MARKET TREND AND
MANAGEMENT POLICY3

Business Model and Strengths
In its oil and gas development business, INPEX employs a business model that focuses
on stable production and supply as well as the reinvestment of cash ﬂows obtained
from production activities toward the acquisition of new reserves and the discovery
and development of oil and gas which contribute to further production revenues. Thiscycle is the wellspring for sustainable growth as a company.

14

Large-scale
LNG project operator
Production
GrowthIchthys

Abadi

INPEX is in the process of developing two of the worldʼsleading-scale LNG projects at Ichthys in Australia andAbadi in Indonesia. We are the ﬁrst Japanese company
to develop such large-scale projects as an operator. The
expected production volume from both projects is vast,equaling more than 10% of Japanʼs current LNG annual
import volume. We are focusing on these priority projects,
which will increase the corporate value of our company.

Strong reserve /Resource base
Proved and probable reserves of

4.09 billion boe

積極的なIncreasing
探鉱・開発
Reserves
投資034

INPEX CORPORATION Annual Report 2013

Reserves and resources, which are the source of corporatevalue, are the critical factor in the oil and gas E&P business.
INPEX has the largest proved reserves in Japanese companies in the sector. Our net proved and probable reserves
total 4.09 billion boe. Our reserves-to-production ratio is14.7 years for proved reserves and 27.5 years if probablereserves are added. Beyond our probable reserves, wehave an abundance of possible reserves and contingent
resources. We expect to continue increasing proved andprobable reserves over the medium to long term.

23Gas supply chain
Domestic natural gas pipeline network

1,400kmComplementing the completion of the Naoetsu LNG
Termnal, INPEX owns a domestic natural gas pipeline
network stretching approximately 1,400 km that connects
domestic and overseas gas assets to the Japanese gas
market. We plan to add value by establishing a gas supply
chain through linkage between this network and our major
LNG projects. We are currently proceeding with work on
the Naoetsu LNG Terminal, with the terminal scheduled
to enter operation in early 2014. Construction of Toyama
Line (Toyama Prefecture) is also under way, with supplies
slated to commence around the end of 2014.

Accountingof Revenue
Attributableto Sales

Strong ﬁnancial position
Equity ratio:

68.6%

Net debt/Net total
capital employed:­43.9%

A strong, healthy balance sheet and plentiful cash reserves
are essential for oil and gas E&P companies. This reﬂects
both the high degree of risk associated with E&P activities and the need to have sufﬁcient funds on hand to takeadvantage of major investment opportunities quickly as
they arise. As a result of a public offering held in August
2010, our company secured a strong ﬁnancial position. Asof March 31, 2013, our company had an equity ratio of68.6% and a ratio of net debt to net total capital employedof –43.9%. (Cash and cash equivalents and public bonds
were greater than interest-bearing debts.) Compared withthe oil majors and other global peers, this represents asound level of ﬁnancial strength.

Aggressive
Exploration andDevelopment
Investment

INPEX CORPORATION Annual Report 2013 035

The Structure and Mechanism of
Oil and Natural Gas Exploration and Development
Acquisition of Blocks
The business activities of the oil and gas industry can be envisioned as the ﬂow of a river. The
upstream consists of exploration, development andproduction of oil and natural gas. The midstream iswhere products are transported. The downstream
refers to reﬁning and sales. Our mainstay business isto handle operations in the upstream including theexploration, drilling, production and sales of crude
oil and natural gas. As shown in the business ﬂow
at right, upstream business activities can be further
classiﬁed into the acquisition of blocks, exploration,appraisal, development, and production and sales.

We collect extensive information on legal system andcountry risks related to areas in which oil and natural
gas are expected to exist.
We then apply and bid
for mining rights and/orexploration and development rights and enter into
a contract for explorationand development.
Signing ceremony of contract

INPEX participates in

80 projects across 29 countries
worldwide as of June 30, 2013.

Eurasia

6JapanAmericas

Asia & Oceania

42

Middle East& Africa

12
Global Reserves andReserves-to-Production Ratio

Proved reserves by region and reserves-to-production ratio (PR ratio)(As of December 31, 2012)

Global proved reserves of oil and natural gas total around 1.7 trillion bbl and6,600 trillion cf, respectively. By region,
the Middle East accounts for the largest portion. In speciﬁc terms, Centraland South America as well as North
America have vast proved reservesof oil while Europe and Eurasia boast
large proved reserves of natural gas.

036 I 037

INPEX CORPORATION Annual Report 2013

Middle East

48.4%
PR ratio(years)52.9

AfricaAsia Paciﬁc 2.5%

7.8%

North America

Asia Paciﬁc

8.2%

North
America 5.8%

13.2%

Crude oil

1,688.9billion bblCentral,SouthAmerica

19.7%Europe,
Eurasia

8.4%

Central,South
America

Africa7.7%
Middle East

43.0%
PR ratioNatural gas

6,614.0
trillion cf

4.1%
Europe,Eurasia31.2%(years)

55.7
Source: BP Statistical Review of World Energy 201319

Exploration

Appraisal

In addition to geological surveys, we utilize geophysicalsurveys conducted through satellite images and seismic
waves in order to assess
the potential subsurface
accumulations of oil andnatural gas. Furthermore,
we drill exploratory wellsin order to conﬁrm thepresence of oil and gas.

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 andto evaluate the amountof reserves. In addition,
we make comprehensive
judgments regarding thecommercial viability of theﬁelds.

Geophysical surveys

Drilling of appraisal wells

Satellite

Offshore drilling rig(platform)

Offshore geophysical survey

Natural gas
Oil

Global Energy Demand
Looking at global primary energy consumption, oil and natural gas accountfor more than half of the worldʼs primaryenergy demand.
From a global perspective, demandfor energy is forecast to increase evenfurther in such developing countries as
China and India. Natural gas in particular is expected to witness substantial
growth in demand especially in majorregions.

Natural gas demand by country or region
Americas(Billion m³)

Middle EastEurope
ChinaIndia
Japan

1,200

World primary energy consumption 2012
Hydroelectricity

Renewables

1.9%

6.7%

1,000

Oil

800

Nuclear
power

Total

600

4.5%

12.48

400

Coal

200

29.9%

33.1%

billion toe
Natural gas02010

2015

2020

2025

2030

2035

Source: IEA World Energy Outlook 2012
in the New Policies Scenario

23.9%
Source: BP Statistical Review of World Energy 2013

Development

Production and Sales

We drill production wells for the production of oil andnatural gas. We also construct separators, gas processing facilities and a transport pipeline, which arenecessary for production
and shipping.

We perform production and operation management
such as reﬁning/treatment to create products from theoil and natural gas recovered from the production
wells. We also engage inmarketing and sales forthe produced crude oil,condensate, LPG, naturalgas and LNG.

Drilling of production wells

LNG tanker

Onshore rig
LNG tanker

World primary energy demand by fuel(Million toe)
5,000

CoaCoalOil
NaturalNaturalal gas
as

4,000

NuclearNucl
ear powepower
Hy oeleHydrl ctricity
i3,000Natural gas

Biomass

To grow 1.6%
annually

OtherOthe
Renewabl
Renewableeenergy2,000
1,00002010

2020

2035

Source: IEA World Energy Outlook 2012 in the New Policies Scenario

Natural gas is forecast to experience high demand growth. Amid
an upswing in overall energy demand, the annual natural gas
growth rate is projected at 1.6% from 2010 to 2035. Expectationsare that demand for natural gas will approach demand for coal in
2035. In contrast to fossil fuels, which are limited resources, solar,hydro, biomass, geothermal, and similar energy sources are gaining attention because they are renewable energy sources that canbe reused in the short term and, moreover, produce less CO2emissions. Although demand for hydro and biomass energy as aratio of overall energy demand is expected to remain more or lessﬂat through to 2035, demand for other renewable energy sources
is expected to increase (2010: 1% → 2035: 4%).Investment Aimed at Further Exploration and the Acquisition of Assets

Consumer demand

3Market Trend andManagement Policy

LNG receiving terminal

Pipeline, tankerNaoetsu
LNG
Terminal(Under construction)

Toyama Line (Under construction)

Minami-Nagaoka
Gas Field

Sh
hin Oumi LineTo
okyo Line

Naoetsu LNG Terminal andNatural Gas Pipeline Network

Shin Tokyo Line
Matsumoto Line
Ryomo Line
Koffu Line
Iruma LineINPEX is constructing an LNG receiving terminal inNaoetsu, Niigata Prefecture. The Company will supply
natural gas throughout Japan using this LNG receivingterminal and its natural gas pipeline network that extends
across the Kanto and Koshinetsu regions.

Shizuoka LineOil and Natural Gas Demand in JapanThe demand for oil has been decreasing inJapan recently, but oil is broadly used as asource of heat and power, as well as in the production of materials, and even now accounts
for more than 40% of Japanʼs primary energy
demand. The share of LNG used for thermal
power generation in Japan has risen in the wakeof the shutdowns of nuclear power plants after
the Great East Japan Earthquake, with demandfor LNG growing. LNG import volume increased
more than 10% from the previous year reachingan all-time peak of 87.31 million tons in 2012.

Japanʼs primary energy supply (2011)
Newenergy,etc.

Hydroelectricity

3.6%

1.5%

Nuclear
power

4.2%

(Million tons/year)

2012: 87.31 million tons

80
60

Coal

21.9%

LNG import trend in Japan

Oil

47.2%

Natural gas

40

20

21.7%
01995

Source: Energy & Economic Statistics in Japan 2013

20002005

2010

Source: Ministry of Finance trade statistics

INPEX CORPORATION Annual Report 2013

038 I 039

The Medium- to Long-Term Vision of INPEXand Investment Plans
In May 2012, INPEX drew up its Medium- to Long-Term Vision of INPEX to clarify the Companyʼs growth targets over the medium to long term and the key initiatives the Company
will take through the year ending March 31, 2017, to achieve these targets. Over the ﬁveyear period from the year ended March 31, 2013 to the year ending March 31, 2017, INPEX
plans to invest a total amount of ¥3.5 trillion. In addition to funds on hand, investment
funding will be covered by future operating cash ﬂows as well as bank loans while taking
into consideration the Companyʼs ﬁnancial soundness.
MEDIUM- TO LONGTERM VISION OF INPEX:Ichthys and our growth beyond
For details, please refer to thebooklet entitled “MEDIUMTO LONG-TERM VISION OF
INPEX: Ichthys and our growth
beyond,” or refer to the following Web site:

I

atlO

Gas E&P Compan
y1Continuous Enhancement ofE&P Activities

Top-Class` inpex.co.jp/en/vision

rnentaio ndil a n

Be comeaAchieve net production
volume ofby the early 2020sThree Growth Targets
We have set three growth targets necessary forsustainable growth, and will conduct key initiatives over the next ﬁve years to achieve them.

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 toevolve 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

040

INPEX CORPORATION Annual Report 2013

Maintain Financial Strengths
Financial performanceand target
As ofMarch 31,2013

Net debt /Net total capital
employed69%

20%

Equity ratio

As ofMarch 31,
2013

50%
or higher

or less-44%

Funding Source
Own Funds
Approximately ¥1.5 trillionof cash available on hand
(As of March 31, 2013)

Cash Flows
Future operating cash ﬂows
obtained per year

Bank Loans■ Lending from JBIC
■ Guarantee from JOGMEC■ Project ﬁnanceBeceomg
I n teanrated Energy Compa nyw2it hnaralga

StrengtheningGas Supply Chaintusasthecore

supply volume of3
Market Trend andManagement Policy

3/by the early 2020s(3.0 billion m³/year in the long term)

3

Reinforcement ofRenewable Energy Initiatives

for the next generation
Investment for Growth andReturn for Shareholders
Future Investment
Investment results andinvestment plan for
the next three years(¥ billion)¥3.5 trillion
to be invested over

5 years
from the year ended
March 31, 2013
to March 31, 2017
in major projects
including Ichthys■Development expenditures*■Exploration expenditures■Other capital expenditures**1,131.0

Including
exploration
expendituresof around

1,003.0

919.0
814.0

653.3

733.0
657.0

576.7

¥300 billion
54.0
22.6
2013/3(Actual)

91.0
37.0
2014/387.0
18.0
2015/370.0
6.0
2016/3* Development expenditures include
investment in Ichthys downstream** Mainly investment in the Naoetsu LNG Terminal and the domestic pipeline network, etc.

3

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 2013041

Where does crude oil and natural gas come from?
Crude oil and natural gas are thought
to originate from organic matter, suchas the remains of once-living organismsthat accumulated at the bottom of seas
and lakes, and then subjected to extreme
heat and pressure underground. Crude
oil and natural gas that have formed
deep underground are lighter than thedirt and water in the earth, allowing themto gradually rise to the surface over a
very long period of time. If the crude oiland natural gas encounters highly dense
geological formations on the way to thesurface, however, it is blocked and forms
deposits that become oil and gas ﬁelds.
Shale gas differs from conventional
natural gas in that it is trapped within layers of hard shale formations. Shale gas isrecovered by drilling horizontal wells into
these formations and applying hydraulicfracturing to crack the layers of shale torelease the trapped gas.

Limestone
Sandstone

Volcanic rock

Approximately
1 mmin diameter

Orangepart is pore

Shale gas field

Conventional
oil and gas field

Crude oil and natural gas is found in small
pores in sand and rocks.

Surface of the earth

Shale

Coalbed methane

Natural gas
Crude oil

Sandstone (reservoir rock)

The color, speciﬁc
gravity and viscosityof crude oil and natural gas differ greatly
depending on thelocation of the well.

Layers of shale rich in gas

Tight sands gas

Shale gas

INPEXʼs position among global E&P companies
INPEX is currently positioned as a mid-tier player among theglobal E&P companies. However, INPEX aims to join the leading group of global E&P companies in the early 2020s after
the commencement of production at the Ichthys LNG Projectin Australia. The chart below compares the proved reserves,net production volume and market capitalization of major E&P
companies.

Proved Reserves, Net Production Volume and the Market Value of the Major E&P Players

1,000

800

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

Apache (US)

Talisman (CA)Occidental (US)Anadarko (US)

600( Present )400408thousand boed

Net production volume (Thousand boed)

Proved reserves and production volume indicated in this chart are from documents disclosed by the major E&P companies in fiscal 2012.
The size of the circle shows the market value of each company as of June 30, 2013.

Santos (AU)hblissta s ae
g to n a ny
kin sitio pa
BG (UK)
See rm po P com 20s
a fi bal E& rly 20
aglo the eProbable reserves toby
upgrade to200

proved through explorationand development

Woodside (AU)
01

2

3

4

Our net production
volumeOur proved
and probable reserves

Proved reserves: 2.19 billion boe

Probable reserves: 1.91 billion boe

Proved reserves (Billion boe)

042

INPEX CORPORATION Annual Report 2013