Business Risks

The following is a discussion on key items that can be considered potential risk factors relating to the business of INPEXCORPORATION, its subsidiaries and affiliates (the “Group”). From the standpoint of information disclosure to investors andshareholders, we proactively disclose matters that are not necessarily the business risks but that can be considered to have important
effects on the investment decisions of investors. The following discussion does not completely cover all business risks relating to theGroup’s businesses.
Unless stated otherwise, forward-looking statements in the discussion are the judgment of the Group as of June 26, 2013 and are
subject to change after such date due to various factors, including changes in social and economic circumstances.

1. CHARACTERISTICS OF AND RISKS ASSOCIATED WITH THE
OIL AND NATURAL GAS DEVELOPMENT BUSINESS(1) Risk of failure in exploration, development or
production
Payment of compensation is ordinarily necessary to acquireparticipating interests. Also, surveying and exploratory drilling
expenses (exploration expenses) become necessar y at thetime of exploration activities for the purpose of discoveringresources. When resources are discovered, it is necessary tofurther invest in substantial development expenses according tovarious conditions, including the size of the recoverable reserves,development costs and details of agreements with oil-producing
countries (including gas-producing countries; hereinafter thesame shall apply).
There is, however, no guarantee of discovering resources
on a scale that makes development and production feasible.
The probability of such discoveries is considerably low despite
various technological advances in recent years, and even whenresources are discovered the scale of the reserves does notnecessarily make commercial produc tion feasible. For thisreason, the Group conservatively recognizes expenses related to
exploration investment in our consolidated ﬁnancial statements.
The Group maintains financial soundness by booking 100% as
expenses in the case of concession agreements (including mining
rights awarded in Japan as well as permits, licenses and leases
awarded overseas) and by booking 100% of exploration project
investment as allowances in the case of production sharing
agreements. In addition, if there are impossibilities of recovery
of investment in a development project, we also book thecorresponding amount of investment in the development projectas allowances while considering the recovery possibility of eachproject.
To increase recoverable reserve and production volumes,
the Group plans to always t ake an interes t in promisingproperties and plans to continue exploration investment. At thesame time, we plan to invest in development projects, including
the acquisition of interests in discovered undeveloped ﬁelds andproducing ﬁelds, so as to maintain an overall balance between
assets at the exploration, development, and production stages.
A l t h o u g h e x p l o r a t i o n a n d d e ve l o p m e n t ( i n c l u d i n g
the acquisition of interes t s) are neces sar y to secure thereserves essential to the Group’s future sustainable businessdevelopment, each type of investment involves technologicaland economic risks, and failed exploration or development could
have an adverse effect on the results of the Group’s operations.

(2) Crude oil, condensate, LPG and natural gas reserves
1) Proved reserves
INPE X CO R P O R AT I O N (t h e “C o m p a ny ” ) c o m mi s s i o n e d
DeGolyer and MacNaughton, an independent petroleum
engineering consultant in the United States, to assess the main
proved reserves of the Group of which projects with a signiﬁcant

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amount of future development investment might materiallyaffect future performance. An assessment of other projects wasundertaken by the Company. The deﬁnition of proved reserves isbased on the U.S. Securities and Exchange Commission’s (SEC)
Regulation S-X, Rule 4-10(a), which is widely known among U.S.
investors. Regardless of whether the deterministic approachor probabilistic approach is used in evaluation, proved oil
and gas reserves are estimated quantities that geological andengineering data demonstrate with reasonable certainty to be
recoverable from known reservoirs under existing economic
and operating conditions, from the date of evaluation throughto the expiration date of the agreement granting operatingrights (or in the event of evidence with a reasonable certainty ofagreement, extension through to the expiration of the projected
extension period). For deﬁnition as “proved reserves,” operators
must have a reasonable degree of certainty that the recovery ofhydrocarbons has commenced or that the project will commence
within an acceptable period of time. This definition is widely
regarded as being conservative. Nevertheless, the strictness ofthe deﬁnition does not imply any guarantee of the production of
total reserves during a future production period.
For f ur t her det ails on proved reser ves of cr ude oil,condensate, LPG and natural gas held by the Group, including
affiliates accounted for under the equity method, please see
the section “Oil and Gas Reserves and Production Volume” on
P. 140.
2) Probable reserves and possible reserves
In addition to the assessment of proved reser ves based on
the SEC standards, the Company commissioned DeGolyer
and MacNaughton to assess its probable reser ves and thepossible reserves of which projects with a significant amountof future development investment might materially affect the
future performance, similar to proved reserves. An assessmentof other projects was undertaken by the Company, based on
the Petroleum Resources Management System 2007 (PRMS)
published by four organizations: the Society of Petroleum
Engineers (SPE), the World Petroleum Congress (WPC), theAmerican Association of Petroleum Geologists (AAPG), andthe Society of Petroleum Evaluation Engineers (SPEE). Probablereserves, as defined by PRMS guidelines established by thefour organizations, are reserves of oil and gas volumes outside
proved reserves that are less likely to be recovered than proved
reserves but more certain to be recovered than possible reserves
based on analyses of geological and engineering data. In thiscontext, when probabilistic methods are employed, there
should be at least a 50% probability that the quantities actually
recovered will equal or exceed the sum of estimated proved
and probable reserves. In addition, possible reserves are also
defined in accordance with PRMS guidelines as reserves of oiland gas volumes which are not categorized as proved reserves
or probable reserves and which are less likely to be recovered
than probable reserves based on analyses of geological andengineering data. In this case, it is unlikely that the actual
quantity of oil and gas recovered will exceed the sum of proved
reserves, probable reserves and possible reserves. Furthermore,when probabilistic methods are employed to calculate possible
reserves, there should be at least a 10% probability that thequantities recovered will equal or exceed the sum of proved
reserves, probable reserves and possible reserves. Probablereserves and possible reserves can be upgraded to proved
reser ves af ter the addition of new technical data or when
uncertainty has been reduced due to clarification of economic
conditions or operational conditions. Nevertheless, probablereserves and possible reserves do not offer a guarantee of the
production of total reserves during a future production periodwith the same certainty as proved reserves.
For fur ther details on probable reser ves and possible
reserves of crude oil, condensate, LPG and natural gas held by
the Group, including affiliates accounted for under the equity
method, please see the section “Oil and Gas Reser ves andProduction Volume” on P. 140.
3) Possibility of changes in reserves
A reserve evaluation depends on the available geological andengineering data from oil and gas reservoirs, the maturity ofdevelopment plans and a considerable number of assumptions,factors and variables including economic conditions as of thedate such an estimate is made. Reserves may be revised in the
future on the basis of geological and engineering data as well
as development plans and information relating to changes in
economic and other conditions made newly available throughprogress in production and operations. As a result, there is apossibility that reserves will be restated upwards or downwards.
As to the reserves under a PSC, not only production, but also
oil and gas prices, investments, recovery of investments due
to contractual conditions and remuneration fees may affectthe economic entitlement. This may cause reserves to increaseor decrease. In this way, the assessed value of reserves could
ﬂuctuate because of various data, assumptions and changes ofdeﬁnition.

(3) In the oil and natural gas development business theperiod from exploration to sales is highly capital intensive
and funds cannot be recovered for a long time(4) Operatorship
In the oil and natural gas development business, companies
frequently form business partnerships for the purpose of thedispersion of risk and financial burden. In such partnerships,
one of the companies becomes the operator, which performs
the actual work and bears the responsibility for operations onbehalf of the partners. The companies other than the operator,
as non-operators, participate in the business by providing apredetermined amount of funds and either carefully examining
the exploration and development plan devised and implemented
by the operator, or participating in some operations.
The integration of INPEX CORPORATION and Teikoku OilCo., Ltd., was completed on October 1, 2008. The resultant
company possesses abundant operational capabilities thanks
to the amalgamation of the former t wo companies’ knowhow based on extensive operation experience in exploration,
development and production both within Japan and overseas aswell as their high level proprietary technologies.
The Group intends to actively pursue operator projects
focusing on the two large-scale LNG Ichthys and Abadi projects
taking into consideration the effective application of businessresources as well as the balance between operator and nonoperator projects, based on the Group’s technical capability,
which has been considerably enhanced by the above-statedbusiness integration. Although the Company lacks operator
experience in LNG development projects, it has significant
expertise as an operator in the development and productionof crude oil and natural gas both in Japan and overseas as well
as a wealth of know-how and knowledge accumulated overmany years as a participant in LNG and other projects in suchcountries as Indonesia and Australia. In addition, we believe thatby utilizing the services of specialized subcontractors and highly
experienced external consultants, a practice similar to foreign
oil companies including the majors, it will be possible to executebusiness appropriately as an operator.
Engaging in projec t coordination as an operator willcontribute to the expansion of oppor tunities of block anda c r e a g e a c q ui s i t i o n t h r o u g h e n h a n c e m e n t o f t e c h nic alcapabilities and greater presence in oil-producing countries
and the industry. At the same time, there exist risks such as
constraints on the recruitment of personnel who have specialized
operational skills and an increase in ﬁnancial burden. Inability toadequately cope with such risks could have an adverse effect on
the Group’s results of operations.

(5) Project partners
In the oil and natural gas development business, as previously
mentioned, several companies often engage in joint businessfor the purpose of dispersion of risk and financial burden. In
such cases, the partners generally enter into a joint operating
agreement among themselves to decide on the decision-making
procedure for execution of the joint business, or to decide on
an operator that conducts business on their behalf. A company

INPEX CORPORATION Annual Report 2013

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Financial /Corporate Information

Considerable time and expense is required for explorationac tivities. Even when promising resources are discovered
through exploration, substantial expenses including production
facility construction costs, and an extended period of time, arenecessary at the development stage leading up to production.
For this reason, a long period of 10 years or more is required
from the time of exploration and development investment until
the recovery of funds through production and sales. In particular,
the development of the Ichthys and the Abadi, large-scale
LNG projects, being pursued by the Company requires a verylarge amount of investment, and the ﬁnancing of these projects
could be impacted by changes in the economic and financial
environment. Following the discovery of resources, a delay inthe development schedule or the loss of the economic viabilityof the properties during the development process leading up
to production and the commencement of sales could have an
adverse effect on the Group’s operational results. Such delays
or losses may occur due to changes in the business environment

including a delay in the acquisition or modiﬁcation of government
approvals, the occurrence of unanticipated problems related
to geological conditions, ﬂuctuations in the price of oil or gas,fluctuations in foreign exchange rates, or escalating prices ofequipment and materials. In the case of LNG projects, suchdelays or losses may occur due to an inability to complete suchprocedural requirements as FID owing to the lack of any longterm contractual agreement with prospective purchasers withrespect to production.

133

that is a partner in one property in which the Group is engaged
in joint business may become a competitor in the acquisition ofother participating interests, even though the relationship withthe partner may be good.
In undertaking the joint business, participants in principle
bear a ﬁnancial burden in proportion to their interest share. Any
inability by a joint business partner to fulﬁll this ﬁnancial burden
may adversely affect the project.

(6) Disaster and accident risks
Oil and natural gas development entails the risk that operational
accidents and disasters may occur in the process of exploration,
development, production and transportation. Should such an
accident, disaster or other such incident occur, there is the riskthat costs will be incurred, excluding compensation covered byinsurance, due to facility damage, as well as the risk of a major
accident or disaster involving loss of life. In addition, a costburden for recovery or opportunity loss from the interruption ofoperations could occur. For the domestic natural gas business,
the Company has continued to procure as source gas natural gas
regasiﬁed from imported LNG since January 2010. Furthermore,
the Company will take steps to procure imported LNG as source
gas in connection with its Naoetsu Receiving Terminal from
September 2013. An inability to procure natural gas regasified
from imported LNG and other imported gas as source gas due
to troubles concerning suppliers or the Company’s Naoetsu
Receiving Terminal may interfere with the Company’s ability tosupply to its customers. This could in turn have an adverse effecton the Company’s domestic natural gas business.
With regard to environmental problems, there is a possibilityof soil contamination, air pollution, and freshwater and seawaterpollution. The Group has established a “Health, Safety andEnvironment Policy,” and as a matter of course abides by theenvironmental laws, regulations, and standards of the countries inwhich we operate and give due consideration to the environment
in the conduct of business, based on our independent guidelines.
Nevertheless, in the event of an operating accident or disasterthat for some reason exerts an impact on the environment, a
response or necessary cost burden for recovery or loss fromthe interruption of operations could occur. Furthermore, in theevent of changes to or the strengthening of the environmental
laws, regulations, and standards (including support measures forthe promotion of new, renewable energies) of the countries inwhich we operate, it may be necessary for the Group to devise
additional measures, and an associated cost burden could occur.
Although the Group maintains accident insurance in thenatural conduct of its operations, should such an accident ordisaster be attributable to willful misconduct or negligence on
the part of the Group, the occurrence of a cost burden could
have an adverse effect on ﬁnancial results. Also, such accident
or trouble would result in receiving administrative punishment or
result in damage to the Group’s credibility and reputation as anoil and natural gas development company, and could therefore
have an adverse effect on future business activities.
In November 2011, an oil sheen was discovered spreading in
the vicinity of the Frade oil ﬁeld, in which an approximately 18.3%
interest is held by Frade Japão Petróleo Limitada (“FJPL”), which
is a subsidiary of INPEX Offshore North Campos, Ltd. (which isan equity-method afﬁliate of INPEX CORPORATION and in which
INPEX CORPORATION holds a 37.5% interest). According to
Chevron Brasil Upstream Frade Ltda. (“Chevron”), the operatorof the Frade oil field, the application of Chevron’s emergency

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INPEX CORPORATION Annual Report 2013

response plan led to the responsible well being brought
under control within four days from the sheen’s discovery andsuccessfully plugged and abandoned(by operations to fill thewell with cement and close it off). While Chevron has continued
to monitor the subsequent state of oil seepage, the well closure
has succeeded in largely resolving the oil seepage and not one
drop of oil reached the beaches and there was no impact onmarine life.
In March 2012 Chevron also identified a small, new oil
seepage emanating from a location different from the November
2011 oil seep and quickly took measures to place containment
devices on the source. According to Chevron the volume of oilreleased in the seep detected in March 2012 has been about one
barrel. Chevron and its partner companies including FJPL had
requested a temporary suspension of production in the Fradeoil ﬁeld. Production had once been suspended since March 16,
2012 but production resumed on April 30, 2013 upon approval of
the relevant Brazilian agencies.
Relevant Brazilian agencies have filed multiple lawsuits
against, and other notices with, Chevron, the operator of
the field, and other companies requesting compensation fordamages and a suspension in operations and other measures inconnection with the oil seeps in November 2011 and March 2012.
As to some of them, discussions are being held for concrete
resolution with the Brazilian agencies, although their ultimate
outcomes remain unknown. On the other hand, among thosethat are being contested are lawsuits filed by Brazil’s Federal
Prosecution Ser vice against Chevron and other companies
demanding damages in the amount of 20 billion real (about 8
hundred billion yen at the rate of one real to about 40 yen) for
each of the incidents in November 2011 and March 2012, but
Chevron has publicly announced its opinion that Chevron is
not aware of any basis for damages to be awarded in any civil
lawsuit. The INPEX group (including FJPL) is not a direct party to
any of these suits or other actions, but if Chevron is made to pay
damages or settlement money, or bear any other ﬁnancial burden
as a result of these suits or actions, it is possible that FJPL will
be required to bear a ﬁnancial burden equivalent to the portionof interest held by FJPL in the Frade oil ﬁeld in accordance with
the Joint Operating Agreement. While a lawsuit ﬁled by Brazil’sFederal Prosecution Service seeking a suspension of operations
had been par tially granted by a cour t, after submission by
Chevron of counterarguments contesting the judgment, thelawsuit seeking the suspension of operations was dismissed. As
Brazil’s Federal Prosecution Service ﬁled an appeal against thisjudgment, if the appeal is ultimately upheld by the higher court,
it is possible that losses will be incurred due to a long-termsuspension of operations. As of the date of this document, thescope of each relevant party’s responsibility remains unclear andthe monetary impact of these oil sheen incidents on the resultsof operations of the INPEX group has not been ﬁxed yet. As ofthe date of this document, we are not aware of the existence ofany lawsuit concerning the oil sheen incidents that involves the
INPEX group (including FJPL) as a direct party. However, if legal
proceedings such as civil, criminal, or administrative proceedings
are brought by Brazilian government agencies, individuals, or any
other body against the INPEX group, it is possible that the INPEX
group will incur losses and/or that the operations of the INPEX
group in Brazil will be affected.

2. EFFECTS OF FLUCTUATIONS IN CRUDE OIL PRICES, NATURALGAS PRICES, FOREIGN EXCHANGE AND INTEREST RATES ON
FINANCIAL RESULTS(1) Effects of ﬂuctuations in crude oil prices and natural
gas prices on ﬁnancial results(2) The effect of ﬂuctuations in exchange rates on
ﬁnancial results

A large percentage of crude oil prices and natural gas prices
in overseas businesses are determined by international market
conditions. In addition, those prices fluctuate significantly inresponse to the inﬂuence of a variety of factors including global
or local supply and demand as well as trends and conditionsin the global economy and ﬁnancial markets. The vast majorityof these factors are beyond the control of the Company. In
this regard, INPEX is not in a position to accurately predict
movements in future crude oil and natural gas prices. The
Group’s sales and proﬁts are subject to the effects of such priceﬂuctuations. Such effects are highly complex and are caused by
the following factors.
1) Although a majority of natural gas selling prices in overseas
businesses are linked to crude oil prices, they are not in direct
proportion to crude oil prices.
2) Because sales and profits are determined on the basis of
crude oil prices and natural gas prices at the time sales arebooked, actual crude oil transaction prices and the averageoil price during the accounting period do not necessarily
correspond.
For the domestic natural gas businesses, the Company
has continued to purchase as source gas natural gas regasiﬁed
from imported LNG as a raw material in addition to natural
gas produced in Japan since January 2010. The price of theCompany’s natural gas sold in Japan is comprised of a ﬁxed priceportion as well as a portion that reﬂects ﬂuctuations in the priceof imported LNG. In addition to the direct impact of trends inthe market prices of LNG and competing energy sources on that
portion that reﬂects ﬂuctuations in the price of imported LNG,
contract negotiations held each ﬁscal year with end purchasers
could have an indirect effect on the ﬁxed price portion.

As most of the Group’s business consists of E&P conducted
overseas, associated revenues (sales) and expenditures (costs) aredenominated in foreign currencies (primarily in U.S. dollars), andproﬁt and loss is subject to the effects of the foreign exchange
market. In the event of appreciation in the value of the yen, yendenominated sales and proﬁts decrease. Conversely, in the eventof depreciation in the value of the yen, yen-denominated sales
and proﬁts increase.
On the other hand, when borrowing necessar y funds,
the Company borrows in foreign currencies. In the event ofappreciation in the value of the yen, a foreign exchange gain on
foreign-currency denominated borrowings is recorded as a resultof ﬁscal year-end conversion; in the event of depreciation in thevalue of the yen, a foreign exchange loss is incurred. For thisreason, the exchange risk associated with the above businessis diminished and the impact of fluctuations in exchange rates
on profit and loss tends to be mitigated. Moreover, although
the Company is taking measures to reduce a portion of the risks
associated with movements in foreign currency exchange rates,
these measures by no means cover all possible risks. As a result,the impact of fluctuations in foreign currency exchange rates
cannot be completely eliminated.

(3) The effect of ﬂuctuations in interest rates on
ﬁnancial results
The Group raises some of the funds necessary for explorationand development operations through borrowing. Much ofthese borrowings are with variable-rates, long term borrowings
based on the U.S. dollar six-month LIBOR rate. Accordingly, theCompany’s profits are subject to the influence of fluctuations
in U.S. dollar interest rates. Furthermore, although the Grouphas devised methods to reduce a portion of interest rate risk,these methods do not cover all risks of interest rate ﬂuctuation
incurred by our Group and do not entirely remove the effect of
ﬂuctuations in interest rates.

3. OVERSEAS BUSINESS ACTIVITIES AND COUNTRY RISKof OPEC production ceilings in OPEC member countries andchanges in the legal system and taxation system of thosecountries (including the establishment or abolition of laws or
regulations and changes in their interpretation or enforcement)
could have a signiﬁcant impact on the Group’s business or results
unless the impact is compensated by insurance.
Additionally, against the background of rising development
costs and other changes in the business environment, theprogress of oil and gas projects, and the need to addressenvironment al is sues, the gover nment s of oil- producing
countries may seek to renegotiate the ﬁscal conditions including
conditions of existing oil contracts related to par ticipatinginterests. In the event that the ﬁscal conditions of contracts were
to be renegotiated, this could have an adverse effect on theGroup’s business performance.

INPEX CORPORATION Annual Report 2013

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Financial /Corporate Information

The Group engages in a large number of oil and natural gas
development projects overseas. Because the Group’s businessactivities, including the acquisition of participating interests,
are conducted on the basis of contracts with the governmentsof oil-producing countries and other entities, steps taken byoil-producing countries to further tighten controls applicable
to home country natural resources, suspension of operation
due to conflicts and other factors, and other such changes
in the political, economic, and social circumstances in such
oil-producing countries or neighboring countries (including
government involvement, stage of economic development,
economic growth rate, capital reinvestment, resource allocation,
res tr ic tion of economic ac tivities by global communit y,government control of foreign exchange or foreign remittances,and the balance of international payments), the application

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4. DEPENDENCE ON SPECIFIC GEOGRAPHICAL AREAS OR
PROPERTIES(1) Production volume
The Group engages in stable production of crude oil and natural
gas in the Offshore Mahakam Block (Indonesia), the ADMA Block(United Arab Emirates), the Minami Nagaoka Gas Field (Japan)
and so on. Through a process of business integration, the Group
had established a wide ranging, diversiﬁed yet balanced portfoliothat encompassed the Asia-Oceania regions (particularly Japan,
Indonesia, and Australia), the Middle East and Africa, Eurasia
including Caspian Sea area and the Americas. For the year
ended March 31, 2013 however, the Asia and Oceania regions
accounted for about 44% of the Group’s production volume, andthe Middle East and Africa accounted for about 39% making up
the vast majority of the Group’s operations.
Looking ahead, the Group will endeavor to further enhance
the balance of its asset portfolio on a regional basis. However,the Group currently relies heavily on speciﬁc geographical areasand properties for its production volume, and the occurrence inthese properties of an operational problem or difficulty could
have an adverse effect on the Group’s operational results.

(2) Contract expiration dates in principal business areas
Expiration dates are customarily stipulated in the agreements
related to participating interests, which are prerequisites for theGroup’s overseas business activities. Although March 30, 1997
was the initial contract expiration date in the production sharing
agreement for the Offshore Mahakam Block of Indonesia, theGroup’s principal geographical business area, an extension wasapproved in 1991, and the current expiration date is December
31, 2017. On the basis of the concession agreement for the
ADMA Block, the concession expiration date is March 8, 2018.
(However, the expiration date for the Upper Zakum Oil Field
has been extended to March 8, 2026.) Although the Groupplans to make efforts together with partners to further extend
these agreements, inability to re-extend the agreements or
unfavorable contract terms and conditions at the time of reextension could have an adverse effect on the Group’s results.
Even should the agreements be re-extended, we anticipate

that remaining recoverable reserves may decrease at the timeof re-extension. Although the Group is striving to acquireinterests that can substitute these properties, failure to acquireparticipating interests in oil and gas ﬁelds to fully substitute forthese properties could have an adverse effect on the Group’s
results. In addition, the period for exploration in oil and gas ﬁelds
currently under exploration is ﬁxed by contracts, and in the caseof ﬁelds where oil and/or gas reserves are found that are deemed
to be commercialized, and the Company is unable to decideon the transition to the development stage by the expiration of
the current contract, efforts will be made through negotiations
with the government of the oil- or gas-producing country inquestion to have the periods extended. However, there remains
the possibility that such negotiations may not be successfully
concluded, in which event the Company would be forced towithdraw from operations in the oil or gas ﬁeld concerned. Also,
as a rule, when there has been a major breach of contract on
the part of one party, it is customary for the other party to havethe right to cancel the agreement before the expiration date.
The agreements for properties in these principal geographicalbusiness areas contain similar provisions. The Group has neverexperienced early cancellation of an agreement due to breachof contract, and we do not anticipate such an occurrence in the
future. Nevertheless, a major breach of contract on the partof a party to an agreement could result in cancellation of anagreement before the expiration date.
A n d i n t h e ove r s e a s n a t u r a l g a s d e ve l o p m e n t a n d
production activities, in many cases we are selling and supplying
gas based on long-term sales and supply contracts in which
expiration dates are stipulated. We plan to make efforts withpartners to extend or re-extend the expiration date before thedeadline stipulated in these contracts. Nevertheless, inability
to extend the contracts, or the occurrence of cases in which
extension is made but sales and supply volumes are reduced,
could have an adverse effect on the Group’s business or results.

5. PRODUCTION SHARING AGREEMENTS(1) Details of production sharing agreements
The Group has entered into production sharing agreementswith countries including Indonesia and Caspian Sea area, andtherefore holds numerous par ticipating interests in thoseregions.
Production sharing agreements are agreements by which
one or several oil and natural gas development companies serveas contractors that undertake at their own expense explorationand development work on behalf of the governments of oilproducing countries or national oil companies and receive
production from the projects as cost recovery and compensation.
That is to say, when exploration and development work results inthe production of oil or natural gas, the contractors recover the
exploration and development costs they incurred by means ofa share in the production. The remaining production (crude oiland gas) is shared among the oil-producing country or nationaloil company and the contractors according to fixed allocation
ratios. (The contactors’ share of production after cost recovery
is called “profit oil and gas.” In the case of natural gas, sales
are conducted by Indonesia and the contractors receive cost
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INPEX CORPORATION Annual Report 2013

recovery and proﬁt gas in the form of cash.) On the other hand,in cases when exploration fails and expected production is notrealized, the contractors are not to recover their invested funds.

(2) Accounting treatment of production sharing
agreements
When a company in the Group owns participating interests under
production sharing agreements, as mentioned above, in the roleof contractor it invests technology and funds in the explorationand development of the proper t y, recovers the inves ted
costs from the production produced, and receives a share of
the remaining production after recovery of invested costs ascompensation.
C o s t s i nve s te d o n t h e b a s i s of p r o d u c t i o n s ha r i n g
agreements are recorded on the balance sheet as assets forwhich future recovery is anticipated under the item “Recoverable
ac co u nt s u n d e r p ro d u c t io n s har ing.” Af te r t he s t ar t ofproduction, recovered costs on the basis of those agreements
are deducted from this balance sheet item.
A s produc tion received under produc tion sharing
agreements is divided into the cost recovery portion and thecompensation portion, the method of calculating cost of sales
is also distinctive. That is to say, the full amount of production
received is temporarily charged to cost of sales as the costof received production, and subsequently the amount of thecompensation portion is calculated and this amount is booked as

an adjustment item to cost of sales (“Free of charge production
allocated”). Consequently, only the cost recovery portion of
production after deduction of the compensation por tion isbooked as cost of sales.

6. RELATIONSHIP WITH THE JAPANESE GOVERNMENT(1) The Company’s relationship with the Japanese
government
Although the government of Japan (the Minister of Economy,
Trade and Industry) holds 18.94% of the Company’s commonshares issued and a Class A Stock as of June 26, 2013, theCompany autonomously exercises business judgment as a
private corporation. There is no relationship of control, such as
through the dispatch of officers or other means between the
Company and the Japanese government. Moreover, we believethat no such relationship will develop in the future. Furthermore,
there is no concurrent posting or secondment to the Company ofofﬁcers or employees from the Japanese government.

(2) Ownership and sale of the Company’s shares by theJapanese government (the Minister of Economy, Tradeand Industry)
The Ministry of Economy, Trade and Industry (METI) holds 18.94%
of the Company’s common shares issued. METI succeeded tothe shares that had been held by Japan National Oil Corporation(JNOC) following the dissolution of JNOC on April 1, 2005.
With regard to the liquidation and disposition of the oil andgas upstream assets owned by JNOC, the Policy Regarding
the Disposal of Oil and Gas Development-Related Assets Heldby Japan National Oil Corporation (hereinafter, the “Report”)

was announced on March 18, 2003 by the Japan National Oil
Corporation Asset Evaluation and Liquidation Deliberation
Subcommit tee of the Advisor y Commit tee on Energy andNatural Resources, an advisory body of the Ministry of Economy,
Trade and Industry. The Report describes the importance ofappropriate timing in selling the shares on the market, taking into
consideration enterprise value growth. In addition, METI may, in
accordance with the Supplementary Provision Article 13 (1) 2 of
the “Special Measures Act for Reconstruction Finance Keeping
After the Great East Japan Earthquake” (“the Reconstruction
Finance Keeping Act“ (provisional translation, the same shallapply hereinaf ter)) enacted December 2, 2011, sell of f theCompany’s shares in Japan or overseas after examining thepossibility of disposal of the said shares based on a review of theholdings from the perspective of energy policy. This could havean impact on the market price of the Company’s shares.
METI also holds one share of the Company’s Class A Stock.
As the holder of a Class A Stock, METI possesses veto rights
over certain resolutions of the Company’s general shareholders’meetings and meetings of the Board of Directors. For details on
the Class A Stock, please refer to “8. CLASS A STOCK” below.

7. TREATMENT OF SHARES OF THE GROUP’S PROJECT COMPANYOWNED BY JAPANESE GOVERNMENT AND JOGMEC(1) Treatment of shares of the Group’s projectcompany previously owned by Japan National Oil
Corporation (JNOC)

INPEX CORPORATION Annual Report 2013

7
Financial /Corporate Information

In the aforementioned Report, INPEX CORPORATION (prior to
the integration with Teikoku Oil; reorganized on October 1, 2008)
was identiﬁed as a company that should comprise part of a corecompany, and is expected to play a role in efficient realizationof a stable supply of energy for Japan through the involvement
by a national ﬂagship company. In response to the Report, theCompany (also, the Group since our acquirement of Teikoku Oil
on October 1, 2008) has sought to promote efﬁcient realizationof a stable supply of energy for Japan while taking advantage
of synergy with the efforts of active resource diplomacy on thepart of the Japanese government, and has aimed to maximize
shareholder value by engaging in highly transparent and efﬁcientbusiness operations.
As a result, with regard to the integration by means oftransfer of shares held by JNOC proposed in the Report, INPEXCORPORATION and JNOC concluded the Basic Agreement
Concerning the Integration of Assets Held by JNOC into INPEXCORPORATION of February 5, 2004 (hereinafter the “Basic
Agreement”) and a memorandum of understanding related
to Basic Agreement (hereinafter “MOU”). On March 29, 2004,
INPEX CORPORATION and JNOC entered into related contracts

including the Basic Contract Concerning the Integration ofAssets Held by JNOC into INPEX CORPORATION (hereinafter
the “Basic Contract”), achieving the agreement on the details
including the treatment of the project companies subject to theintegration and shareholding ratios.
I n 2 0 0 4 I N P E X C O R P O R AT I O N a c c o m p l i s h e d t h e
integration of Japan Oil Development Co., Ltd. (JODCO), INPEXJava Ltd. (disposal was completed on September 30, 2010) and
INPEX ABK, Ltd. which are three of four companies covered by
the Basic Agreement. Although INPEX Southwest Caspian Sea
Ltd. (hereinafter “INPEX Southwest Caspian”) would become awholly owned subsidiary of INPEX CORPORATION by means of ashare exchange and the procedures were undertaken, the shareexchange contract was invalidated owing to failure to accomplish
the terms and conditions of the share exchange contract and theplanned share exchange was cancelled. Following the dissolutionof JNOC on April 1, 2005, the Minister of Economy, Trade andIndustry succeeded to the INPEX Southwest Caspian shares
held by JNOC. The Company continues to study the possibility
to acquire the shares. However, the METI’s future treatmentof these shares is undecided and, depending on the result ofreview in accordance with the Reconstruction Finance Keeping
Act, acquisition of INPEX Southwest Caspian shares could be
unavailable.

137

The treatment of Sakhalin Oil and Gas Development Co.,
Ltd. (hereinafter “SODECO”), INPEX Offshore North Campos,
Ltd., INPEX Nor th Makassar, Ltd. (liquidation proceedings
completed on December 19, 2008), INPEX Masela, Ltd., and
INPEX North Caspian Sea, Ltd. was agreed between INPEXCORPORATION and JNOC in the MOU of February 5, 2004.
Regarding the treatment of shares of SODECO, refer to thesection “(2) Treatment of the shares of Sakhalin Oil and Gas
Development (SODECO) owned by the Japanese government”
below. With regard to the transfer to INPEX CORPORATION of
the shares in the above project companies other than SODECO,
it was decided that the shares are to be transferred for cash
compensation as soon as prerequisites such as the consent of
the oil-producing country and joint venture partners and thepossibility of appropriate asset evaluations are in place. However,
the transfer of shares held by JNOC in the above companies has
not been decided and the shares in the above project companies
were succeeded to by the Japan Oil Gas and Metals National
Corporation (hereinafter “JOGMEC”) on the dissolution of JNOC
on April 1, 2005, except shares related to INPEX North Makassar,
Ltd., to which the Minister of Economy, Trade and Industr y
succeeded. JOGMEC states in its “medium-term objective” and“medium-term plan” that the shares succeeded to from JNOC
will be disposed of at an appropriate time and in an appropriatemanner, but the timing and manner of the disposal for the shares
held by JOGMEC have not been decided, and it is possible that
the Company will be unable to acquire the shares.

(2) Treatment of the shares of Sakhalin Oil and Gas
Development (SODECO) owned by the Japanese
government
The Japanese government (the Minister of Economy, Tradeand Industry) owns 50% of the shares of SODECO. SODECO
was established in 1995 to engage in an oil and natural gas
exploration and development project located on the northeast
continental shelf off Sakhalin Island. SODECO owns a 30.0%
interest in the Sakhalin-1 Project, of which ExxonMobil of theUnited States is the operator. In October 2005, Phase 1 ofthis project started with the goal of advanced production ofoil and natural gas. Furthermore, there is a plan for additional
development operations (Phase 2) for the purpose of the fullscale production of natural gas. The Company holds 5.74% of
SODECO shares issued and outstanding.
In the previously mentioned Report, SODECO, along withINPEX CORPORATION and JODCO, has been identified as acompany that should comprise part of a core company in Japan’s
oil and natural gas upstream industry in the future.
In accordance with the Report, it is assumed that privatesec tor shareholders, including INPEX CORPOR ATION, will
acquire shares of SODECO issued and outstanding to which the
Minister of Economy, Trade and Industry succeeded and thatwere previously held by JNOC (50.0%). The Company plans tohold a maximum of 33% of the SODECO shares to become its
largest shareholder. In the event that the consent of SODECO’s
joint-venture par tner s, the relevant Rus sian gover nment
entity, or other parties is necessary for the acquisition of theshares, obtaining the consent is a prerequisite for acquisition.
In addition, it will be necessar y to reach agreement on theshareholder composition for SODECO, the share transfer price,and other matters.
In the event that the additional acquisition of the SODECO
shares is realized, the Group will hold a substantial ownershipinterest in oil and natural gas assets in Russia, as well as in Asiaand Oceania, the Middle East, Caspian Sea area, and otherregions, and we expect the acquisition to contribute to theachievement of a more balanced overseas asset portfolio for theGroup.
However, at this time it is undecided whether agreement
concerning acquisition of the shares with the Minister of
Economy, Trade and Industry will be reached as anticipated andwill be realized. Also, even in the event that the acquisition isrealized, the conditions and time of acquisition are undecided
and, depending on the result of review in accordance with theReconstruction Finance Keeping Act, the acquisition by theCompany could be unavailable.

8. CLASS A STOCK(1) Overview of the classiﬁed share
1) Reason for the introduction
The Company was established as the holding company througha stock transfer between INPEX CORPORATION and Teikoku
Oil Co., Ltd. on April 3, 2006. Along with this, a classiﬁed shareoriginally issued by INPEX CORPORATION (prior to the merger)
was transferred and at the same time the Company issued aclassified share with the same effect (hereinafter the “Class A
Stock”) to the Minister of Economy, Trade and Industry. The
classified share originally issued by INPEX CORPORATION
was the minimally required and a highly transparent measure
to eliminate the possibility of management control by foreign
capital while not unreasonably impeding the efficiency andflexibility of management based on the concept in the Reportdiscussed in the above section 7. “TREATMENT OF SHARES OF
THE GROUP’S PROJECT COMPANY OWNED BY JAPANESEGOVERNMENT AND JOGMEC.” INPEX CORPOR ATION is
identified as a company that should comprise part of a corecompany for Japan’s oil and gas upstream industr y and is138

INPEX CORPORATION Annual Report 2013

expected to play a role in efﬁcient realization of a stable supplyof energy for Japan as a national ﬂagship company. On the basisof the concept of the Report, the Company issued the Class
A Stock because it can be considered an effective means ofpreventing risks such as a speculative hostile takeover.
2) Shareholders’ meeting resolutions, dividends, distributionof residual assets, and redemption
Unless otherwise provided by laws or ordinances, the Class A
Stock does not have any voting rights at the Company’s generalshareholders’ meetings. The holder of the Class A Stock will
receive the same amount of dividends, interim dividends, anddistributions of residual assets as a holder of common stock.
The Class A Stock will be redeemed by resolution of the Boardof Directors of the Company if the holder of the Class A Stockrequests redemption or if the Class A Stock is transferred to a
party other than the government of Japan or an independentadministrative body that is fully funded by the government ofJapan.

3) Veto rights in the Articles of Incorporation
The Articles of Incorporation of the Company provide that an
approval resolution of the meeting of the holder of the Class A
Stock is necessary in addition to resolutions of the Company’s
general shareholders’ meetings and resolutions of meetings ofthe Board of Directors for the decisions on certain important
mat ters such as the appointment or removal of Direc tors,
disposition of material asset s, changes to the Ar ticles ofIncorporation, business integration, capital reduction or company
dissolution in connection with the business of the Company.
Accordingly, the Minister of Economy, Trade and Industry, as theholder of the Class A Stock, has veto rights over these importantmatters.
4) Criteria for the exercise of veto rights provided in theguidelines
Guidelines concerning the exercise of the veto rights havebeen established in a Ministry of Economy, Trade and Industry
Notice (No. 220, 2008) (hereinafter the “Notice”). The guidelines
stipulate the exercise of veto rights only in the following speciﬁccases.
• When resolutions pertaining to appointment or removal of
Directors and integration are not voted down and it is judgedthat the probability is high that the Company will engage inmanagement inconsistent with the role that a core company
should perform for efficient realization of a stable supply ofenergy to Japan.
• When resolutions pertaining to disposition of material assets
are not voted down and the objects of disposition are oil andnatural gas exploration or production rights or rights similar
thereto or shares or ownership interest in the Company’s
subsidiary whose principal assets are said rights and it isjudged that the probability is high that the Company will
engage in management inconsistent with the role that a corecompany should perform for efficient realization of a stablesupply of energy to Japan.
• When resolutions pertaining to amendments to the Company’s
Articles of Incorporation relating to changes in the Company’sbusiness objectives, capital reduction, or dissolution are notvoted down and it is judged that the probability is high that
the Company will engage in management inconsistent withthe role that a core company should perform for efficient
realization of a stable supply of energy to Japan.
• When resolutions pertaining to amendments to the Articles ofIncorporation granting voting rights to any shares other thanthe common shares of the Company are not voted down andcould have an effect on the exercise of the voting rights of theClass A Stock.
It is provided that the above guidelines shall not be limited in theevent that the Notice is changed in the light of energy policy.

(2) Risk in connection with the Class A Stock
Although the Class A Stock was issued as a minimally required
measure to eliminate the possibility of management controlled
by foreign capital while not unreasonably impeding the efﬁciency
and flexibility of management, anticipated risks in connection
with the Class A Stock include the following.
1) Possibility of conﬂict of interest between national policy
and the Company and its common shareholders
It is conceivable that the Minister of Economy, Trade and Industry
could exercise the veto rights in accordance with the above
guidelines provided in the Notice. As the guidelines have been
provided from the standpoint of efﬁcient realization of a stablesupply of energy to Japan, it is possible that the exercise of theveto rights by the Minister of Economy, Trade and Industry could
conflict with the interest of other shareholders who hold theCompany’s common shares. Also, it is possible that the above
guidelines could be changed in the light of energy policy.
2) Impact of the exercise of veto rights on the price ofshares of common stock
As mentioned above, as the holder of the Class A Stock has theveto rights over certain important matters in connection with thebusiness of the Company, the actual exercise of the veto rights
over a certain matter could have an impact on the price of theCompany’s shares of common stock.
3) Impact on the Company’s degree of freedom in businessand business judgment
As the Minister of Economy, Trade and Industry holds the Class
A Stock with the previously mentioned veto rights, the Company
needs a resolution of the meeting of the holder of the Class
A Stock concerning the above matters. For this reason, theCompany’s degree of freedom in management in those matters
could be restricted by the judgment of the Minister of Economy,
Trade and Industry. Also, attendant on the need for a resolutionof the meeting of the holder of the Class A Stock concerning theabove matters, a certain period of time is required for procedures
such as the convening and holding of meetings and resolutions
and for the processing of formal objections, if necessary.

9. CONCURRENTLY SERVING OUTSIDE DIRECTORSAt the same time, however, the shareholder corporations are
involved in businesses that overlap with those of the Company.
The Company therefore recognizes that it must pay particularattention to corporate governance to avoid conﬂicts of interest inconnection with competition and other matters.
To this end, all Company direc tors, including the four
outside directors described above, are required to sign a written
undertaking to carry out their duties as ofﬁcers of the Company
appropriately and with the highest regard for the importance ofsuch matters as their obligations in connection with noncompetitive
practices under the Japanese Companies Act, the proper mannerfor dealing with conﬂict of interest, and conﬁdentiality.
INPEX CORPORATION Annual Report 2013

7
Financial /Corporate Information

The Board of Directors of the Company is composed of 16
members, ﬁve of whom are outside directors.
The four outside directors have many years of management
experience in the Company’s business and are able to offer
objective, professional advice regarding operations. For thisreason, they were asked to join the Board of Direc tors tocontribute to the development of the Company’s business.
The four outside directors concurrently serve as directors
or advisers of Japan Petroleum Exploration Co., Ltd., Mitsubishi
Corporation, Mitsui Oil Exploration Co., Ltd. and JX Holdings,
Inc. (hereinafter “shareholder corporations”), respectively.

139