theseregions. As our deep understanding of local conditions allows us to provide a proper response, we believethat we can limit the damage from any problems that should arise.

Formulating the Optimal Portfolio> In 2004, the Japan Oil, Gas and Metals National Corporation (JOGMEC) was established to takeover the functions of the Japan National Oil Corporation (JNOC), and JNOC began selling shares heldin overseas oil and natural gas upstream projects. We considered this to be an excellent opportunity toincrease the Group’s holdings of high-quality interests and have acquired shares in four projects in which
we played a leading role, including projects located in Egypt, Venezuela and D.R. Congo. These
acquisitions strengthened the foundation of the overseas business, and we anticipate that they will make agreater contribution to consolidated performance.
Considerable lead time is required to develop oil and natural gas, so it is necessary not to place adisproportionate emphasis on exploration alone, but to make a continual effort while at the same time
controlling risks by combining projects in different phases, specifically development and production.
Enhancing our presence in core areas by utilizing our wealth of experience in project execution, we willcontinually seek to uncover superior opportunities and formulate an optimal portfolio.

Production Projections for
Existing Overseas Projects(in terms of Teikoku Oil’s share)(BOE per day)
120,000■■■

100,000■■■

80,000■■60,000EcuadorMexicoOhanet Oil & Gas
Two Malaysia Companies
Two Venezuela Companies
Egyptian Petroleum Development
Teikoku Oil (D.R. Congo)
Teikoku Oil Domestic andOffshore Iwaki Petroleum

40,00020,00001998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Forecast※Gas conversions at 5,800cf = 1bbl

11 Teikoku Oil Co., Ltd. Investors’ Guide 2004

Major Overseas Projects(2004 average daily production volume,
based on 100% of project production volume)

Venezuela
Teikoku Oil (Venezuela) Co., Ltd. / Teikoku Oil (Sanvi-Guere) Co., Ltd.
> In 1991, the Venezuelan national petroleum company PDVSA announced it was opening bidding
to foreign companies through international tenders for work to reactivate suspended oil fields and to
facilitate new petroleum exploration. Teikoku Oil participated in this project from the first bidding
round and was awarded two central onshore areas (the East Guarico Unit and the Sanvi Guere Unit),
Teikoku Oil (Venezuela) Co., Ltd.
Teikoku Oil (Sanvi-Guere) Co., Ltd.

both of which are operated by Teikoku Oil.
■ Crude Oil: 4,000 barrels/day■ Natural Gas: 70 million cubic feet/day

Teikoku Gas Venezuela, C.A.

Teikoku Gas Venezuela, C.A.
> Teikoku Oil participated in the exploration and development project in the San Carlos and Tinaco
Blocks in October 2002, where exploratory operations continue.

Egypt
The Egyptian Petroleum Development Co., Ltd.
> In June 1975, the Egyptian Petroleum Development Co., Ltd. signed a cooperative agreement with
the Arab Republic of Egypt for petroleum exploration and development in the West Bakr area, a desert
region on the west bank of Egypt’s Gulf of Suez, and it is conducting exploration activities as the de facto
operator of the project. As a result, three oil fields were discovered and commercial production has been
The Egyptian Petroleum Development Co., Ltd.
Teikoku Oil Suez SEJ Co., Ltd.

under way since 1980. The Egyptian Petroleum Development Co., Ltd. continues to drill additional wells
to develop new reserves.
■ Crude Oil: 4,600 barrels/day

Teikoku Oil Suez SEJ Co., Ltd.
> Teikoku Oil Suez SEJ Co., Ltd. was established in December 2003 and is participating in the
exploration and development of the South East July (SEJ) block in the Gulf of Suez, Arab Republic of
Egypt. Drilling activity began in the SEJ block in July 2004.

Democratic Republic of Congo
Teikoku Oil (D.R. Congo) Co., Ltd.
> Teikoku Oil (D.R. Congo) Co., Ltd. was established in August 1970 and participated in a joint oil
project operated by U.S. and Belgium companies. Teikoku Oil (D.R. Congo) Co., Ltd. acquired a
32.28% interest of this project, and production began in November 1975 at approximately 25,000
barrels/day. In addition, water flooding was introduced in 1978 to improve crude oil recovery, and newoil fields have also been discovered in the surrounding areas. Teikoku Oil (D.R. Congo) Co., Ltd. is
Teikoku Oil (D.R. Congo) Co., Ltd.

actively exploring other new fields in the area, and expects to maintain a stable supply with thisproduction base in Africa.
■ Crude Oil: 19,000 barrels/day

12 Teikoku Oil Co., Ltd. Investors’ Guide 2004

Ecuador
Teikoku Oil Ecuador> Teikoku Oil Ecuador was established in January 2005 and has acquired a 40% participatinginterest in the Block 18 and Block 31 in Ecuador. Approximately 20,000 barrels/day of crude oil is being
produced in Block 18, and daily production volume is expected to expand further with the developmentof more wells. In addition, four oil fields have been found in Block 31, from which Teikoku Oil foresees
30,000 barrels/day production from 2006.
Teikoku Oil Ecuador

Algeria
Japan Ohanet Oil & Gas Co., Ltd.
> Demand for gas in Western Europe across the Mediterranean Sea is expected to continue increasingin the years to come, and it is estimated that Algeria-produced natural gas in the future will account for
25% of total demand. Teikoku Oil invested in Japan Ohanet Oil & Gas Co., Ltd. in January 2001. Japan
Ohanet Oil & Gas Co., Ltd. is participating in the Ohanet gas field development project which is
Teikoku Oil Algeria (El Ouar) Co., Ltd.

operated by Australia’s BHP, and production has been under way since October 2003.
■ LPG • Condensate: 45,000 barrels/day (crude oil equivalent)

Japan Ohanet Oil & Gas Co., Ltd.

Teikoku Oil Algeria (El Ouar) Co., Ltd.
> Teikoku Oil Algeria (El Ouar) Co., Ltd. was established in December 2001 and participated in the
exploration and development project of the El Ouar 1 and 2 blocks. The company is currently studying
the feasibility of shifting to the development stage.
MexicoTeikoku Oil de Burgos S.A. de C.V.
> Teikoku Oil de Burgos S.A. de C.V. was established in September 2003 and is involved in the gas
development services business in Mexico. Operations began in February 2004, and the company is thefirst Japanese corporation to participate in the gas development business in Mexico.
■ Natural Gas: 24 million cubic feet/day
Teikoku Oil de Burgos S.A. de C.V.

Malaysia
Nippon Oil Exploration (Malaysia), Ltd. / Nippon Oil Exploration (Sarawak), Ltd.
> Two projects being developed offshore around the Miri Gas Fields in Sarawak, Malaysia are
Nippon Oil Exploration (Malaysia), Ltd. (SK-10 unit) established in 1987 and Nippon Oil Exploration(Sarawak), Ltd. (SK-8 unit) established in 1991.
The three gas fields discovered in these blocks are in the future expected to produce a maximum of 1
Nippon Oil Exploration (Malaysia), Ltd.
Nippon Oil Exploration (Sarawak), Ltd.

billion cubic feet/day of natural gas and 42,000 barrels/day of condensate. The natural gas produced will
be supplied to Japan and South Korea as LNG. Teikoku Oil invested in both of these projects in
November 2000 as part of its operational alliance with the Nippon Oil Group.

13 Teikoku Oil Co., Ltd. Investors’ Guide 2004

Global Network(As of December 31, 2004 / Teikoku Oil Ecuador was established in January 2005)■ Overseas> Teikoku Oil is actively committed to overseas exploration and development projects and aims to make its
overseas operations its second cash engine, with a particular emphasis on Middle/South America and North Africa
as core overseas business development areas. The London, Houston and Caracas representative offices function tocollect global oil business information and help to make plans for participation in promising overseas projects.

•Middle / South America

Venezuela

Teikoku Oil (Venezuela) Co., Ltd. / Teikoku Oil (Sanvi-Guere) Co., Ltd.
Teikoku Gas Venezuela, C.A.

•North Africa

MexicoTeikoku Oil de Burgos S.A. de C.V.

EcuadorTeikoku Oil Ecuador

America

Teikoku Oil (North America) Co., Ltd.

Egypt

The Egyptian Petroleum Development Co., Ltd.
Teikoku Oil Suez SEJ Co., Ltd.

Algeria

Japan Ohanet Oil & Gas Co., Ltd.
Teikoku Oil Algeria (El Ouar) Co., Ltd.

•Other Areas

D.R. Congo

Teikoku Oil (D.R. Congo) Co., Ltd.

Malaysia

Nippon Oil Exploration (Malaysia), Ltd. / Nippon Oil Exploration (Sarawak), Ltd.

Vietnam

Teikoku Oil (Con Son) Co., Ltd.

Canada Oil Sands Co., Ltd.

Houston Representative Office
Teikoku Oil de Burgos S.A. de C.V
Teikoku Oil (North America) Co., Ltd.

Teikoku Oil (Venezuela) Co., Ltd.

● Exploration stage projects

Caracas Representative Office
Teikoku Oil (Sanvi-Guere) Co., Ltd.

● Development stage projects● Production stage projects◎ Overseas offices● Other participating projects

Teikoku Gas Venezuela, C.A.
Teikoku Oil Ecuador

Portfolio Diversification
14 Teikoku Oil Co., Ltd. Investors’ Guide 2004

> The solid cash engine of Teikoku Oil’s wide-ranging businesses which encompasses the upstream anddownstream of the energy flow cycle, is complemented by various Teikoku Oil Group companies. This large groupof affiliated companies provides powerful, integrated support for Teikoku Oil’s exploration, development,
production and marketing operations.

■ Japan• Petroleum development

Offshore Iwaki Petroleum Co., Ltd.

Supply of natural gas to Tokyo Electric Power Co., Inc.’s Hirono thermal power station• businesses

Teiseki Drilling Co., Ltd.

Geothermal production wells, crust activity observation wells, wells for hot springs,• Petroleum refining andTeiseki Topping Plant Co., Ltd.

civil engineering
Petroleum refining related production, storage and shipment of petroleum products• distribution related businesses Teiseki Transport System Co., Ltd.

Equipment and materials shipping, transport and sales of petrochemical products• Pipeline related businesses

Natural gas transportation, pipeline operation, maintenance and management

Teiseki Pipeline Maintenance Service Co., Ltd.

• City gas, LPG sales businesses Teiseki Propane Co., Ltd.
• Other related businesses

Sales of LPG and petroleum products

Saitama Gas Co., Ltd.

City gas, LPG sales

Teiseki Real Estate Co., Ltd.

Real estate rental, management and insurance agency services

Daiichi Warehouse Co., Ltd.

Warehousing services

London Representative Office

Offshore Iwaki Petroleum Co., Ltd.
Teiseki Drilling Co., Ltd.
Teiseki Topping Plant Co., Ltd.
Teiseki Transport System Co., Ltd.
Teiseki Pipeline Maintenance Service Co., Ltd.
Teiseki Propane Co., Ltd.
Saitama Gas Co., Ltd.
Teiseki Real Estate Co., Ltd.
Daiichi Warehouse Co., Ltd.

Sakhalin Oil and Gas Development Co., Ltd.

Teikoku Oil Algeria (El Ouar) Co., Ltd.
The Egyptian Petroleum Development Co., Ltd.
Teikoku Oil Suez SEJ Co., Ltd.
Japan Ohanet Oil & Gas Co., Ltd.

Japex New Nanhai Ltd.

Nippon Oil Exploration (Malaysia), Ltd
Teikoku Oil (Con Son) Co., Ltd.
Southern Highlands Petroleum Co., Ltd.
Indonesia Nippon Oil Cooperation Co., Ltd.
Nippon Oil Exploration (Sarawak), Ltd.
Teikoku Oil (D.R. Congo) Co., Ltd.
Jawa Oil Co., Ltd.
Murray Petroleum Co., Ltd.

15 Teikoku Oil Co., Ltd. Investors’ Guide 2004

Research and Development> Teikoku Oil’s Minami Nagaoka gas field is one of Japan’s largest gas fields, but as this gas reservoir
is entrapped in volcanic rock, the variations in lithologic character are severe, and due to differences in theease with which gas flows (permeability), the production capacity of each well differs greatly by area. The
areas of this gas field that are currently being developed are in the southern region, where the volcanic
rock has relatively high permeability and it is possible to drill wells with high production capacity.
However, as large deposits of natural gas have also been confirmed in the northern area, Teikoku Oil has
been developing new technologies to economically produce this gas.
Hydraulic fracturing is a technology where high pressure water is pumped into the well to create“Minami Nagaoka
MHF-1” Success

artificial fractures in the surrounding geological stratum andachieve dramatic improvements in the production capacity of awell. At Teikoku Oil’s Minami Nagaoka MHF-1 well, which
was drilled in the northern section of the Minami Nagaoka gas
field, the Company was able to achieve the first application ofthis technology for deep subterranean drilling in volcanic rockand has succeeded in improving it to the point ofcommercialization. Application of hydraulic fracturing to six intervals at levels nearly 5,000 meters
underground in a green tuff formation with low permeability has improved well production capacity byeight-fold, resulting in natural gas production capacity equal to the natural gas production capacity ofcurrent wells of 300,000 cubic meters/day. With the application of this technology, the northern sectionof the Minami Nagaoka gas field has become a new target for development.

Hydraulic Fracturing Method●

Map of the geological stratum of the well withhydraulic fracturing applied
Gas flow

Artificial fracturing withthe hydraulic fracturing method(aqua-colored portion)
Gas pipe●

Overhead map of a well withhydraulic fracturing method applied
Gas flow

Artificial fracturing withthe hydraulic fracturing method(aqua-colored portion)
Gas pipe

Artificial fracturing is caused by injecting highly viscous fluids into the well from above ground.
Gas accumulates in the direction of the arrow through the fracture, raising productivity.

16 Teikoku Oil Co., Ltd. Investors’ Guide 2004

CSR (Corporate Social Responsibility)> The foundation of Teikoku Oil’s CSR (Corporate Social Responsibility) is embodied in the
Teikoku Oil Group’s corporate philosophy. Teikoku Oil’s corporate philosophy is the commitment to“the creation of an abundant society through the stable, long-term supply of the energy that supports
everyday living and industry”. In order to realize this ethos, Teikoku Oil needs to continue being acompany that is trusted by its shareholders, customers, employees, the local community and society as awhole. Recognizing that management needs to be more efficient and transparent, and that thoroughcompliance is an important issue, Teikoku Oil is working to enhance corporate governance.
In addition, awareness of environmental preservation is growing year by year. As the proliferation of

Enhancing“Corporate Value”

greenhouse gases (carbon dioxide, methane, etc.) leads to global
warming and threatens the ecological system, the Kyoto Protocol(Framework Convention on Climate Change) was adopted tostabilize the density of greenhouse gases. As a result, demand fornatural gas, which is a cash engine for Teikoku Oil, is expected tocontinue expanding as an environmentally friendly source of energy.
Moreover, Teikoku Oil is actively promoting newenvironmentally friendly businesses in Japan and overseas, such as the use of natural gas for wholesale
electricity supply, and the first verification tests in Japan of underground storage for atmospheric carbon
dioxide.
In January 2004, the Teikoku Oil Group established the “Teikoku Oil Charter of Corporate
Behavior”, which contains the Company’s corporate philosophy and code of conduct. In fulfilling thesocial responsibilities that are becoming more important in communicating with its stakeholders, Teikoku
Oil believes it is necessary to enhance its role in society.
Moreover, Teikoku Oil believes that responding to the expectations of all its stakeholders will work toenhance corporate value.

Administrative System of Corporate Governance

Shareholders’ Meeting
Selection of Board Directors

Auditor Selection

Board ofDirectors’ Meeting
Board Director

Accounting
Audit

PresidentInternal Audit
Department

Internal
Audit

Respective
Departments

Performance of Operations

17 Teikoku Oil Co., Ltd. Investors’ Guide 2004

Accounting Firm
Auditor

Auditor Board
Auditing Corporate Auditor
Accounting
Audit
Auditing

Selection / Supervision
Compliance
Committee

Selection

Executive Officers
BoardBoard of Directors and Auditors(As of March 31, 2005)(Standing, from left)

Masaharu Sano

Kyosuke Furukawa

Shigeru Hayashi

Keiji Yamashita

Yoshitsugu Takai

Hisatake Matsuno

Akira Isono

Masatoshi Sugioka

Takeshi Maki

(Seated, from left)

Kensuke Takase

Managing Director

Akira Isono
Masatoshi Sugioka
Hisatake Matsuno
Takeshi Maki
Kensuke Takase
Masami Ayabe
Shigeru Hayashi
Kyosuke Furukawa

Managing Director

Keiji Yamashita

Managing Director
Managing Director

Masaharu Sano
Yoshitsugu Takai

Director

Akinori Sakamoto

Director

Kasaburo Tamura
Kazuo Yamamoto
Takahiko Ikeda
Hiroaki Tsuburaya
Teruo Omori

ChairmanPresident
Executive Vice President
Executive Vice President
Senior Managing Director
Senior Managing Director
Managing Director

Masami Ayabe

President of Marketing Division

President of Pipeline Construction Division
Vice President of Marketing Division
President of Domestic Operating Division
Vice President of Pipeline Construction Division
President of International Projects Division / Domestic Offshore Division
Vice President of Domestic Operating Division
General Manager of Niigata District OfficeVice President of Pipeline Construction Division

Director
Director
Director
Director
Senior Corporate Auditor
Senior Corporate Auditor
Corporate Auditor
Corporate Auditor

General Manager of Natural Gas Marketing Department, Marketing Division
General Manager of Technical Planning Department
General Manager of Production Department, Domestic Operating Division

Kazuhiko Taniguchi
Satoshi Tono
Nagayoshi Kudo
Takao Ohtake
18 Teikoku Oil Co., Ltd. Investors’ Guide 2004

FINANCIAL SECTION

Table of Contents
20

11-Year Financial Data Summary

22Management Discussion and Analysis

30

Consolidated Balance Sheets

32

Consolidated Statements of Income

33

Consolidated Statements of Shareholders’ Equity

34

Consolidated Statements of Cash Flows35

Notes to Consolidated Financial Statements

48

Independent Auditors’ Report

19 Teikoku Oil Co., Ltd. Investors’ Guide 2004

FINANCIAL SECTION

11- Y e a r F i n a n c i a l D a t a S u m m a r yTeikoku Oil Co., Ltd. and Consolidated Subsidiaries
For the Fiscal Years Ended December 31

Net Sales
Cost to Sales
Gross Profit
Exploration Expenses
Selling, General and Administrative Expenses
Operating Income
Ordinary Income
Net Income for the Period
Depreciation and Amortization
Gross Cash Flow
Capital Expenditures
Total Shareholders’ Equity
Total Assets

1994

1995

1996

1997

¥049,684¥053,192¥060,254¥055,714

29,17032,44235,504

31,237

20,514

20,74924,75024,476

3,999

2,009

2,652

1,934

12,062

12,972

13,14813,271

4,451

5,768

8,948

9,271

4,103

4,613

7,347

2,997

2,802

2,783

4,247

703

—

—

8,332

8,964

—

—

12,579

9,667

5,934

23,099101,733

104,443

107,177

106,369

130,446

136,236

148,381

147,160

Shareholders’ Equity Ratio (%)

77.99

76.66

72.23

72.28

Debt Ratio (%)

4.74

6.31

5.88

5.56

—

—

—

—

—

—

—

—

—

—

—

—

2.8

2.7

4.0

0.7

Cash Flows from Operating Activities
Cash Flows from Investing Activities
Cash Flows from Financing Activities
Return on Equity (ROE) (%)
Return on Assets (ROA) (%)
Earnings per Share (EPS) (Yen)
Book-Value per Share (BPS) (Yen)
Cash Flow per Share (Yen)Dividend per Share (Yen)

2.2

2.1

3.0

0.5

10.53

10.46

15.96

2.64

382.19392.36402.63399.59

—

—

47.25

36.31

5.50

5.50

5.50

5.50

Gross Cash Flow = Net income + Depreciation expenses
ROE = Net income / Average shareholders’ equity x 100
ROA = Net income / Average total assets x 100
EPS = Net income / Average number of shares outstanding for the fiscal year
Book Value Per Share (BPS) = Total shareholders’ equity / Number of shares outstanding at the fiscal year-end
Cash Flow Per Share = (Net income + Depreciation expences) / Average number of shares outstanding for the fiscal year
Notes: (1) Gross cash flow and cash flow per share for 1994 and 1995 are not disclosed.
Notes: (2) Statements of cash flows not disclosed prior to 1999.

20 Teikoku Oil Co., Ltd. Investors’ Guide 2004

FINANCIAL SECTION

Millions of yen, unless otherwise indicated

1998

1999

2000

2001

2002

2003

2004

¥049,363¥055,655¥071,360¥075,767¥073,630¥078,498¥084,032

25,98030,10841,37145,03644,93147,06248,45523,38325,54729,98830,73028,69931,43635,576

2,461

2,392

3,051

2,645

4,666

4,918

4,339

14,025

13,976

15,288

16,22016,736

17,77917,703

6,896

9,177

11,648

11,864

7,296

8,739

13,533

5,948

8,421

10,855

10,136

10,744

11,158

16,523

3,249

4,490

6,068

5,704

5,233

6,796

9,276

6,887

6,798

8,224

7,263

8,520

9,953

10,160

10,136

11,28814,292

12,967

13,753

16,74919,436

17,665

19,51813,29824,56523,1494,486

20,827108,104

111,080

126,563

134,307

135,911

156,463

165,936

150,597

160,363

182,893

202,369

203,986

226,280

240,513

71.78

69.27

69.20

66.37

66.63

69.15

68.99

5.01

15.23

12.23

17.50

18.84

13.89

10.81

—

—

19,974

15,971

15,004

19,955

19,225——(27,336)(19,666)(27,166)(8,284)(20,018)

—

—

9,390

6,238

(407)

(5,914)(5,824)

3.0

4.1

5.1

4.4

3.9

4.6

5.8

2.2

2.9

3.5

3.0

2.6

3.2

4.0

12.21

16.87

20.37

18.63

17.11

22.09

30.22

406.11

417.29413.43438.79444.90512.18543.62

38.08

42.40

46.69

42.36

45.02

54.85

63.66

5.50

5.50

5.50

7.00

6.00

6.00

7.50

21 Teikoku Oil Co., Ltd. Investors’ Guide 2004

FINANCIAL SECTIONManagement Discussion and Analysis(1) Operating Environment(2) Consolidated Operating Results

During the year, a full-fledged recovery in Japan’s economy proved

1. Scope of Consolidation

elusive, as personal consumption waned and decelerating export growth
offset an increase in capital expenditures that was supported by

In terms of the scope of consolidation for the fiscal year ended
December 31, 2004, 25 subsidiaries were fully consolidated

recovering corporate profits.
In the oil industry, international oil prices continued to trend at(representing an increase of 9 consolidated subsidiaries from theextremely high levels throughout the year. There was strong oil

previous year), while equity in one affiliate was accounted for under thedemand in China and the United States, while declining producer

equity method (representing the addition of one new company and acapacity at OPEC and other producers was exacerbated by politicaldecrease of two companies due to full consolidation).

instability in oil producing nations, resulting in a sharp appreciation in

The newly consolidated subsidiaries included Egyptian Petroleum

international oil prices. As a result, oil and oil product prices

Development, Teikoku Oil (Venezuela), and Teikoku Oil (Sanvi-

continued to rise in Japan as well. On the other hand, the domestic

Guere), in which our ownership increased with the purchase of sharesoperating environment for the gas market deteriorated further. There

held by the Japan National Oil Corporation. In addition, three otherwas increased competition for sales from new entrants as well as more

subsidiaries established to promote our Venezuelan operations were

aggressive competition with electric power and other energy sources, asadded (Teikoku Oil de Sanvi-Guere, C.A., Teikoku Oil de Venezuela,

market liberalization continues to progress.

C.A. and Teikoku Oil Venezuela B.V.). In addition, three exploration

Given this environment, Teikoku Oil further expanded production

project companies (Teikoku Oil (North America) Co., Ltd., Teikoku

capacity at its main Minami Nagaoka gas field while accelerating

Oil (Con Son) Co., Ltd. and Teikoku Gas Venezuela, C.A.) were also

domestic exploration activities, with the aim of providing stable long-

newly consolidated.

term energy supply. In addition, we continued developing new

As mentioned above, Teikoku Oil (Venezuela) and Teikoku Oil

demand for natural gas while expanding and upgrading our pipeline(Sanvi-Guere), the equity in which had been reflected under the equity

network. In addition to extending the Iruma Line, acquiring themethod until the previous fiscal year, were converted to fully

Ryomo Line and starting construction on the Shizuoka Line as well as

consolidated subsidiaries, while equity in Japan Ohanet Oil & Gas Co.,

the Minamifuji Line, we initiated the extension of the Shin Tokyo Line,Ltd. was newly reflected under the equity method as full-fledged

as we continue to significantly expand our transportation capacity.

production began during the year.

At the same time, we actively pursued the development of our

2. Impact on Results from the Purchase of Stock Owned byoverseas business, centering on the strategically important
Middle/South America and North Africa regions, and thus continue toJapan National Oil Corporation

expand our portfolio of valuable overseas interests. Due to theliquidation of stock held by Japan National Oil Corporation, Teikoku

The purchase of the stock held by Japan National Oil Corporation

Oil was able to purchase the stock of four companies for overseas

in Egyptian Petroleum Development, Teikoku Oil (Venezuela),

projects which it manages (The Egyptian Petroleum Development Co.,

Teikoku Oil (Sanvi-Guere) and Teikoku Oil (D.R.Congo) had theLtd., Teikoku Oil (Sanvi-Guere) Co., Ltd., Teikoku Oil (Venezuela)

following impact on consolidated results due to the timing of theseCo., Ltd. and Teikoku Oil (D.R. Congo) Co., Ltd.). Moreover, wepurchases.

won the right to participate in a new exploration project in Vietnam,
and established Teikoku Oil (Con Son) Co., Ltd. for the project.

As stock in Egyptian Petroleum Development was purchased in
September, the purchase date of the stock for accounting purposes was

22 Teikoku Oil Co., Ltd. Investors’ Guide 2004

FINANCIAL SECTION

considered as the first day of the second half of Teikoku Oil’s fiscal

4. Net Sales

accounting year, meaning that the financial contribution of thissubsidiary was reflected in the second half of the fiscal year. As the

In terms of consolidated sales by segment, “Oil and Gas

effective accounting date for the purchase of Teikoku Oil (Venezuela),Businesses” sales grew by ¥6,415 million (+8.5% YoY) to ¥81,809

Teikoku Oil (Sanvi-Guere) and Teikoku Oil (D.R. Congo) stock was

million, while sales of “Other Businesses” declined by ¥882 million

the fiscal year-end of December 31, these transactions did not have an(-28.4%) to ¥2,222 million.

impact on the consolidated results of operations.
Earnings from investments in Teikoku Oil (Venezuela) and(A) Natural Gas

Teikoku Oil (Sanvi-Guere) , held from the past years, were instead

Natural gas sales volume increased by 61 million m3 to 942 million

reflected as equity in earnings of affiliates.

m3, while sales value grew by ¥1,215 million to ¥34,534 million. Salesby major company were as follows.

3. Financial Results

Sales volumes for Teikoku Oil Co., Ltd. grew by 81 m3 to 838
million m3, with city gas companies accounting for 65 million m3 andConsolidated net sales for the period increased by ¥5,534

direct sales to factories and other users accounting for 17 million m3.

million (+7.0% YoY) to ¥84,032 million. Operating income and net

While sales volumes were negatively affected because supply to Tokyo

income for the period increased by ¥4,794 million (+54.9%) to

Gas’s Utsunomiya branch was discontinued in October 2004, a full

¥13,533 million and by ¥2,480 million (+36.5%) to ¥9,276 million,

year of operations of the Kofu Line completed in May 2003 andrespectively.

expanded sales efforts contributed to the increase. Sales volumes for
Offshore Iwaki Petroleum Co., Ltd. declined by 21 million m3 to 95
million m3, reflecting an unusually high level of sales volumes in fiscal
2003 owing to temporary supply to thermal electric power stations.

Net Sales □ (Millions of yen)
Gross Profit Margin (%)

Net Sales by Product Category

Breakdown of
Net Sales by Product Category(Millions of yen)■

(Millions of yen)

71,36078,49875,76773,63071,36078,498

40.56

38.98

73,630

Crude Oil

Oil Products
IodineOthersOther Businesses
2001

2002

2003

2004

2.64%
2,222

Oil and Gas
Businesses

97.36%
81,809Natural Gas

40.05
LPG

2000

Others1.22%
1,021

Oil and Gas
Businesses

42.34
42.02

Other Businesses

84,032

84,03275,767

2000

2001

2002

2003

2004

23 Teikoku Oil Co., Ltd. Investors’ Guide 2004

Iodine
0.84%
704
Oil
Products
39.71%
33,372Crude
Oil
12.16%
10,219NaturalGas
41.10%
34,534

LPG
2.33%
1,957

FINANCIAL SECTION

Consolidated average unit prices declined by ¥1.17 per m3,

owing mainly to higher sales prices. LPG sales value increased by ¥53

reflecting a normal review of unit pricing and larger growth in sales tomillion to ¥1,957 million, reflecting higher sales volumes and unit

large volume users. In addition, as unit prices for Teikoku Oil are fixedprices.
Iodine sales volumes declined, but the decline in sales value by ¥64

annually in individual contract negotiations with users, there is no

million to ¥704 million was limited by a slight rise in unit sellingshort-term impact from market or exchange rate fluctuations.

prices. Sales of other services and products including oil product(B) Oilstorage, inbound and outbound shipping, transportation, instrument

Consolidated oil sales volume increased by 698,000 barrels tosales and contracted construction declined by ¥29 million to ¥1,021

2.847 million barrels, resulting in a sales value increase of ¥3,764

million.

million to ¥10,219 million. In addition to higher oil prices, the(D) Other Businesses

consolidation of Egyptian Petroleum Development from the second
half of the year added 352,000 barrels, while an increase in Teikoku

Other businesses consist of real estate rental, management andOil (D.R. Congo) tanker shipments of one tanker to a total of seventransactions, civil engineering and well drilling, and warehousing.

added another 337,000 barrels. The average unit price per barrel sold

Consolidated sales in this segment declined by ¥882 million to ¥2,222

was US$24.74 for Egyptian Petroleum Development, while unit prices

million, reflecting the absence of large overseas civil engineering

for Teikoku Oil (D.R. Congo) rose by US$7.73 to US$35.62 perprojects.

barrel.

5. Operating Expenses and Operating Income(C) Other Oil and Gas Businesses
Consolidated oil product sales volume was limited to a slight

Cost of sales increased by ¥1,393 million to ¥48,455 million,

increase, while sales value grew by ¥1,476 million to ¥33,372 million,

largely because of a ¥775 million increase from the inclusion of

Natural Gas Sales

Crude Oil Sales

Oil Product Sales(Millions of yen)

(Millions of yen)

(Millions of yen)

33,31931,169 31,582

10,21934,53430,13931,31332,281 31,896

2001

2002

33,372

28,207

6,455

6,190
5,737
5,013

2000

2001

2002

2003

2004

2000

2001

2002

2003

2004

24 Teikoku Oil Co., Ltd. Investors’ Guide 2004

2000

2003

2004

FINANCIAL SECTION

Egyptian Petroleum Development from the second half of the year and6. Other Non-Operating and Pretax Incomea ¥591 million increase in natural gas purchase costs. Exploration
expenses declined by ¥579 million to ¥4,339 million reflecting reduced

Other net non-operating income increased by ¥837 million toworkload. Domestic exploration expenses excluding exploration¥3,142 million, largely reflecting a ¥326 million increase in earnings

subsidies declined by ¥163 million to ¥3,485 million, and overseas

from companies reflected under the equity method, and a ¥199 million

exploration expenses for consolidated subsidiaries declined by ¥416

reversal in allowance for losses on overseas investments versus an increase

million to ¥854 million. In addition, because exploration investmentof ¥100 million in this allowance in the previous fiscal year. Equity inincluding geological surveys, geophysical surveys, test well drilling andearnings of affiliates included under the equity method reflected a ¥110

other costs for oil and gas exploration involves a degree of risk, thesemillion decline in the contributions from Teikoku Oil (Venezuela) andcosts are expensed in the accounting year that the work is initiated.

Teikoku Oil (Sanvi-Guere) to ¥918 million and a ¥436 million

Selling, general and administrative expenses declined by ¥76
million to ¥17,703 million. While there was a ¥413 million increase indepreciation expenses for pipelines such as the Kofu Line, Ryomo Line

contribution from newly added Japan Ohanet Oil & Gas.
As a result, income before income taxes and minority interests
increased by ¥5,632 million (51.0% YoY) to ¥16,676 million.

and others that began operating during the fiscal year, there was an

7. Corporate Taxes and Net Income for the Period

offsetting ¥443 million decline as depreciation charges werediscontinued for the existing Shin Nagaoka Line.
As a result, operating income increased by ¥4,794 million (+54.9%
YoY) to ¥13,533 million.

Corporation, inhabitants’ and enterprise taxes increased by ¥3,576
million to ¥7,360 million. This reflected the higher profits recorded by
Teikoku Oil Co., Ltd. and a ¥1,946 million increase resulting from alower allocation to the reserve for special depreciation. In addition,
there was a ¥1,707 million tax increase related to the profit increase at

Operating Income □Net Income □ (Millions of yen)
Earnings per Share (EPS)(Millions of yen)

Operating Margin

■

(%)

■

(Yen)

9,276

13,533
11,648 11,864
6,796
16.32

8,739
15.66

6,068
16.10

5,233

7,296
20.37
9.91

2000

2001

2002

18.63

11.13

2003

30.22

5,704

22.09
17.11

2004

2000

2001

25 Teikoku Oil Co., Ltd. Investors’ Guide 2004

2002

2003

2004

FINANCIAL SECTION(3) Analysis of Financial Position

Teikoku Oil (D.R. Congo).
Adjustments for income taxes and minority interests declined by¥740 million and were minus ¥581 million, mainly reflecting the lower

1. Balance Sheet Analysis

allocation to the reserve for special depreciation for Teikoku Oil Co.,Ltd.

Total consolidated assets at the end of the fiscal year increased by

As a result, net income for the period grew by ¥2,480 million(+36.5% YoY) to ¥9,276 million.

¥14,233 million to ¥240,513 million. Current assets declined by ¥4,508
million to ¥45,658 million, while tangible fixed assets increased by¥10,552 million to ¥114,220 million.

8. Capital Expenditures and Depreciation

Total liabilities increased by ¥5,663 million to ¥72,425 million, of
which current liabilities increased by ¥6,778 million to ¥27,439 million.

Capital expenditures during the fiscal year increased by ¥16,341
million to ¥20,827 million mainly due to increases in pipeline

Long-term liabilities on the other hand declined by ¥1,115 million to¥44,986 million.

investment. Capital expenditures consisted mainly of construction forDuring the year, Teikoku Oil worked to further strengthen thethe Shizuoka Line of ¥5,446 million, acquisition of the Ryomo Line offoundations of its business by constructing more new pipelines, acquiring¥5,028 million, construction to extend the Iruma Line of ¥2,624

the Ryomo Line and purchasing stock held by Japan National Oil

million, and construction for the Koshijihara Power Plant of ¥1,349

Corporation.

million.

To meet this active fund demand, we worked to improve theDepreciation expenses increased by ¥207 million for the year toefficiency of funds available within the Group, including the recovery of¥10,160 million, mainly reflecting full year depreciation expenses for¥2,000 million in dividends from Offshore Iwaki Petroleum. In addition,

the debottlenecking of the Koshijihara Plant, which was completed in

we worked to minimize new borrowings and to cope with the decrease in

the previous fiscal year.

available funds by obtaining a finance commitment line (with aCapital Expenditures

Depreciation andAmortization(Millions of yen)

(Millions of yen)
24,56523,14920,827

9,953

10,160

2003

2004

8,520

8,224
7,263
13,298

4,486

2000

2001

2002

2003

2004

2000

2001

26 Teikoku Oil Co., Ltd. Investors’ Guide 2004

2002

FINANCIAL SECTION

maximum loan value of ¥10.0 billion). As a result of these efforts, weconcentrated capital expenditures, we believe that our cash flow position

were able to avoid having to procure funds with new borrowings andwill improve as pipelines currently under construction begin operating

moreover were able to reduce long-term borrowings by ¥3,625 million toand expand our market for natural gas.

¥13,529 million.

3. Financial Policies

As described above, Teikoku was able to maintain its balance sheet
health and achieve an equity ratio of 69.0% for the period despite theAs an oil and gas development company, Teikoku Oil is working tosignificant increase in fund demand resulting from large-scale
investments and the purchase of stock from Japan National Oil

expand and reproduce its domestic and overseas reserves by establishing

Corporation.

and expanding the infrastructure to efficiently produce and market thereserves it acquires. We believe the salient characteristic of our business

2. Cash Flow Analysis

is the length of time it takes from the initiation to completion ofprojects, while we foresee growing competition in the future between

While net cash flow from operating activities was a positive ¥19,225

energy domains. In order to increase competitiveness in the businessmillion for the period, the purchase of fixed assets resulted in a net cash

environs in which we operate, we believe it is important to build a solid

outflow from investing activities of ¥20,108 million, resulting in a freefinancial structure and to maintain our financial health.

cash flow deficit of ¥793 million. In addition, cash dividend payments

In addition, in order to ensure the future ability to maintain ourand repayment of long-term borrowings resulted in a net cash outflow

exploration activities, we continue to add to our reserves for explorationfrom financing activities of ¥5,824 million. As a result, consolidated

on the one hand, while also allocating funds to our allowance for losses

cash and cash equivalents at the end of the period decreased by ¥6,555

on overseas investments, accruals for the estimated cost of abandoned

million to ¥22,234 million as compared with the previous year. As

wells and other reserves in order to be well prepared for unavoidable

described above, while this net cash decrease was the result of

future expenses.

Gross Cash Flow

ROE (%)ROA (%)(Millions of yen)

19,436

5.8
5.1

16,7494.4

14,292
12,967

4.6

13,753

4.0

3.9

3.5
3.0
3.2
2.6

2000

2001

2002

2003

2004

2000

2001

2002

2003

2004

Note: Gross Cash Flow = Net income +Depreciation and amortization

27 Teikoku Oil Co., Ltd. Investors’ Guide 2004

2000

2001

2002

2003

2004

FINANCIAL SECTION(4) Dividend Policy

environment that result in increased investment and operating costs,
thereby worsening profitability and possibly having a negative impact
on the Group’s financial performance.

The basis of Teikoku Oil’s philosophy is to provide stabledividends to shareholders. As we were able to achieve good financial

In order to mitigate these risks, the Teikoku Oil Group seeks toperformance despite a severe operating environment, we have declared

manage investments in exploration activities within levels that do not

an annual dividend of ¥7.50 per share (¥3.0 per share in the first halfpose a serious risk to its financial health, while at the same timeand ¥4.50 per share in the second half), which represents a dividend

endeavoring to improve the Group’s technological and projectincrease of ¥1.50 over the previous year.

evaluation capabilities and working to create an optimal businessportfolio composed of different types of businesses.

(5) Business and Other Risks
2. Country Risk
1. Characteristic Risks of the Business
The Group’s overseas oil and natural gas development activities
are often in regions with a high degree of country risk, and it is

The oil and natural gas exploration activities of the Teikoku OilGroup normally involve a significant amount of investment and longpossible that economic difficulties or political, legal and tax system

periods of time between project start and recovery of capital invested.

changes in countries in which the Group operates could impact its

Moreover, exploration activities involve risk as there is no guarantee theoverseas operations.
Currently, the Group’s strategic regional focus for overseas

resources found will be of sufficient scale to be commerciallydeveloped. In addition, the probability of discovery is low. After

operations is Middle/South America and North Africa. By

commercialization, there is the risk that fluctuations in crude oil prices

accumulating understanding, knowledge and experience of theand exchange rates among others could lead to changes in the operating

political, economic and social conditions in these regions, we are

Total Assets □Shareholders’ Equity ■Interest-Bearing Debt □Dividend per Share □ (Yen)Dividend Payout Ratio (%)(Millions of yen)

Debt Ratio(Millions of yen)

Shareholders’ Equity Ratio

■

■

■

(%)

(%)

240,5137.50

226,280
202,369 203,986

23,509

182,893

69.20

6.00

21,735
156,463

126,563

7.00

25,603

165,93617.50

134,307 135,911
66.37

66.63

18.84

6.00

5.50
37.57

17,93535.08

15,473
69.15

68.99

27.01

13.89

12.23

27.17

24.82

10.81

2000

2001

2002

2003

2004

2000

2001

2002

2003

2004

28 Teikoku Oil Co., Ltd. Investors’ Guide 2004

2000

2001

2002

2003

2004

FINANCIAL SECTION

working to strengthen our ability to analyze and respond toother “gas pipeline operators” who remain obligated to provide

potential risks. In addition, we are working to minimize business

contracted supply. As a result, we expect more price competition as wellrisk by combining different types of businesses and developing

as competition for new and existing supply customers. Such changes inpartnerships with companies having a well-established track record

the market environment could have an impact on the Group’s financial

in these regions.

performance.
In response, Teikoku Oil is working to strengthen its price

3. Oil Price, Exchange Rate and LNG Price Fluctuations

competitiveness and to enhance its market advantage by efficiently
utilizing abundant domestic natural gas reserves.

As the Group sells crude oil and oil products in Japan and inoverseas markets, fluctuations in crude oil prices and exchange rates can

6. Natural Disasters and Accidents

have an impact on our business. In natural gas sales, price fluctuations
in energy sources that compete with LNG can exert downward pressure

The Group’s excavation, oil and natural gas development,on selling prices and therefore have an impact on the Group’s financial

production and transportation activities incur operational accident andperformance.

natural disaster risks that are inherent to the nature of the mining

On the other hand, as the majority of the natural gas sold in thebusiness. In addition, the occurrence of a large natural disaster or an

Japanese market is sold under contracts with yen-denominated selling

accident would not only cause direct losses, but also possibly result in

prices that are fixed annually, there is minimal impact from short-termcompensation being paid to third parties and administrative penalties

market fluctuations.

that could damage the Company’s reputation and cause intangible
losses.

4. Natural Gas Demand Fluctuations

In response, the Teikoku Oil Group is working to mitigate suchrisk by strengthening everyday safety and compliance, establishing crisis

Demand for natural gas, which is a major product for the Group,
can fluctuate significantly and as a result have an impact on the

management procedures and maintaining sufficient amounts ofproperty and casualty insurance.

Group’s financial performance. Fluctuations in natural gas demandcaused by unusually warm or cold weather conditions could have an
impact on temperature and humidity-sensitive household demand. In
addition, recently growing industrial demand could fluctuatesignificantly as corporate restructuring and other factors cause large
users to curtail consumption.

5. Changes in the Market Environment Caused
by Deregulation
Competition in the domestic natural gas business is intensifying
with the liberalization of energy markets and the entry of newcompetitors crossing traditional business domains in electric power,gas, and oil. In addition, the ratification of the amended Gas Business
Law in April 2004 has intensified competition for Teikoku Oil and

29 Teikoku Oil Co., Ltd. Investors’ Guide 2004

FINANCIAL SECTION

Consolidated Balance Sheets
Teikoku Oil Co., Ltd. and Consolidated Subsidiaries
Fiscal years ended December 31, 2004 and 2003
Thousands of
U.S. dollars(Note 3)

Millions of yen

2004

2003

2004

¥22,234¥28,789$213,788

AssetsCurrent assets:
Cash and cash equivalents
Time deposits

1,681

581

16,163Marketable securities (Note 4)

1,651

4,388

15,875

16

16

154

12,377

8,924

119,010

(10)

(21)

(96)

12,383

8,919

119,067

Inventories (Note 5)

5,514

4,701

53,019Other current assets

2,193

2,785

21,08745,65850,166

439,019

68,381

67,930657,510Notes and accounts receivable:
Unconsolidated subsidiaries and affiliates
Trade
Less: Allowance for doubtful receivables

Total current assets
Investments and long-term receivables:
Investments in securities (Notes 4, 6 and 7)
Less: Allowance for losses on overseas investments (Note 6)
Oil and gas investments
Other long-term receivables
Total investments and long-term receivables(2,253)(5,075)(21,663)

66,12762,855635,837

2,582—

24,827

712

208

6,846

69,422

63,064

667,519

Property, plant and equipment (Note 7):
8,644

8,099

83,115

Buildings and structures

132,709126,332

1,276,048

Wells

58,02956,916557,971

Machinery and equipment

89,067

87,770856,413Land

11,743

1,339

112,913300,194

280,457

2,886,481

Less: Accumulated depreciation(185,974)(176,789)(1,788,212)

Property, plant and equipment, net

114,220

103,668

1,098,269

Construction in progress

Other assets

11,212

9,380

107,808

Total assets¥240,513¥226,280$2,312,625

30 Teikoku Oil Co., Ltd. Annual Report 2004

FINANCIAL SECTION

Teikoku Oil Co., Ltd. and Consolidated Subsidiaries
Fiscal years ended December 31, 2004 and 2003
Thousands of
U.S. dollars(Note 3)

Millions of yen

2004

2003

2004

Liabilities and shareholders’ equity
Current liabilities:
Short-term bank loans (Note 7)

¥575

¥560

$5,529Current portion of long-term debt (Note 7)

3,831

4,021

36,837

Notes and accounts payable:
65

129

625

Trade

2,420

2,250

23,269Other

14,211

8,483

136,644

16,698

10,862

160,558

Accrued income taxes (Note 8)

2,834

1,175

27,250Accrued expenses

1,781

1,810

17,125

Unconsolidated subsidiaries and affiliates

1,718

2,230

16,51927,43920,661

263,837

Long-term debt (Note 7)

13,52917,154130,087

Accrued retirement benefits for employees (Note 9)

6,466

6,552

62,173

Accrued estimated cost of abandonment of wells

9,611

7,942

92,413

Deferred tax liabilities (Note 8)

12,611

11,856

121,260

Other long-term liabilities

2,766

2,594

26,596

Total long-term liabilities

44,986

46,101

432,558

Minority interests in consolidated subsidiaries

2,150

3,053

20,673

Other current liabilities
Total current liabilities
Long-term liabilities:

Shareholders’ equity (Notes 10 and 17):
Common stock:
Authorized – 800,000,000 shares
19,57919,579188,260

Capital surplus

11,225

11,222

107,933

Retained earnings

114,999

107,735

1,105,760

Unrealized holding gain on securities, net of deferred income taxes

20,533

18,205

197,433

78

60

750

166,415

156,804

1,600,144

(479)

(340)

(4,606)

165,936

156,463

1,595,538¥240,513¥226,280$2,312,625

Issued– 306,130,000 shares

Translation adjustments
Less: Treasury stock, at cost; 978,622 shares in 2004 and 743,270 shares in 2003
Total shareholders’ equity
Contingent liabilities (Note 14)
Total liabilities and shareholders’ equity
See notes to consolidated financial statements.

31 Teikoku Oil Co., Ltd. Annual Report 2004

FINANCIAL SECTION

Consolidated Statements of Income
Teikoku Oil Co., Ltd. and Consolidated Subsidiaries
Fiscal years ended December 31, 2004 and 2003
Thousands of
U.S. dollars(Note 3)

Millions of yen

2004

2003

2004

Net sales¥84,032¥78,498$808,000Cost of sales

48,45547,062465,913Gross profit

35,576

31,436

342,077

Exploration expenses

4,339

4,918

41,721

Selling, general and administrative expenses (Note 12)

17,703

17,779170,221

Operating income

13,533

8,739

130,125

Other income (expenses):
Interest and dividend income

764

649

7,346

Equity in earnings of affiliates

1,354

1,028

13,019Interest expense

(368)

(443)

(3,538)

—

(324)

—

1,392

1,395

13,385

3,142

2,305

30,212

16,676

11,044160,346

Current

7,360

3,784

70,769Deferred

(581)

159

(5,587)

6,778

3,943

65,173

Income before minority interests

9,897

7,100

95,163

Minority interests in earnings of consolidated subsidiaries

(621)

(303)

(5,971)¥9,276¥6,796$89,192

Loss on devaluation of real estate for sale
Other, net
Income before income taxes and minority interests
Income taxes (Note 8):

Net income

U.S. dollars(Note 3)

Yen

2004

2003

2004

Net income¥30.22¥22.09$0.29

Cash dividends

7.5

6.0

0.07

Amounts per share:

See notes to consolidated financial statements.

32 Teikoku Oil Co., Ltd. Annual Report 2004

FINANCIAL SECTION

Consolidated Statements of Shareholders’ Equity
Teikoku Oil Co., Ltd. and Consolidated Subsidiaries
Fiscal years ended December 31, 2004 and 2003
Thousands of
U.S. dollars(Note 3)

Millions of yen

2004

2003

2004

Beginning of year

¥19,579¥19,579$188,260

End of year

¥19,579¥19,579$188,260¥11,222¥11,222$107,9042—

19¥11,225¥11,222$107,933¥107,735¥102,900$1,035,913

Common stock

Capital surplus
Beginning of year
Profit on sales of treasury stock
End of year
Retained earnings
Beginning of year
Net income for the year

9,276

6,796

89,192

Cash dividends paid

(1,832)(1,909)(17,615)

Bonuses to directors and statutory auditors

(50)

(50)

(481)

Loss on sales of treasury stock

—

(2)

—

Adjustment for inclusion in consolidation or equity method of accounting
End of year

(130)

—

(1,250)¥114,999¥107,735$1,105,760¥18,205¥2,629$175,048

Unrealized holding gain on securities
Beginning of year

2,327

15,576

22,375¥20,533¥18,205$197,433

Beginning of year

¥60¥(125)$577

Net change during the year

17

186

163

End of year

¥78

¥60

$750

Beginning of year¥(340)¥(293)$(3,269)

Net change during the year

(138)

(46)

(1,327)

End of year¥(479)¥(340)$(4,606)

Net change during the year
End of year
Translation adjustments

Treasury stock

See notes to consolidated financial statements.

33 Teikoku Oil Co., Ltd. Annual Report 2004

FINANCIAL SECTION

Consolidated Statements of Cash Flows
Teikoku Oil Co., Ltd. and Consolidated Subsidiaries
Fiscal years ended December 31, 2004 and 2003
Thousands of
U.S. dollars(Note 3)

Millions of yen

2004

2003

2004

Operating activities
Income before income taxes and minority interests
Depreciation and amortization
Loss on devaluation of investments in securities
Loss on devaluation of real estate for sale
(Decrease) increase in accrued retirement benefits
Increase in accrued estimated cost of abandonment of wells(Decrease) increase in allowance for losses on overseas investments
Other provisionInterest and dividend income
Interest expense
Equity in earnings of affiliates
Loss (gain) on sales of investments in securities
Gain on sales of property, plants and equipment
Increase in notes and accounts receivable(Increase) decrease in inventories
Decrease (increase) in other current assets
Increase (decrease) in notes and accounts payable
Increase consumption taxes payable
Increase (decrease) in other current liabilities
Bonuses to directors and statutory auditors
Recovery of oil and gas investments
Other, net
SubtotalInterest and dividend received
Interest paid
Income taxes paid
Net cash provided by operating activities¥16,676
10,160
124
—
(183)
246
(199)
150
(764)
368
(1,354)29(138)(1,620)
(78)
1,004
82
157
430
(50)
454
(814)
24,682820(373)(5,903)
19,225¥11,044
9,953
0
324
59
87
100
206
(649)
443
(1,028)
(45)
(201)
(352)
3,774
(522)
(148)
384
(1,263)(50)—
649
22,767657(453)(3,016)
19,955$160,346
97,692
1,192—(1,760)2,365(1,913)
1,442(7,346)
3,538(13,019)279(1,327)(15,577)
(750)
9,654
788
1,510
4,135
(481)
4,365
(7,827)
237,327
7,885(3,587)(56,760)
184,856

Investing activities(Increase) decrease in time deposits
Decrease (increase) in marketable securities
Decrease in short-term receivables
Additions to property, plant and equipment
Proceeds from sales of property, plant and equipment
Additions to intangible fixed assets
Increase in investments in securities(Increase) decrease in other long-term receivables
Acquisition of subsidiaries stock resulting
Acquisition of subsidiaries stock resulting in changes in scope of consolidation (Note 16)
Payments of oil and gas investments
Other, net
Net cash used in investing activities(2,091)2,737
0(15,964)156(136)(2,011)(474)(2,421)
618
(56)
(375)
(20,018)

1,020(1,708)0(5,765)272(53)(2,121)50———
21(8,284)(20,106)
26,3170(153,500)
1,500(1,308)(19,337)(4,558)(23,279)
5,942
(538)
(3,606)(192,481)

Financing activities
Increase (decrease) in short-term bank loans
Proceeds from long-term debt
Repayment of long-term debt
Cash dividends paid
Other, net
Net cash provided by financing activities
Effect of exchange rate changes on cash
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Increase arising from inclusion of subsidiaries in consolidation
Cash and cash equivalents at end of year

15
260
(4,050)(1,912)(136)(5,824)16(6,601)
28,78946¥22,234(5)
200(4,061)(1,999)(48)(5,914)
11
5,768
23,020—¥28,789144
2,500(38,942)(18,385)(1,308)(56,000)
154(63,471)
276,817442$213,788

See notes to consolidated financial statements.
34 Teikoku Oil Co., Ltd. Annual Report 2004

FINANCIAL SECTION

Notes to Consolidated Financial Statements
Teikoku Oil Co., Ltd. and Consolidated Subsidiaries
Fiscal years ended December 31, 2004 and 2003

1. Basis of Preparation
The accompanying consolidated financial statements of Teikoku OilCo., Ltd. (the “Company”) and consolidated subsidiaries are preparedon the basis of accounting principles generally accepted in Japan, which
are different in certain respects as to the application and disclosure
requirements of International Financial Reporting Standards, and its
consolidated foreign subsidiaries, in conformity with those of theircountries of domicile, and are compiled from the consolidated financial
statements prepared by the Company as required by the Securities andExchange Law of Japan.
As permitted by the regulations under the Securities and Exchange
Law of Japan, amounts less than one million yen have been omitted.
As a result, the totals shown in the accompanying consolidated financial
statements (both in yen and in U.S. dollars) do not necessarily agreewith the sums of the individual amounts.

2. Significant Accounting Policies(a) Principles of consolidation and accounting for investments
in unconsolidated subsidiaries and affiliates

balance sheet date.

The accompanying consolidated financial statements include theaccounts of the Company and significant companies controlled directly
or indirectly by the Company. Significant companies over which theCompany exercises substantial influence in terms of their operating andfinancial policies have been included in the consolidated financial
statements on an equity basis. All significant intercompany balances
and transactions have been eliminated in consolidation.

(c) Cash equivalents

The excess cost over underlying net equity at fair value ofinvestments in consolidated subsidiaries and in companies accounted
for by the equity method is being amortized by the straight-line
method over a period no more than 20 years.
Investments in unconsolidated subsidiaries and affiliates notaccounted for by the equity method are stated at cost or less. Where
there has been permanent impairment in the value of such investments,
the Company has written down its investments to reflect such
impairment.

(b) Foreign currency translation
Monetary assets and liabilities denominated in foreign currencies aretranslated into yen at the exchange rates prevailing at the balance sheet
dates.
All revenues and expenses associated with foreign currencies aretranslated at the rates of exchange prevailing when such transactions
were made. The resulting exchange gains and losses are credited or
charged to income.
The balance sheet accounts of the foreign consolidated subsidiaries,
except for shareholders’ equity, the components of which are translated
at the historical exchange rates, are translated into yen at the rate ofexchange in effect at the balance sheet date. Revenue and expense
accounts are also translated at the rate of exchange in effect at the

The Company and its consolidated subsidiaries consider all highly
liquid investments with a maturity of three months or less whenpurchased to be cash equivalents.

(d) Securities
In general, securities are classified into three categories: trading,held-to-maturity or other securities. Securities held by the Company
and its consolidated subsidiaries are all classified as other securities.
Other securities with a determinable market value are stated at fairvalue with any changes in unrealized holding gain or loss, net of theapplicable income taxes, included directly in shareholders’ equity.
Other securities without a determinable market value are stated at cost.
Cost of securities sold is determined by the moving average method.

(e) Inventories
Finished products are mainly stated at the lower of cost or market, cost
being determined by the moving average method. Other inventories
are stated at cost determined by the moving average method except for
construction projects in progress which are determined by the specificidentification method.

(f) Accounting procedure for oil and gas investments
Expenditures relating to exploration and development under certain
agreements are capitalized as assets and recovered in accordance withthe terms of the respective agreements.

(g) Property, plant and equipment and depreciation
Property, plant and equipment are stated at cost.
Depreciation is mainly computed by the straight-line method overthe estimated useful lives of the respective assets. Significant renewals
and improvements are capitalized at cost. Maintenance and repairs arecharged to income.

35 Teikoku Oil Co., Ltd. Annual Report 2004

FINANCIAL SECTION(h) Leases
Noncancelable leases are primarily accounted for as operating leases(whether such leases are classified as operating or finance leases) exceptthat lease agreements which stipulate the transfer of ownership of theleased assets to the lessee are accounted for as finance leases.

(i) Retirement benefits
Accrued retirement benefits for employees are provided principally at
the amount calculated based on the retirement benefit obligation andthe fair value of the pension plan assets as of balance sheet dates, asadjusted for unrecognized actuarial gain or loss. The retirement benefit
obligation is attributed to each period by the straight-line method overthe estimated years of service of the eligible employees. Actuarial gain
and loss are amortized in the year following the year in which the gainor loss is recognized by the straight-line method over a period of 10
years which is shorter than the average remaining years of service of theemployees.
In addition, directors and statutory auditors of the Company andcertain consolidated subsidiaries are customarily entitled to lump-sum
payments under their respective unfunded retirement allowances plans.
The provision for retirement benefits for these officers has been made at
an estimated amount.

(j) Income taxes
Deferred tax assets and liabilities are determined based on the
differences between financial reporting and the tax bases of the assets

and liabilities, and are measured using the enacted tax rates and laws
which will be in effect when the differences are expected to reverse.

(k) Accrued estimated cost of abandonment of wells
The accrued estimated cost of abandonment of wells is provided tocover the costs to be incurred upon the abandonment of wells at an
estimated amount allocated over a scheduled period based on the
Company’s or consolidated subsidiaries’ plans for the abandonment ofsuch wells.

(l) Allowance for losses on overseas investments
Allowance for losses on overseas investments is provided for possible
losses arising from investments in the development of natural resources
at an amount determined by the Company with reference to the net
worth of the investees and certain other factors.

(m) Research and development expenses
Research and development expenses are charged to income whenincurred.

(n) Appropriation of retained earnings
Under the Commercial Code of Japan, the appropriation of retained
earnings with respect to a given financial period is made by resolutionof the shareholders at a general meeting held subsequent to the close ofsuch financial period. The accounts for that period do not, therefore,
reflect such appropriation. (See Note 17.)

3. U.S. Dollar Amounts
The translation of yen amounts into U.S. dollar amounts is included
solely for convenience and has been made, as a matter of arithmeticalcomputation only, at the rate of ¥104 = U.S.$1.00, the approximate
rate of exchange on December 31, 2004. The translation should not be

construed as a representation that yen have been, could have been, or
could in the future be, converted into U.S. dollars at that or any otherrate.

4. Securities(a) Information regarding marketable securities classified as other securities as of December 31, 2004 and 2003 is as follows:

36 Teikoku Oil Co., Ltd. Annual Report 2004

FINANCIAL SECTION

Millions of yen

Thousands of U.S. dollars

December 31, 2004

December 31, 2004

Carrying value

Unrealized gain
(loss)

Acquisition
cost

Carrying value

Unrealized gain
(loss)¥21,062¥53,701¥32,638$202,519$516,356$313,827

Government bonds

1,049

1,065

15

10,087

10,240144

Corporate bonds

300

301

0

2,885

2,894

0

Other debt securities

149

149

0

1,433

1,433

0

Securities whose carrying value exceeds theiracquisition cost:
Stock

Acquisition
cost

Bonds:

Others

—

—

—

—

—

—

22,56355,21832,654

216,952

530,942

313,981

1,014

683

(331)

9,750

6,567

(3,183)Government bonds

30

30

(0)

288

288

(0)

Corporate bonds

415

415

(0)

3,990

3,990

(0)

1,599

1,599

(0)

15,375

15,375

(0)

—

—

—

—

—

—

Subtotal
Securities whose acquisition cost exceeds theircarrying value:
Stock
Bonds:

Other debt securities
OthersSubtotal

3,061

2,729

(332)

29,433

26,240(3,192)

Total¥25,624¥57,947¥32,322$246,385$557,183$310,788

Millions of yen

December 31, 2003

Securities whose carrying value exceeds theiracquisition cost:
Stock

Acquisition
cost

Carrying value

Unrealized gain
(loss)¥20,165¥49,152¥28,986

Bonds:
Government bonds

—

—

—

Corporate bonds

742

742

0

Other debt securities

149

149

0

Others

700

700

0

21,75850,74528,987

997

656

(341)

Government bonds

1,273

1,143

(129)

Corporate bonds

2,400

2,397

(2)

Other debt securities

3,700

3,699

(0)

—

—

—

Subtotal
Securities whose acquisition cost exceeds theircarrying value:
Stock
Bonds:

OthersSubtotal

8,371

7,897

(474)

Total

¥30,129¥58,642¥28,51237 Teikoku Oil Co., Ltd. Annual Report 2004

FINANCIAL SECTION(b) Information regarding sales of securities classified as other securities for the years ended December 31, 2004 and 2003 is as follows:
Millions of yen

Thousands of U.S. dollars

2004

2003

2004

¥84

¥302

$808

Gain on sales

0

45

0

Loss on sales

(30)

—

(288)

Proceeds from sales(c) The redemption schedule for securities with maturity dates classified as other securities is summarized as follows:
Millions of yen

Due after five years¥314

December 31, 2004
Due after one year throughfive years¥781

Due in one year or lessGovernment bonds
Corporate bonds

¥—

616

100

—

Other debt securities

1,749

—

—

Total

¥2,681¥881¥—

Thousands of U.S. dollars

Government bonds$3,019December 31, 2004
Due after one year throughfive years$7,510

Corporate bonds

5,923

962

Due in one year or lessDue after five years—$—

Other debt securities

16,817

—

—

Total

$25,779$8,471$—

5. Inventories
Inventories at December 31, 2004 and 2003 were composed of the following:
Millions of yen

Merchandise and finished products
Work in progress
Real estate for sale
Raw materials and supplies

Thousands of U.S. dollars

2004

2003

2004

¥2,553¥2,672$24,548

451

330

4,337

263

244

2,529

2,246

1,453

21,596¥5,514¥4,701$53,019

38 Teikoku Oil Co., Ltd. Annual Report 2004

FINANCIAL SECTION

6. Investments in Securities and Allowance for Losses on Overseas Investments
Investments in securities and allowance for losses on overseas investments at December 31, 2004 and 2003 consisted of the following:
Millions of yen

Unconsolidated subsidiaries and affiliates
Less: Allowance for losses on overseas investments
Other securities:
Listed stocks
Marketable debt securities
Unlisted stocks and otherLess: Allowance for losses on overseas investments

Thousands of U.S. dollars

2004¥3,374(2,253)
1,120

2003¥6,581(1,970)4,611

2004$32,442(21,663)
10,76954,384
1,196
9,425
—
65,006¥66,127

49,808
1,244
10,296(3,105)58,244¥62,855

522,923
11,50090,625—625,058$635,837

7. Short-Term Loans and Long-Term Debt
Short-term bank loans are principally unsecured and generally represent notes. The weighted average interest rates for the years ended December
31, 2004 and 2003 were approximately 1.48% and 1.47%, respectively.
Long-term debt at December 31, 2004 and 2003 consisted of the following:
Millions of yen

Loans from banks and others, at interest rates
ranging from 0.84% to 5.9%, due through 2016:
SecuredUnsecured
Less: Current portion

Thousands of U.S. dollars

2004

2003

2004

¥9,874
7,485
17,360(3,831)¥13,529¥11,485
9,690
21,176(4,021)¥17,154$94,942
71,971
166,923(36,837)$130,087

Assets pledged as collateral for long-term debt and other liabilities at December 31, 2004 and 2003 were as follows:
Millions of yen

Investments in securities
Property, plant and equipment – at net book value

Thousands of U.S. dollars

2004¥10,713
8,321¥19,034

2003¥11,081
8,935¥20,017Aggregate annual maturities of long-term debt subsequent to December 31, 2004 are as follows:Year ending December 31,
2005
2006
2007
2008
2009 and thereafter

Millions of yen

Thousands of U.S. dollars¥3,831
3,573
3,207
2,214
4,533
¥17,360$36,837
34,35630,837
21,28843,587$166,923

39 Teikoku Oil Co., Ltd. Annual Report 2004

2004
$103,010
80,010$183,019

FINANCIAL SECTION

8. Income Taxes
Income taxes applicable to the Company and its domestic consolidated subsidiaries comprise corporation, enterprise and inhabitants’ taxes which, inthe aggregate, resulted in a statutory tax rate of approximately 36.1% for 2004 and 2003.
The effective tax rates reflected in the consolidated statements of income for the years ended December 31, 2004 and 2003 differ from thestatutory tax rate for the following reasons:Statutory tax rate

2004

2003

36.1%

36.1%

Effect of:Foreign tax

26.6

26.1

Exploration cost deducted for income tax purposes(9.4)(15.2)

Expenses not deductible for income tax purposes

0.6

1.0

Dividend income deductible for income tax purposes

(0.6)

(4.2)

Foreign tax credit(12.2)(10.6)

Equity in earnings of affiliates

(2.9)

(3.4)

Changes in valuation allowance

2.3

3.6

Other, net

0.1

2.3

Effective tax rate

40.6%

35.7%

The significant components of deferred tax assets and liabilities at December 31, 2004 and 2003 were as follows:
Millions of yen

Deferred tax assets:
Allowance for losses on overseas investments
Depreciation
Foreign tax credit carryforward
Accrued severance benefits
Loss on devaluation of securities
Accrued estimated cost of abandonment of wells
Property, plant and equipment
Net operating loss carryforward
Advanced depreciation of fixed assets
Foreign exchange loss
Loss on revaluation of exploration, investment and development
Other
Subtotal
Valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Reserve for exploration
Reserve for special depreciation
Reserve for advanced depreciation of fixed assets
Reserve for losses on overseas investments
Unrealized holding gains on securities
Other
Total deferred tax liabilities
Net deferred tax liabilities

Thousands of U.S. dollars

2004

2003

2004

¥3,628
3,069
4,620
2,519
776
974
606
498
394
1,032
559
1,347
20,027(12,715)
7,311¥3,489
2,608
3,238
2,370
754
855
606
343
425
—
—
1,294
15,986(9,660)6,326$34,885
29,51044,42324,221
7,462
9,365
5,827
4,788
3,788
9,923
5,375
12,952
192,567(122,260)
70,298

4,358
1,257
414
287
11,788100
18,207¥10,896

4,158
1,401
338
287
10,465158
16,809¥10,482

41,90412,087
3,981
2,760
113,346962
175,067$104,769

40 Teikoku Oil Co., Ltd. Annual Report 2004

FINANCIAL SECTION

9. Retirement Benefit Plans
The Company, its domestic subsidiaries and certain foreign subsidiaries have defined benefit plans, i.e., tax-qualified pension plans and lump-sum
payment plans, covering substantially all employees who are entitled to lump-sum or annuity payments, the amounts of which are determined byreference to their basic rates of pay, length of service, and the conditions under which termination occurs.
The following table sets forth the funded and accrued status of the plans, and the amounts recognized in the consolidated balance sheet as ofDecember 31, 2004 and 2003 for the Company’s and the subsidiaries’ defined benefit plans:Millions of yen

Thousands of U.S. dollars

December 31,

December 31,

2004

2003

2004

¥(13,259)¥(13,615)$(127,490)

Plan assets at fair value

7,216

7,320

69,385

Unfunded retirement benefit obligation(6,042)(6,294)(58,096)

(423)

(257)

(4,067)¥(6,466)¥(6,552)$(62,173)

Retirement benefit obligation

Unrecognized actuarial gain or loss
Accrued retirement benefits for employees

The components of retirement benefit expenses for the years ended December 31, 2004 and 2003 are outlined as follows:
Millions of yen

Thousands of U.S. dollars

Year ended December 31,

Year ended December 31,

2004

2003

2004

Service cost

¥576

¥641

$5,538Interest cost

253

262

2,433

Expected return on plan assets

(35)

(70)

(337)

Amortization of actuarial gain or loss
Total

(21)

27

(202)

¥773

¥860

$7,433

The assumptions used in accounting for the above plans were as follows:
December 31,
2004

2003

Discount rates

2.0%

2.0%

Expected return on plan assets

0.5%

1.0%

41 Teikoku Oil Co., Ltd. Annual Report 2004

FINANCIAL SECTION

10. Capital Surplus and Retained Earnings
In accordance with the Commercial Code of Japan, the Company has
provided a legal reserve which is included in retained earnings. This
reserve amounted to ¥3,401 million ($32,702 thousand) as ofDecember 31, 2004 and 2003. The Code provides that neither capitalsurplus nor the legal reserve is, in principle, available for dividends, butboth may be used to reduce or eliminate a deficit by resolution of theshareholders or may be transferred to common stock by resolution of
the Board of Directors. The Code, however, does provide that if thetotal amount of capital surplus and the legal reserve exceeds 25% of theamount of common stock, the excess may be distributed to theshareholders either as a return of capital or as dividends subject to theapproval of the shareholders.

11. Depreciation and Amortization
Depreciation and amortization of property, plant and equipment andother assets charged to income for the years ended December 31, 2004

and 2003 amounted to ¥10,160 million ($97,692 thousand) and¥9,953 million, respectively.

12. Research and Development Expenses
Research and development expenses included in selling, general andadministrative expenses for the years ended December 31, 2004 and2003 were ¥96 million ($923 thousand) and ¥39 million, respectively.

42 Teikoku Oil Co., Ltd. Annual Report 2004

FINANCIAL SECTION

13. Leases
The following pro forma amounts represent the acquisition costs,
accumulated depreciation and net book value of leased property as ofDecember 31, 2004 and 2003 which would have been reflected in the

consolidated balance sheets if finance lease accounting had been applied
to the finance lease transactions currently accounted for as operatingleases:Millions of yen

Thousands of U.S. dollars

2004

2003

2004

¥768

¥773

$7,385

—

23

—

¥768

¥796

$7,385¥350¥310$3,365

—

20

—

¥350

¥331

$3,365¥418¥463$4,019Acquisition costs:
Machinery and equipment
Other
Accumulated depreciation:
Machinery and equipment
Other
Net book value:
Machinery and equipment
Other

—

2

—

¥418

¥465

$4,019Lease payments relating to finance lease transactions accounted for
as operating leases amounted to ¥144 million ($1,385 thousand) and¥148 million, which were equal to the depreciation expense of theleased assets computed by the straight-line method over the lease terms,
for the years ended December 31, 2004 and 2003, respectively.
Year ending December 31,
2005
2006 and thereafter

Future minimum lease payments (including the interest portion
thereon) subsequent to December 31, 2004 for finance leasetransactions accounted for as operating leases are summarized asfollows:

Millions of yen

Thousands of U.S. dollars¥129$1,240

289

2,779

¥418

$4,01914. Contingent Liabilities
At December 31, 2004, the Company and its consolidated subsidiaries had the following contingent liabilities:

As guarantor of indebtedness of others

Millions of yen

Thousands of U.S. dollars¥8,364$80,42343 Teikoku Oil Co., Ltd. Annual Report 2004

FINANCIAL SECTION

15. Segment Information(a) Business segments

and management, drilling wells and warehousing.

The Company and its consolidated subsidiaries are primarily engaged
in the oil and gas business. The oil and gas segment comprises naturalgas, liquid petroleum gas, crude oil, petroleum products, iodine,
petrochemical refining, and the transportation of natural gas andpetroleum products; and the other segment comprises real estate leasing

The business segment information for the Company and its
consolidated subsidiaries for the years ended December 31, 2004 and2003 is outlined as follows:

Millions of yen

Oil and Gas

Other

Total

Eliminations andotherConsolidated¥81,809¥2,222¥84,032¥—¥84,032

2004:
I. Sales and operating income
Sales to third parties
Intergroup sales and transfers

23

602

626

(626)

—

81,833

2,825

84,658(626)

84,032

Operating expenses

68,622

2,588

71,211(712)

70,498Operating income¥13,211¥236¥13,447¥85¥13,533¥234,784¥6,688¥241,473¥(960)¥240,513

Depreciation and amortization

10,008181

10,189(29)

10,160Capital expenditures

20,81423

20,837(10)

20,827

Total sales

II.Assets, depreciation and capital expenditures
Total assets(a) Business segments (continued)
Millions of yen

Oil and Gas

Other

Total

Eliminations andotherConsolidated¥75,394¥3,104¥78,498¥—¥78,498

2003:
I. Sales and operating income
Sales to third parties

16

458

474

(474)

—

Total sales

Intergroup sales and transfers

75,411

3,562

78,973(474)

78,498Operating expenses

66,6603,674

70,334(575)

69,759Operating income (loss)¥8,751¥(112)¥8,638¥100¥8,739¥220,524¥6,895¥227,419¥(1,139)¥226,280

Depreciation and amortization

9,800

185

9,985

(31)

9,953

Capital expenditures

3,992

494

4,486

—

4,486

II.Assets, depreciation and capital expenditures
Total assets

44 Teikoku Oil Co., Ltd. Annual Report 2004

FINANCIAL SECTION

Teikoku Oil Co., Ltd. and Consolidated Subsidiaries
Fiscal years ended December 31, 2004 and 2003

Thousands of U.S. dollars

Eliminations andotherConsolidated$808,000$—$808,000

6,019(6,019)—27,163814,019(6,019)808,000

24,885684,721(6,846)

677,865$127,029$2,269$129,298$817$130,125$2,257,538$64,308$2,321,856$(9,231)$2,312,625

Depreciation and amortization

96,231

1,740

97,971(279)

97,692

Capital expenditures

200,135

221

200,356(96)

200,260

Oil and Gas

Other

Total

$786,625$21,365

221

5,788

Total sales

786,856

Operating expenses

659,827

Operating income

2004:
I. Sales and operating income
Sales to third parties
Intergroup sales and transfers

II.Assets, depreciation and capital expenditures
Total assets(b) Geographical areas

The disclosure of geographical segment information for the year
ended December 31, 2003, has been omitted as net sales and total
assets of the operations in Japan constituted over 90% of theconsolidated totals.

The geographical areas segment information for the Company and its
consolidated subsidiaries for the years ended December 31, 2004 and2003 is outlined as follows:

Millions of yen

Japan

The Africa

The Central andSouth America

Other

Total

Eliminations
and other

Consolidated¥74,086¥9,945¥—¥—¥84,032¥—¥84,032

—

—

—

—

—

—

—

Total

74,086

9,945

—

—

84,032—

84,032

Operating expenses

65,152

4,883

—

462

70,498070,498

2004:
Sales to third parties
Interarea sales and transfers

Operating income (loss)
Total assets¥8,934¥5,062¥—¥(462)¥13,533¥(0)¥13,533¥216,922¥15,265¥9,543¥101¥241,833¥(1,320)¥240,513

Thousands of U.S. dollars

Japan

The Africa

The Central andSouth America

Other

Total

Eliminations
and other

Consolidated$712,365$95,625$—$—$808,000$—$808,000

—

—

—

—

—

—

—

712,365

95,625——808,000—

808,000

2004:
Sales to third parties
Interarea sales and transfers
Total
Operating expenses

626,462

46,952—

4,442

677,8650677,865

Operating income (loss)$85,904$48,673$—$(4,442)$130,125$(0)$130,125$2,085,788$146,779$91,760$971$2,325,317$(12,692)$2,312,625

Total assets(c) Overseas sales
Overseas sales, which include export sales of the Company and its
domestic consolidated subsidiaries, and sales (other than exports toJapan) of its foreign consolidated subsidiaries for the years ended
December 31, 2004 and 2003 are outlined as follows:

The disclosure of overseas sales information for the year ended
December 31, 2003, has been omitted as overseas sales constituted lessthan 10% of consolidated net sales.

45 Teikoku Oil Co., Ltd. Annual Report 2004

FINANCIAL SECTION

Millions of yen

North America

Other

Total

¥9,270¥1,379¥10,650

2004:
Overseas sales
Consolidated net sales

84,032Thousands of U.S. dollars

Overseas sales$89,135$13,260

Consolidated net sales$102,404
808,000

Overseas sales as a percentage of consolidated net sales

11.0%

1.6%

12.7%

16. Supplementary Cash Flow Information
Summary of assets and liabilities of subsidiaries included inconsolidation upon acquisition of their stock.

The following is a summary of the assets and liabilities ofsubsidiaries which were included in consolidation upon acquisition of
their stock and a reconciliation of the related acquisition cost and net
cash inflows for the year ended December 31, 2004:
Millions of yen

Thousands of U.S. dollars

Current assets¥8,402$80,788

Non-current assets

3,432

33,000

Excess of cost over net assets acquired

987

9,490

Current liabilities(1,420)(13,654)

Non-current liabilities(1,548)(14,885)

Minority interests(1,963)(18,875)(377)(3,625)Carrying value on an equity basis(3,138)(30,173)

Acquisition cost

4,372

42,038Cash and cash equivalents held by subsidiaries(4,991)(47,990)

Net cash inflows¥(618)$(5,942)

Already acquired cost before consolidation

46 Teikoku Oil Co., Ltd. Annual Report 2004

FINANCIAL SECTION

Teikoku Oil Co., Ltd. and Consolidated Subsidiaries
Fiscal years ended December 31, 2004 and 2003

17. Subsequent Events(a) Appropriations of retained earnings

financial statements for the year ended December 31, 2004, wereapproved at a shareholders’ meeting held on March 30, 2005:

The following appropriations of retained earnings of the Company,
which have not been reflected in the accompanying consolidated
Millions of yen

Thousands of U.S. dollars

Cash dividends (¥4.50 = $0.04 per share)¥1,373$13,202

Bonuses to directors and statutory auditors

50

481

(b) The foundation of affiliate
We have established a new affiliate, “Teikoku Oil Ecuador,” and haveentered into an agreement to acquire the right of the development of
40% of oil in the east land of the republic of Ecuador through theaffiliate on January 24, 2005. The agreement will officially come into
effect after approval by the government of Ecuador.

The outline of the affiliate is as follows:
Name
Teikoku Oil Ecuador
Representative
Akira Isono
Date of establishment
January 11, 2005
Description of business
The exploration, development, production and sales of oil resources in the east land of the republic of Ecuador
Capital Stock
US$10,000
Ratio of shares held
100%

47 Teikoku Oil Co., Ltd. Annual Report 2004

FINANCIAL SECTION

Report of Independent Auditors

The Board of Directors
Teikoku Oil Co., Ltd.
We have audited the accompanying consolidated balance sheets of Teikoku Oil Co., Ltd. and consolidated subsidiaries as of December 31, 2004 and2003, and the related consolidated statements of income, shareholders’ equity, and cash flows for the years then ended, all expressed in yen. These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in Japan. Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Teikoku Oil Co.,
Ltd. and consolidated subsidiaries at December 31, 2004 and 2003, and the consolidated results of their operations and their cash flows for the years
then ended in conformity with accounting principles generally accepted in Japan.
The U.S. dollar amounts in the accompanying consolidated financial statements with respect to the year ended December 31, 2004 are presented
solely for convenience. Our audit also included the translation of yen amounts into U.S. dollar amounts and, in our opinion, such translation has
been made on the basis described in Note 3.

March 30, 2005

48 Teikoku Oil Co., Ltd. Annual Report 2004

Consolidated Group Companies(As of December 31, 2004)

Company

Paid-in
Percent
Capital Ownership(Millions of yen)

Teiseki Real Estate Co., Ltd.

Business Operations

(%)

2,500

100.0

Real estate management, rental, brokerage services and well boring materials

Teikoku Oil (D.R. Congo) Co., Ltd.

2,040

100.0

Oil exploration, development, production and sales in the Democratic Republic of Congo

Teikoku Oil SCT Exploration B.V.

*5,300100.0

Exploration and extraction of crude oil and natural gas in the San Carlos and Tinaco blocks in Venezuela

Teikoku Oil Algeria (El Ouar) Co., Ltd.

663

100.0

Exploration and extraction of crude oil in the east of Algeria

Teikoku Oil (North America) Co., Ltd.

**4,303

100.0

Exploration and extraction of crude oil in the United States

Teikoku Oil Suez SEJ Co., Ltd.

454

100.0

Exploration and extraction of crude oil and natural gas in Suez bay, Arab Republic of Egypt

Teiseki Drilling Co., Ltd.

395

100.0

Oil, geothermal and large diameter drilling

Teiseki Pipeline Maintenance Service Co., Ltd.

200

100.0

Contract-based maintenance services for Teikoku Oil’s natural gas pipelines

Teiseki Propane Co., Ltd.

80

100.0

Sale of liquified petroleum gas and petroleum products

Teiseki Topping Plant Co., Ltd.

70

100.0

Contract-based refining of crude oil from domestic fields; storage and shipment of petroleum products

Teikoku Oil (Con Son) Co., Ltd.

20

100.0

Offshore exploration and extraction of crude oil south of the Socialist Republic of Vietnam

Offshore Iwaki Petroleum Co., Ltd.

10

100.0

Development, production and sales of petroleum and natural gas from the Offshore Iwaki Gas Field

Teikoku Oil Company Panama, S.A.

**10

100.0

Sale of crude oil developed overseas

Teikoku Oil (Sanvi-Guere) Co., Ltd.

8,304

99.6

Teikoku Oil (Venezuela) Co., Ltd.

8,189

99.6

60

62.0

10,722

44.1

Teiseki Transport System Co., Ltd.

10

100.0

Logistics services and the sale of petroleum products

Daiichi Warehouse Co., Ltd.

200

94.0

Ordinary and refrigerated warehousing services

Saitama Gas Co., Ltd.
The Egyptian Petroleum Development Co., Ltd.

Oil and gas recovery, exploration and development under an operating service agreement in
the Sanvi-Guere region of the Bolivar republic of Venezuela
Oil and gas recovery, exploration and development under an operating service agreement in
the East Guarico region of the Bolivar republic of Venezuela
Sale of natural gas
Extraction, development, production and sales of petroleum and natural gas in the West Bakr region of
the Arab Republic of Egypt

Six Other Companies** Thousands of euros** Thousands of U.S. dollars

49 Teikoku Oil Co., Ltd. Investors’ Guide 2004

Investor Information(Fiscal years ended December 31)

Price Range and Volume■ (Price Range / Yen)

900

(Nikkei Average / Yen)
2,000

800

1,800

700

1,600

600

1,400

500

1,200

400

1,000

300

800

〜
〜

〜
〜

0

0

■

■ (Volume / Thousands of shares)

100,000
80,00060,00040,00020,0000

1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5
2000
2001
2002
2003
2004
2005

10 Biggest Shareholders

Number of Shares by
Shareholder Category(Thousands of shares)

Name

350,000

280,000

210,000

140,000

70,000

0

2000

2001

2002

2003

2004

Number of Shares

Percentage(Truncated to nearest thousand)(%)

Nippon Oil Corporation

50,443

16.8

Japan Trustee Services Bank, Ltd.

33,459

11.2

Japan Energy Corporation

15,634

5.2

Sumitomo Mitsui Banking Corporation

14,9685.0

The Master Trust Bank of Japan, Ltd.

12,912

4.3

Trust & Custody Services Bank, Ltd.

7,503

2.5

Japan Petroleum Exploration Co., Ltd.

6,123

2.0

Mitsui Asset Trust and Banking Company, Ltd.

5,866

2.0

Tokio Marine & Nichido Fire Insurance Co., Ltd.

4,644

1.6

Nippon Life Insurance Company

4,516

1.5

■ Financial institutions■ Securities companies■ Other corporations■ Overseas institutions□ Individuals and others

50 Teikoku Oil Co., Ltd. Investors’ Guide 2004

Company Overview(As of December 31, 2004)> During the approximate 60 years since its founding in 1941, Teikoku Oil Co., Ltd. has discovered
many oil and gas fields and has been instrumental in securing both domestic and international energy
resources as a pioneer of Japan’s oil development. As the result of pipeline expansion from 1996, theCompany's Minami Nagaoka gas field has over the years become a cash engine gas field with world-classmarket potential. In addition, Teikoku Oil has diversified overseas energy development operations in theCongo, Egypt, and Venezuela, in addition to other countries. Going forward, supported by the abundant
recoverable reserves of the Minami Nagaoka gas field, Teikoku Oil will continue expanding the recovery
and reproduction cycle of this field, while seeking to expand its business domain and establish a second
cash engine with a special geographical focus on Middle and South America and North Africa. At thesame time, Teikoku Oil will seek to maximize corporate value while achieving the most efficient
allocation of management resources in order to maintain a strong balance sheet.

Offices
Technical Research Center

Table of Contents
1

Financial Highlights

2

Letter to Shareholders

5

Review of Operations by Segment

12

Major Overseas Projects

14

Global Network

16

Research and Development

17

CSR (Corporate Social Responsibility)

18

Board of Directors and Auditors

19

Financial Section

49

Consolidated Group Companies

50

Investor Information

51

Company Overview

Company Name
Head Office
Phone
Fax
Date Established
Paid-in Capital
Shares of Common Stock Issued
Stock Listings
Transfer Agent for the Shares
URL
E-mailAkita District OfficeNiigata District Office
Chiba District OfficeLondon Representative Office
Houston Representative Office
Caracas Representative Office

Our IncessantChallenge >Teikoku Oil Co., Ltd.
31-10 Hatagaya 1-chome, Shibuya-ku, Tokyo 151-8565, Japan+81-3-3466-1242+81-3-3468-3511
September 1, 1941
¥19,579 million
306,130,000 shares
Tokyo, Osaka
UFJ Trust Bank Limited
http://www.teikokuoil.co.jp/
ir@teikokuoil.co.jp

23-30, Kita-Karasuyama 9-chome, Setagaya-ku, Tokyo 157-0061 Japan
Phone: +81-3-3300-5121 Fax: +81-3-3300-5129
2-1, Daido Higashi, Yabase, Akita City, Akita Pref. 010-0977 Japan
Phone: +81-18-862-4131 Fax: +81-18-862-4139
3-1, Higashi-Odori 1-chome, Niigata City, Niigata Pref. 950-8512 Japan
Phone: +81-25-247-2171 Fax: +81-25-247-5390
3319, Aza Hachimandai, Oaza Naruto, Naruto Town, Sanbu Gun, Chiba Pref.
289-1326 Japan
Phone: +81-475-82-0830 Fax: +81-475-82-0836
9 Berkeley Street, London W1J8DW, U.K.
Phone: +44-20-7495-8718 Fax: +44-20-7495-8697
Williams Tower 2800 Post Oak Blvd., #5200, Houston, TX 77056, U.S.A.
Phone: +1-713-850-8480 Fax: +1-713-850-0678
Av. Principal Eugenio Mendoza con Av. Jose Angel Lamas, Edif. Torre la Castellana,
Piso 4, Ofic.4-C y 4-D, Urb. La Castellana, Caracas Venezuela
Phone: +58-212-263-7031 Fax: +58-212-263-9141■ Cautionary Statement regarding Forward-Looking Statements

With the exception of historical facts, forward-looking statements such as present plans, strategies and forecasts made in this report are rational determinations by management based on
information that was currently available at the time of the report. These forward-looking statements may differ from actual results due to various factors, including potential risks anduncertainties that may affect performance, such as various social and economic factors—including but not limited to business conditions in the energy industry and natural gas markets,
crude oil prices, exchange rate fluctuations, and the results from as well as changes in domestic and international mining operations. As a result, these statements should not be relied on as
the sole source upon which to make investment decisions.
51 Teikoku Oil Co., Ltd. Investors’ Guide 2004

TEIKOKU OIL CO., LTD. INVESTORS’ GUIDE 2004

TEIKOKU OIL CO., LTD.
INVESTORS’ GUIDE2004

For the year ended December 31, 2004 ,Our Incessant Challenge >Printed in Japan