3Market Trend andManagement Policy

Business Flow in Oil and
Gas Development and Our Strengths
The business activities of the oil and gas industry can be envisioned as the flow of a river. The upstream consists of exploration, development and production of oil and natural gas. The
midstream is where products are transported. The downstream
refers to refining and sales. Our mainstay business entails handling upstream operations including the exploration, drilling,
production and sale of crude oil and natural gas. As shown in thebusiness flow at right, upstream business activities can be further
classified into 1 acquisition of blocks, 2 exploration,
3 appraisal, 4 development, 5 production and 6 sales.
The Company’s Oil andNatural Gas Projects
ln production
Projects that entail the production
and sales of oil and natural gas
Under development
Projects for which the Company has
made a final investment decisionand is undertaking development
activities with a view to production
Discovered/Preparation for development
Projects that entail the discoveryof resources through explorationand evaluation

Under exploration
Projects where exploration andevaluation activities are in progresswith resources yet to be discovered

Other projects

Signing ceremony of contract

We collect extensive information on
legal system and country risks related
to areas in which oil and natural gas
are expected to exist. We then apply
and bid for mining rights and/or
exploration and development rights
and enter into a contract for exploration and development.

022

INPEX CORPORATION Annual Report 2014

78 projects in 27 countries(As of June 30, 2014)

Other
Under
exploration

Japan
Americas118

Number of
Middle projects by
East &
region4230

Africa10 Eurasia
7

1

Asia &
Oceania

Number of
projects bydevelopment
stage

34

In production

8
Discovered/Preparation fordevelopment

5

3

Under
development

Market Trend andManagement Policy

Geophysical surveys

In addition to geological surveys, we
utilize geophysical surveys conducted
through satellite images and seismic
waves in order to assess the potential subsurface accumulations of oil
and natural gas. Furthermore, we drill
exploratory wells in order to confirm
the presence of oil and gas.

Drilling of appraisal wells

Once the presence of oil and natural gas has been confirmed, we drill
appraisal wells to assess the extent of
the oil and gas fields and to evaluate
the amount of reserves. In addition,
we make comprehensive judgments
regarding the commercial viability of
the fields.

INPEX CORPORATION Annual Report 2014

023

024

INPEX CORPORATION Annual Report 2014

Christmas tree

To pipeline

High pressure separator

Refrigeration unit
Carbon gas
separator

Water, oil,sand
1

Water, oil

CO2

2

3

Refining/treatment of natural gas

Aft
f er separating oil and removft
ing impurities (e.g., carbon gas,hydrogen), we ship natural gasthat can be used as a product.

3
Market Trend andManagement Policy

INPEX CORPORATION Annual Report 2014025

Business Environment in Oil and Gas Development
The forecast is for further expansion of global
primary energy demand, including oil and natural gas, to be centered on developing countries,
such as China and India. Of that demand, thatfor natural gas is expected to see a significant
increase. Due to such factors as rising resource
nationalism, however, the securing of new oiland natural gas interests will continue to bebiased toward frontier regions where development is beset with difficulties.

Europe/Eurasia
Natural gas

Crude oil17.28 MMbbl/d99.9 billion
cf/d

Crude oil production volume
1 MMbbl/dNatural gas
production volume
10 billion cf/d

Middle East
Natural gas

Crude oil

55.0 billion
cf/d28.36 MMbbl/d

Asia/Pacific

AfricaCrude oil8.82
MMbbl/dNatural gas

19.8 billion
cf/dNatural gas

Crude oil47.3 billion cf/d

8.23 MMbbl/d

Representation of main oil and natural gas production areas

Global Proved Reserves and Reserves-to-Production Ratio
Global proved reserves of crude oiland natural gas total approximately
1.7 trillion barrels and 6.6 quadrillion
cubic feet, respectively. By region,
the Middle East holds the largest
reserve volumes of both crude oiland natural gas in existence. There
are also extensive proved reservesof crude oil in South and Central
America and North America and ofnatural gas in Europe and Eurasia.

Proved Reserves by Region and Reserves-to-Production Ratio (PR ratio) (As of December 31, 2013)
Asia/Paciﬁc 2.5%

Africa7.7%
Europe/Eurasia

8.8%

North
America

1,687.9
47.9%

13.6%
South andCentral America

19.5%

Middle East

PR ratio

53.3 years

South
and Central
America

6.3%
AfricaCrude oilbillion bbl

North America

7.6%

Natural gas

Asia/
Paciﬁctrillion cf

6,557.8

8.2%
Europe/Eurasia

30.5%

4.1%

Middle East

43.2%

PR ratio

55.1 years
Source: BP Statistical Review of World Energy 2014026

INPEX CORPORATION Annual Report 2014

North America

Oil and Natural Gas
Demand in Japan

Crude oil16.83
MMbbl/dNatural gas

87.0 billion
cf/d

LNG Import Trend in Japan(Million tons/year)100

2013: 87.49 million tons

80
60
40
20
0

1995

2000

2005

2010

Demand for LNG is increasing in Japan. This reflects the upswing in
LNG use for thermal power generation in the wake of the shutdowns
Source: Ministry of Finance trade statistics
of nuclear power plants.

3
Market Trend andManagement Policy

Japan’s Primary Energy Supply (2012)
Hydroelectricity

3.3%

Renewables,
etc.

1.8%

Nuclear
power

0.7%
Coal

23.2%
Natural gas

22.8%

Oil

48.3%

Although the demand for oil
has declined in Japan in recent
years, oil that is broadly used
as a source of heat and power,
as well as in the production ofmaterials, even now accounts
for more than 40% of Japan’s
primary energy demand.

South andCentral America

Source: Energy & Economic Statistics in Japan 2013

Production Volume by Region
There are many countries and regions that produce oil and natural gas, but countries thathave large-scale production, have opened their mining areas to foreign oil companies orare capable of exporting LNG are limited to just a few. Due to the rise in resource nationalism, the securing of new oil and natural gas interests by energy development companies
has in recent years continued to be biased toward frontier regions where development isbeset with difficulties. Among these regions, however, are promising areas where largescale reserve volumes are to be expected.

Natural ggasas

Crude oil17.1 billion
ion
cf/d

7.29
MMbbl/dProduction volume source: BP Statistical Review of World Energy 2014

Global Energy Demand
Oil and natural gas account for
more than half of the amount of
global primary energy consumption. The main focus is on otherforms of energy, such as solar,hydro, biomass and geothermal, as
these are renewable within a shorttime of first use and emit less CO2
during power generation whencompared with finite fossil fuels.

World Primary Energy Consumption (2013)
Hydroelectricity

Renewables

6.7%

2.2%

Oil

Hydroelectricity

Oil

4.4%

Total

32.9%

12.73

Natural gas
Biomass

Nuclear power
Other renewable energy

4,000

Natural gas to grow

3,000

1.6% annuallybillion toe

30.1%

Coal

(Million toe)
5,000

Nuclear
power

Coal

World Primary Energy Demand by Fuel

2,000

Natural gas

23.7%

1,000
0

2010
Source: BP Statistical Review of World Energy 2014

2020

2035

Source: IEA World Energy Outlook 2013 in the New Policies Scenario

INPEX CORPORATION Annual Report 2014027

The Medium- to Long-Te
T rm Vision ofTe
INPEX and Investment Plans
Three Gror wth Taro
T rgets

In May 2012, the Company formulated the INPEX
Medium- to Long-Term Vision that clarified such aspects
as key initiatives up to the fiscal year ending March2017 toward medium- to long-term growth targets
and the achievement of those targets. The Medium- to
Long-Term Vision defined three growth targets andthree management policies and clearly specified the
key initiatives over the following five-year period.

For details, please refer to thebooklet entitled “MEDIUMTO LONG-TERM VISIONOF INPEX: Ichthys and Our
Growth Beyond,” or refer tothe following Web site:

Bec

MEDIUM- TO LONG-TERM
VISION OF INPEX:
Ichthys and Our Growth
Beyond4www.inpex.co.jp/en/vision

Three Management Policies
We are positioning ourselves to become a top-classinternational oil and gas E&P company and are
improving and building our management base to
evolve into an integrated energy company.

1

Securing/Developing
Human Resources andBuilding an Efficient
Organizational Structure
Recruit and utilize personnel in and outside ofJapan to develop global professionals.
Establish an efficient business execution
system to facilitate decision making.

028

INPEX CORPORATION Annual Report 2014eom

We have set three growth targets necessary forsustainable growth and will conduct key initiatives
over the next five years to achieve them.

op
T
a

las
C
-

ational Oil and
n
r
e
t
Ga
s In

1

s

Continuous Enhancement of
E&P Activities

Achieve net production
volume of 1 million boedby the early 2020s

2

Investment for Growth andReturn for Shareholders
Investment over

five years¥3.5 trillion

From the period in which Ichthys starts production, we will be aware of our position as a topclass international oil and gas E&P company andwill plan appropriate returns for our shareholders.

Dividend Payout Ratio
（%）
20

15

14.7%

14.3%

2013

2014

13.2%

10

Including exploration
expenditures ofaround14.0%

5¥300 billion
0

From the year ended March 31, 2013,
to March 31, 2017

2011

2012

an
o me
c
e
B

Integrated Ener
gy

2

yw

Strengthening
Gas Supply Chain

Co
mp
an
it h
t
na

l
ura
ga

e co
s th
sa

re

3

ny
pa
m
Co

3

Reinforcement ofRenewable Energy Initiatives

Market Trend andManagement Policy

Achieve domestic gas supply
volume of 2.5 billion m3/ yearby the early 2020s
E&(3.0 billion m³/year in the long term)P

Promote efforts to commercialize
renewable energies andreinforce R&D activities
for the next generation

Maintain Financial Strength
Equity Ratio, Net Debt/
Net Total Capital Employed
（%）
70

60
50
40

Funding Source

Equity ratio

69.1%(As of March 31,
2014)

Target: 50% or higher

30
20
10
0
-10
-20
-30
-40

Target:20%
or less
Net debt/
Net total capital
employed-31.9%(As of March 31, 2014)

Own funds
Approximately ¥1.5 trillionof cash available on hand
(As of March 31, 2014)

Cash flows
Future operating cash flows
obtained per year

Bank loans■ Lending from JBIC
■ Guarantee from JOGMEC■ Project finance3

Responsible Management
as a Global Company
Promote continuous improvements
in corporate compliance and HSE initiatives.
Build trust-based working relationships
with stakeholders throughinteractive communications.

INPEX CORPORATION Annual Report 2014029

Company Management Content in Business Model
A principal issue of the oil and gas development business is the ability to put in place a continuous cycle thatentails the reinvestment of earnings for sustainable growth. In specific terms, this cycle involves 1 aggressive
exploration and development investment; 2 increasing reserves; 3 maintenance/growth of production
volume; and 4 accounting of revenue attributable to sales.
Over the five-year period from the year ended March 31, 2013, to the year ending March 31, 2017, INPEX
intends to invest a total of ¥3.5 trillion and to continuously enhance its E&P activities. In specific terms, the Comompany will work diligently to achieve net production volume of 1 million boed by the early 2020s.

2 Increasing Reserves

1 Aggressive Exploration andDevelopment Investment

T realize its growth targets, the Company will actively proTo
moteboth exploration investment intended to maintain/m
expand reserve volume and development investment toproduce oil and natural gas from reserve volume holdings.
The scale of investment is planned to be ¥3.5 trillion
over the five-year period from the year ended March 2013
to that ending March 2017 (up until the start of production at Ichthys). Investment in Ichthys will account for morethan half of the ¥3.5 trillion. As development operation at
Ichthys is progressing smoothly for the most part, investment is being advanced in line with the investment plan.
The value of the yen has weakened compared with the foreign currency exchange rate assumptions adopted at thetime investment plans were formulated in May 2012. As aresult, the amount of future investment has increased on a
yen basis. However, as the Company’s investments are forthe most part denominated in U.S. dollars, there has been
no change from the initial U.S. dollar–based investment
amount of the ¥3.5 trillion.

At the end of March 2014, the Company’s reserves wereproved reserves of 2.5 billion boe, probable reserves of
1.9 billion boe and possible reserves of 600 million boe.
If reserve production is shown in terms of how many years
reserve volumes will last at the current production volume, proved reserves will last 17.1 years, and 30.2 years
if combined with probable reserves. Showing what levelof recovery in interim production volume could be possible by increasing the interim reserve volume, the reserve
replacement ratio (three-year average) has reached 370%.
Also holding a wealth of contingent resource amounts,
the Company expects to expand its medium- to long-term
proved and probable reserves by launching new projects
and improving the recovery rate from its existing oil andgas fields.

Our Reserves■Proved reserves(MMboe)

5,082
4,126

4,256

4,095

2,818

1,823

1,907

Investment Results and Investment Plan for
the Next Three Years
1,125.0(¥ billion)

962.9■Development expenditures*■Exploration expenditures■Other capital expenditures**

2,432

2,188

4,477

605

1,945

2014/3
Reserves-toProduction
Ratio

2014/334.3 years

30.2 years

2,532

17.1 years

1,308

2011/3 2012/3 2013/3 2014/3

794.0
653.3

■Probable reserves■Possible reserves ■Contingent resources

650.0

Reserve Replacement Ratio (3-year average)
(%)
400

990.0

370%

854.7
682.0
576.7

576.0

282%

300

255%

200

54.0
22.6

71.0
37.2

105.0
30.0

91.0
21.0

55.0
19.0

2013/3

2014/3

2015/3

2016/32017/3(Actual)(Actual)* Development expenditures include investment in the Ichthys downstream business*** Mainly investment in the Naoetsu LNG Terminal and the domestic pipeline network, etc.

030

INPEX CORPORATION Annual Report 2014

100

35%
25%

0 61%

2009/3

2010/3

2011/3

2012/3

2013/3

2014/3

4 Accounting of Revenue
Attributable to Sales
3 Maintenance/
Growth of Production Volume

Net Sales (by product), Net Income■Crude oil sales ■Natural gas sales ■Other sales

1,334.6(¥ billion)

28.9

455.4

409 thousand boed

397.8
429.1

Japan

1%

Middle East
& Africa

356.2

Crude oil

Asia & Oceania

558.0

thousand bbl/d

Europe & Eurasia

19%

11%

Mainly from oilfields in U.A.E.

194.0

Japan

12%

14%

Natural gas

876

Asia &
Oceania

Gas fields including
the MinamiNagaoka Oil Field,
Niigata Prefecture

million cf/d

73%

Gas fields including
the Mahakam Oil
Field, Indonesia

Medium- to Long-Term Production Volume Targets(Thousand boed)

Around 700 thousand boed fromexisting projects from thecommencement of production at theIchthys LNG Project and other factors

409

411

421

Target for
the early 2020s
1 million boed

472

(Actual)Existing
projects

Existing
projects

2014/3 2015/3 2016/3 2017/3

New
projects■Japan ■Asia & Oceania ■Eurasia■Middle East & Africa ■Americas

183.0

128.7

Oil fields in
Caspian Sea

Americas

858.8

788.1

726.2

1%

245

68%

30.6

31.4

943.1

Net Production (Year ended March 31, 2014)
Americas1,316.0

20.4

1,216.5

1,186.7■Net income

3Market Trend andManagement Policy

The Company’s net production volumes for the year ended
March 31, 2014, were 245 thousand barrels per day ofcrude oil, 876 million cubic feet per day of natural gas (164thousand boed) for a combined oil and natural gas total of409 thousand boed. We expect to increase that figure to411 thousand boed for the year ending March 2015.
Concerning our medium- to long-term production volume forecasts, we plan to maintain and expand production
volume due to the contributions from production at startup production projects and existing projects until the startof production at the Ichthys LNG Project. After that, due
to such factors as the start of production at Ichthys, we will
increase net production volume of existing projects to the
700 thousand boed level and aim to achieve one million
boed in the early 2020s by, for example, increasing the production volume of new projects.

The Company maintains robust revenue based on the stable production of its revenue sources, crude oil and naturalgas. For the year ended March 31, 2014, net sales reached
an all-time high due to the effects of the yen’s depreciation.
The Company’s business revenues are greatly
affected by changes in crude oil prices and exchange
rates (U.S. dollar). The yearly average price of crude oil(ICE Brent) in the year under review was US$107 per barrel. On foreign currency exchanges, the yen remained atthe ¥100 to the U.S. dollar mark for the year. The chart
below shows the Company’s sensitivity with regard to its
consolidated net income forecasts for the current year in
the event of changes in crude oil prices and exchange
rates. A rise in crude oil prices and yen depreciation
would have a positive effect on net income.

Early 2020s

2011/3

2012/3

2013/3

183.7

2014/3178.0

2015/3(Forecast as of August 2014)

Sensitivities of Crude Oil Price and Foreign Exchange Fluctuation
on Consolidated Net Income for the Year Ending March 31, 2015*1
Crude oil price; $1/bbl increase (decrease)*2 +2.5 (-2.5) billion yen
Exchange rate; ¥1 depreciation(appreciation) against the U.S. dollar+0.8 (-0.8) billion yen

Flow effect on net income fromoperating activities*3+2.1 (-2.1) billion yen

Stock effect on net income (valuation for assets -1.3 (+1.3) billion yen
and liabilities denominated in U.S. dollar)*4*1: The sensitivities represent the impact on net income for the year ending March 31,
2015 against $1/bbl increase (decrease) of Brent crude oil price on annual average and¥1 depreciation (appreciation) against the U.S. dollar. These are based on the financial
situation at the beginning of the fiscal year. These are information purpose only andthe actual impact may be subject to change in production volumes, capital expenditures and cost recoveries, and may not be constant, depending on crude oil prices andexchange rates.
*2: This is a sensitivity on net income by fluctuation of crude oil price and is subject to theaverage price of crude oil (Brent) in the fiscal year.
*3: This is a sensitivity on net income from operating activities by fluctuation of the yen
against the U.S. dollar and is subject to the average exchange rate in the fiscal year.
*4: This is the impact of foreign exchange differences for foreign currency-denominatedassets and liabilities, and is affected by the difference between the exchange rate at theend of the fiscal year and the end of the previous fiscal year. In this fiscal year, as foreign
currency-denominated debt is greater than foreign currency-denominated assets due toan increase in foreign currency debt, exchange valuation gains will occur when the yen
is appreciated against foreign currency, while exchange valuation losses will occur when
the yen becomes weaker against foreign currency. In addition, because of the impact ofdeferred tax accounting, when the yen is appreciated against the U.S. dollar to a certain
extent, the above sensitivities may show different trend.

INPEX CORPORATION Annual Report 2014031

Comparison with Global Oil Companies
Oil companies that conduct upstream activities can be divided into three categories: 1 national oil
companies of governments in oil-producing countries that possess oil and natural gas assets,
2m
major international oil companies known as the “oil majors” and 3 companies that specialize iin upstream activities and are second in scale to the oil majors. INPEX is currently positioned
the mid-tier of international oil and gasthat are second to the oil majors.
in th
g E&P companiespj

Reserve Volume Comparison with Global Peers
Our reserve replacement ratio and reservesto-production ratio were superior to thoseof the oil majors and other international oil
and gas E&P companies, and they represent our growth potential.

Reserve Replacement
Ratio (3-year average)

Reserves-to-Production Ratio
370％

17.1 years
13.4 years
11.0 years

Average of majors:
BP, Chevron, ConocoPhillips, ENI, ExxonMobil, TOTAL, Shell
Average of E&P that disclose the data:
Anadarko, Apache, BG, Occidental, Santos, Statoil, Talisman,
Woodside

108％

112％

Oil majors(Average)

International E&P(Average)

Oil major(Average)

INPEXInternational E&P(Average)

Proved Reserves, Net Production Volume and the Market Valueof the Major International Oil and Gas E&P Players
Comparing net production volumes and reserve volume, INPEX is positioned in the
mid-tier of international oil and gas E&P companies that are ranked second to theoil majors. Looking ahead, the Company plans to join the leading group of international oil and gas E&P companies in the early 2020s through a variety of initiatives
including increasing its net production volume and upgrading its reserve volume.

Seeking to establish
a firm position as aninternational oil andgas E&P company
by the early 2020s

Proved reserves and production volume indicated in this chart are from documents disclosed by the major E&P companies infiscal 2013. The size of the circle shows the market value of each company as of March 31, 2014.

1,000

900

Anadarko (US)Apache (US)

600

500

BG (UK)
400

Talisman (CA)

INPEX
INP
PEX

300

Probable reserves to
upgrade to proved
through the shift ofdevelopment

200

100

Woodside (AU)Santos (AU)

0

0.5

1.0

1.5

Proved reserves: 2.53 billion boe

2.0

2.5

INPEX CORPORATION Annual Report 2014

3.0

3.5

4.0

Probable reserves: 1.95 billion boe

Proved and probable reserves (Billion boe)032

Occidental (US)700

409 thousand boed

Net production volume (Thousand boed)

800

To achieve 1 MMboed of net
production by the early 2020s
through medium- to long-term
investment

INPEX