Maximizing Corporate Value as a Comprehensive Energy Company

Annual Report 2002

In April 1999, Nippon Oil Co., Ltd., and Mitsubishi Oil Co., Ltd., merged, creating

Nippon Mitsubishi Oil Corporation (NMOC). Since then, NMOC has been able to

integrate its refining network, marketing brands, and various other businesses and systems.

The Company has adopted the Nippon Oil Corporation name to mark the completion of

post-merger adjustments and the start of operations as a thoroughly integrated company.

Profile

Contents1 Financial and Operating Highlights

2 A Message from the President

5 Maximizing Corporate Value as a Comprehensive Energy Company

20 Review of Operations

30 Board of Directors

31 Financial Section

32 Management’s Discussion and Analysis of Operations

36 Six-Year Financial and Operating Summary

54 Principal NOC Group Companies

55 Overseas Offices

56 Organization Chart

57 Investor Information

A Cautionary Note on Forward-Looking Statements

The financial forecasts, management targets, and any other

estimates and projections of the Company presented in

this report are based on information available to manage-

ment as of the date set forth within.

Please note that actual results may vary significantly

from projected forecasts due to various uncertain factors,

and as such, readers should take care when making invest-

ment decisions based solely on the forecasts herein.

The factors affecting actual results include but are not

limited to economic conditions, crude oil prices, demand

for and market conditions of oil-related products, and

exchange rate and interest rate trends.

Nippon Oil Corporation holds the rights in Japan to the ENEOS trademark and logo.The Company offers its products and services under the ENEOS brand.

1

Financial and Operating HighlightsNippon Oil Corporation and Consolidated Subsidiaries

Financial Highlights

Thousands ofMillions of yen U.S. dollars

Years ended March 31, 2002 and 2001 2002 2001 2002

Net sales ..................................................................................................................... ¥3,949,571 ¥4,076,890 $29,696,023

Net income ................................................................................................................. 24,006 29,787 180,496

Cash dividends paid ................................................................................................... 13,960 12,614 104,962

Total assets ................................................................................................................ 3,444,742 3,971,252 25,900,316

Total shareholders’ equity .......................................................................................... 924,140 898,083 6,948,421

* U.S. dollar figures are translated from yen, for convenience only, at the rate of ¥133 to US$1, the approximate rate of exchange on March 31, 2002.

Operating Highlights

Years ended March 31, 2002, 2001 and 2000 2002 2001 2000

Crude oil imports (million kiloliters) ............................................................................ 58.7 62.4 60.0

Sales of petroleum products*1 (million kiloliters) ........................................................ 84.0 83.4 83.6

Capacity of refining facilities (barrels per stream day) ............................................... 1,227,000 1,227,000*3 1,348,000

Number of employees*2 .............................................................................................. 14,368 14,895 15,570

*1 Petroleum products include lubricants, liquefied petroleum gas (LPG), and others.*2 The number of employees includes those of Nippon Oil Corporation and all consolidated subsidiaries.*3 This figure represents capacity as of April 1, 2001.

The abbreviation NiSSEKI is used in this annual report. NiSSEKI, an abbreviation of Nippon Oil Company’s Japanese name, was the name used in marketing operations and was therefore the Company’s best-known appellation.Notes: 1. Unless otherwise indicated, all dollar figures herein refer to U.S. currency. Billion is used in the American sense of one thousand million.

2. Sales figures for petroleum fuel and crude oil, petrochemical operations, those related to construction, and others referred to in this annual reportinclude transactions among consolidated companies.

3. In this report, the term “NOC” and such terms as “the Company,” “our,” and “we” may refer to Nippon Oil Corporation and its consolidated subsidiariestaken as a whole, or to all subsidiaries, affiliates, and associated companies considered part of the NOC Group taken as a whole. When the referenceis only to Nippon Oil Corporation, the term “parent company” is used. These terms are used for convenience only. A listing of principal companiesand their relationship to NOC is shown on page 54.

2

During fiscal 2002, ended March 31, 2002, Nippon Oil Corporation (NOC, previously Nippon

Mitsubishi Oil Corporation (NMOC)) worked to strengthen its position as the leading company in

Japan’s oil industry by completing the integration of operations inherited from its predecessor companies—

Nippon Oil Co., Ltd., and Mitsubishi Oil Co., Ltd.—when they merged in April 1999. The Company

was able to integrate its refining network, brands, and electronics systems during the year, thereby creat-

ing a solid base for the Group’s future efforts to strengthen marketing operations and launch promising

new types of energy businesses.

As a crowning step in completing the post-merger integration process, we changed our corporate

name from Nippon Mitsubishi Oil Corporation to Nippon Oil Corporation. This change was approved

at the June 27, 2002, general meeting of shareholders.

In April 2002, the NOC Group began implementing its second three-year management plan, which

is designed to promote stable profitability and strategic investments in a way that will enable the Group

to overcome fierce competition, increase corporate value, and thereby become a strong comprehensive

energy company that meets the expectations of its stakeholders.

A Message from the President

3

Operating Environment

The Japanese economy remained sluggish during the year under review. Personal spending was weak

and capital investment continued to fall. Crude oil prices were relatively stable during the first half of

the year but dropped considerably in the second half, in the wake of the September 11 events in the

United States.

Reflecting the weakness of the Japanese economy, domestic demand for petroleum products was

lower than in the previous fiscal year. The combination of rising oil prices and the weakening yen caused

a surge in crude oil procurement costs, depressing the profitability of the entire domestic oil industry.

In this environment, NOC’s consolidated net sales declined 3.1%, to ¥3,949.5 billion. Operating

profit increased 7.4%, to ¥75.2 billion, mainly due to cost reductions and profit from the adoption of

a new inventory valuation method. However, net income fell 19.4%, to ¥24.0 billion.

Accomplishments during the Year

Ever since the merger three years ago, the NOC Group has worked hard to cut costs through rationali-

zation and efficiency-boosting measures and to lower the level of its interest-bearing debt. The initial

goals were to lower annual costs ¥86 billion and cut interest-bearing debt ¥300 billion. In fact, we were

able to reduce annual costs and interest-bearing debt by approximately ¥120 billion and ¥320 billion,

respectively.

The Group conducted business with three major integration initiatives in mind during fiscal 2002—

in the fields of refining, retailing, and information technology (IT).

To ensure that the NOC Group’s principal refining facilities can flexibly respond to changing

demand trends and patterns as a highly coordinated unit with optimized production systems, two refin-

ing subsidiaries—Koa Oil Co., Ltd., and Tohoku Oil Co., Ltd.—were merged with Nippon Petroleum

Refining Co., Ltd. (NPRC), on April 1, 2002. The merger is promoting unified crude oil procure-

ment and further reductions in indirect costs and expenses, which will further improve the Group’s

cost-competitiveness.

NOC has Japan’s largest service station network, comprising approximately 12,000 facilities. During

the last nine months of fiscal 2002, the Company moved to better unify the network and raise its profile

in the eyes of customers by introducing service station color schemes centered on the new ENEOS

brand at all NOC service stations throughout Japan.

Following the merger, NOC continued to use the electronics systems inherited from the Company’s

predecessor companies. In April 2002, the Company introduced a comprehensive system that handles

all marketing and distribution processes from order reception through truck dispatching and sales

accounting.

4

Outlook

Looking ahead, we see signs that the Japanese economy may improve as a result of economic recovery

in the United States and Asia, but its weakness is projected to persist. This and the shift of Japanese

manufacturing operations to overseas bases make a further decline in domestic demand for petroleum

products almost inevitable. Consequently, companies in Japan’s oil industry will have to redouble their

competitive efforts to survive. In light of these circumstances, NOC is anticipating that it will continue

to face a highly challenging operating environment.

Progressive deregulation measures in Japan are creating a borderless energy industry, with companies

no longer confining their operations to such individual energy segments as electric power, natural gas,

or petroleum products. This is giving rise to greater competition between companies that previously

specialized in different energy sources. However, we are pleased to note that deregulation is enabling us

to accelerate the implementation of our strategies for becoming a comprehensive energy company.

As mentioned, the NOC Group has just begun implementing its second three-year management plan,

which is aimed at increasing the profitability of its core oil operations while launching diverse new

operations in other energy industry segments. By the end of March 2005, the plan aims to achieve

a ¥100 billion drop in annual costs, a ¥200 billion reduction in interest-bearing debt, and a 6.5% ROE.

All Group units have begun working concertedly to realize these targets, which will substantially bolster

the Group’s fundamental strengths.

As the top company in Japan’s oil industry, NOC believes it has an important responsibility to

society to be a leader in showing how to ensure the dependable supply and consumption of energy in an

environment-friendly manner. The Company is on the leading edge of technological progress in such

fields as removing sulfur from fuels, reducing refineries’ carbon dioxide emissions per unit of output,

and engineering fuel cells that offer both high efficiency and low pollutant emissions. As a result, we are

well positioned to meet the increasingly strict environmental protection standards that are expected to be

adopted in Japan and to benefit from the elimination of refining facilities that cannot meet these standards.

Our new three-year management plan is designed to provide NOC with a rock-solid foundation for

efficient operations and to maximize corporate value. We will do our utmost to ensure that the plan is

carried out successfully.

Fumiaki Watari

President and Representative Director

5

Maximizing corporate value asa comprehensiveenergy company

6

Understanding the competitive environment

Major Countries’ Dependence on Foreign Energy Sources and Oil (1998)

� Structure of Energy Consumption in Major Industrialized Countries (2000)

�

...Identifying growth

100

50

0

–50

–100

100

80

60

20

0

40

(%) (%) (Million tons, crude oil equivalent basis)

U.S.A.GermanyU.K.FranceItalyJapan

Depe

nden

ce o

n fo

reig

n en

ergy

sou

rces

Depe

nden

ce o

n fo

reig

n oi

l

Hydroelectric power

Nuclear power

Natural gas

Coal

Oil

WorldRussiaChinaFranceGermanyU.K.U.S.A.Japan

514.5 2,237.3 224.0 335.2 256.4 839.7 643.0 9,124.8*

Factors such as slack domestic demand for petroleum

products due to sluggish economic conditions along

with surplus refining capacity are creating a very harsh

operating environment for the oil industry in Japan,

but the oil business continues to have the potential for

generating high levels of cash flow.

Source: International Energy Agency (IEA), Energy Balances Source: BP, Statistical Review of World Energy

* This figure represents world total volume.

7

Petroleum currently meets nearly half of Japan’s

energy needs, and this share is projected to fall to

about 45% in 2010. Despite growing consump-

tion of liquefied natural gas (LNG) and coal as

well as increasing interest in alternative energy

sources, Japan can be expected to maintain a high

and quite stable level of demand for petroleum

fuels for many years to come.

Despite this, the oil industry in Japan is facing

extremely difficult challenges. Besides the current

slackness of economic conditions, the country is

undergoing industrial restructuring that will con-

tinue reducing demand for fuels associated with

manufacturing industries over the long term.

Japan’s surplus refining capacity and excessive

number of service stations are still preventing

healthy supply-demand balances that would sup-

port adequate profit margins. The oil industry has

for several years been striving for efficiency and

lower excess capacity through various measures,

including those involving mergers and corporate

alliances. However, the industry still has from

15% to 20% surplus refining capacity.

Number of NOC Service Stations� NOC Group Share of Japan’sDomestic Refining Capacity

�

Moreover, increasingly strict environmental

protection standards mandating the reduction of

fuels’ sulfur content will make it inevitable for the

industry to eliminate surplus capacity expeditiously.

Requiring advanced technological capabilities

as well as funds for installing and upgrading

equipment, new standards are likely to trigger the

abandonment of certain refining facilities.

Other noteworthy trends include the Japanese

government’s ongoing efforts toward privat-

ization to make better use of the private sector’s

capabilities for upstream activities and crude

oil storage.

Amid these conditions, NOC is beginning to

use its infrastructure and superior technologies to

address growing demand for petroleum products

in China and other Asian countries, which are

gradually relaxing regulations that have previously

impeded some types of international oil business.

As described, the oil industry in Japan still

faces certain problems that must be solved, but

the companies that survive are likely to generate

higher levels of profit in the future.

potentials

Nippon Petroleum Refining Co., Ltd.1,167 (23.5%)

Nihonkai Oil Co., Ltd.60 (1.2%)

60

40

0

20

(Thousands) (Thousand barrels/day)

Industry total

NOC

NiSSEKI

Mitsubishi Oil

Industry total

NOC

NiSSEKI

Mitsubishi Oil

Japan4,968

2001200019991998

Source: Petroleum Association of Japan

8

Reaffirming our medium-to-long-term vision

...Maximizing corporate

E&P

Importationand storage

Refining

Distribution

Marketing

New energy

Coal

LPG

Crude oil

Lubricant oils

Petrochemicals

LNG

Electric power

Establishing a ComprehensiveEnergy Company

Establ

ishing

integ

rated

system

s

“

”

In line with its motto, “Your Choice of Energy,” NOC intends to become a truly

comprehensive energy company with highly efficient and integrated operating

systems. We want to offer our clients one-stop shopping for various kinds of

energy needs efficiently and profitably. During the next three years, we will be

focusing on increasing the profitability of our core businesses and launching

several kinds of new energy businesses.

Shigeo Hirai, Director, General Manager of Corporate Planning & Management Department

9

NOC’s management plan for the three years

from fiscal 2003 through fiscal 2005 calls for the

Company to increase its domestic and overseas

competitiveness by vertically integrating all oil

operations from exploration and production (E&P)

through shipping, refining, distribution, and

marketing. The plan’s

main goals are reduc-

ing interest-bearing

debt from ¥1.1 trillion

to ¥900 billion and boosting ROE from 2.6%

to 6.5%. It also calls for NOC to make large

investments to establish business in non-oil energy

sectors so that the Company can meet all kinds of

energy requirements, adjust its business portfolio

in line with changing needs, and thereby ensure

that it can evolve in step with 21st-century society.

By maintaining stable profitability in its core

refining and marketing operations, NOC will

seek to generate a high level of free cash flow.

Approximately ¥360 billion of that cash flow will

be allocated for investment over the next three

years, including ¥195 billion for domestic mar-

keting, refining, and petrochemical business. The

remaining ¥165 billion of investment will be in

strategic fields, including ¥77 billion in oil E&P,

¥57 billion in electric power business, ¥14 billion

in environmental protection, and ¥17 billion in

natural gas and other new businesses.

In view of the shrinkage in profit margins, efforts

will be made to maintain profitability in market-

ing and refining operations through further cost-

cutting and profit margin-enhancing measures.

The Company’s rationalization measures are

designed to reduce annual costs by ¥100 billion,

mainly by streamlining marketing, distribution,

and refining operations. Profitability is also to

be enhanced by consolidating the service sta-

tion network to facilitate the rationalization of

distribution operations and through efforts to

promote appropriate selling prices.

Besides strengthening the Company’s financial

position, attaining these objectives will promote

the expansion of E&P operations and the develop-

ment of such new businesses as those associated

with natural gas and independent power producer

(IPP) operations.

value

NOC’s Principal Financial Goals�

ROE

Interest-Bearing Debt

2.6%FY2002

6.5%FY2005

¥1,094billion

As of March 31, 2002

¥900billion

As of March 31, 2005

Capital Investment (FY2003–FY2005)�

Petrochemicals, etc.¥59 billion (16%)

Oil marketing and refining

¥136 billion (38%)

Strategic investments ¥165 billion (46%)

Oil E&P 77

Electric power 57

Environmental protection 14

Natural gas business and other 17

Total 165

(Billion ¥)

10

11

”

“The NOC Group is concentrating responsibility for all its oil and natural gasE&P operations within Nippon Oil Exploration Limited (NOEX). Increasing ourown oil and gas production is a crucial means of helping ensure sufficient

supplies and stabilizing earnings. When crude oil prices rise, the increased

profitability of upstream operations partially offsets the pressure on the profit-

ability of downstream operations.

Masaru Kai, President and Representative Director of Nippon Oil Exploration Limited

12

...Augmentingprofitability:

Reevaluating our core competencies

“”

NOC is looking at the potential demand for its products in markets throughout

Asia, and our goal is to create an internationally cost-competitive refining net-

work through consolidation and other measures that help establish optimal

production systems.

Keizoh Takeuchi, General Manager of Engineering Department

The NOC Group has been

making steady progress in its

efforts to increase the effi-

ciency of its refineries. It is

currently working to further reduce costs through

NEOS (NPRC Efficient Operation Strategy) and

other programs, and aims to realize ¥45 billion in

rationalization benefits and reductions in annual

refining costs during the next three years.

The Company is also endeavoring to boost

the value added of its facilities by transforming

refineries into comprehensive energy bases with

integrated operations encompassing refining,

petrochemicals manufacturing, IPP facilities, and

LNG facilities.

Moreover, the Group is boosting the efficiency

of its refineries by creating alliances with other

companies and responding to demand outside of

Japan through such moves as the promotion of

exports to Asian markets and the arrangement of

term contracts providing for NOC facilities to

refine products on behalf of clients in China

and elsewhere.

Refining Expense (As percentage of fiscal 1998 level)

�

13

100

80

0

40

60

20

(%)

2001 (First half)

200019991998

exploration, development,and production

The NOC Group currently has oil and gas reserves

totaling approximately 925 million barrels of oil

equivalent*1, which are producing about 47,000

barrels of oil equivalent per day (BOED)*2. The

Company is aiming to boost this production

volume to 150,000 BOED*2, or 15% of its total

crude oil requirements in the near future. To

achieve this growth, the Company will under-

take to acquire oil-producing assets, increase

refining

E&P Companies 12

2

14

E&P Companies

Before Consolidation

NOC E&P CompaniesAfter Consolidation

production from current fields, and bring some

developing fields to production in a timely manner.

NOEX has selected the United Kingdom, the

United States, and Australia as focus areas to

strengthen its current E&P position. It also sees the

Middle East and Africa as areas for future activities.

*1 Proved and probable reserves, on a project company basis*2 On a project company basis

NOEX

NOEX

NOC

14

”

“NOC has the largest service station network in Japan, which displays the newENEOS brand and is changing with the times while retaining the best tradi-tions. Our service station marketing strategies emphasize highly appealing

facilities that customers can depend on to provide extra value in the form of

high-quality products and services. We are aiming to establish a new business

model for high-value-added service stations in Japan.

Satoru Katougi, General Manager of the Marketing Department

•Service StationBusiness Model

•Total car life support

•Capabilities for highlevels of value added

Dr. Drive Type

Multi-VendorComplexes

Car Care Type

(1) Full-service facilities(2) Self-service facilities

• Consistently high-quality car care

products and services

• Car care products and services in line

with local market needs

• Comprehensive car care

• Specialized car care (quick oil changes,

car washes, tire services)

• Drivers’ rest and snacks/light meals:

coffee shops, fast-food restaurants

• One-stop shopping: convenience stores

Fundamental Concepts in NOC’s Service Station Strategy

Reevaluating our core competencies

•Fuel sales capabilities

...Augmentingprofitability:

Operating Japan’s largest service station network,

NOC is working to ensure that all of its full-service

and self-service retail outlets are attractive facilities

able to efficiently offer high-value-added services

in line with customers’ various needs.

In view of changes in customer needs and mar-

ket trends, NOC is establishing a rising number of

self-service facilities. However, the Company is

not seeking to create stripped-down self-service

facilities that focus on high-volume fuel sales

alone, so customers can still expect to find high-

value-added products and services at any outlet

within the NOC retailing network.

The Company has three high-value-added

service station formats.

• Since 1998, NOC has established a growing num-

ber of “Dr. Drive” facilities. These facilities always

have certified mechanics on duty so that they can

handle vehicle checkups, maintenance, and peri-

odic statutory vehicle inspections as well as a full

range of such services as car washing and waxing.

• The majority of NOC’s service stations are clas-

sified as car care service outlets. They are striv-

ing to supplement profit earned on fuel sales by

marketing a variety of car care goods, and the Com-

pany is facilitating these marketing efforts by sup-

plying original goods of consistently high quality.

• When feasible, NOC has further increased the

appeal of its service stations by combining them

with various types of restaurants and stores. The

Company intends to increase the number, variety,

and scale of such composite service station com-

plexes with an eye to boosting customer conven-

ience as well as service station profitability.

The ideal format for individual service stations

is determined first, based on the special charac-

teristics of the site and clientele, and then the deci-

sion is made to employ either the full-service or

self-service fuel-pumping system.

NOC is seeking to develop Dr. Drive into a

powerful nationwide brand that will be a central

element of the Company’s strategies for differen-

tiating its service stations from those of compet-

ing companies.

NOC is taking numerous steps to rationalize its

distribution operations. First, to strengthen the

operations of affiliated service station operators, the

Company is helping boost affiliates’ profitability by

providing guidance, electronics systems, and retailing

support programs for introducing low-cost man-

agement practices and boosting sales volumes.

These programs are designed to reduce the fuel

sale gross profit margin required to generate oper-

ating profit.

The Company will also strive to reduce the cost

structure of affiliated service station operators by

promoting consolidation into a smaller number of

larger companies.

NOC’s Marketing Channels�

General Consumers Large-Scale Users

Consumers

Total Number of ServiceStations

12,000

Direct Sales

Service Station Operators 4,300 service stations

NOC

15

Proprietary ServiceStations 7,700 service stations

marketing

16

17

18

”Seeking out new opportunities

“The relaxation of Japanese regulations governing the energy industry is pre-senting NOC with many new business opportunities. To sustain and expandits profitability in the future, NOC is proactively developing such new busi-

nesses as those related to electric power and natural gas.

Tatsunosuke Okabe, Managing Director

...Developing new types of

19

The Japanese government has projected that

domestic demand for natural gas will rise by six

million tons on an LNG conversion basis in the

11 years through fiscal 2011. However, NOC

believes that demand will rise more rapidly in

view of such factors as the low probability of cre-

ating additional nuclear power plants and the

trend of modifying aging oil-fueled power plants

so that they can utilize natural gas. The Company

is seeking to build an integrated gas business system

that leverages its advantageous position due to its

participation in major overseas LNG projects, its

ownership of land that is ideal for siting LNG

bases and power plants, and its relationships it has

established through oil business with potential

large-volume LNG consumers.

Responding to Japan’s regulatory relaxation with

respect to the wholesale electric power market in

1995 and a similar regulatory relaxation move for

the retail market in 2000, NOC has undertaken a

number of electric power business projects. Antici-

pating further regulatory relaxation measures,

reductions in power prices, and other changes in

the operating environment, the Company is ex-

panding its business in such fields as IPP opera-

tions, natural gas-fueled power plant operations,

retail power marketing to certain types of high-

volume energy users, and Total Energy System

(TES) on-site energy system operations. As a

result, the NOC Group projects that it will have a

total electric power generation capacity of 1.4 mil-

lion kW in fiscal 2009. Moreover, the full-scale

expansion of TES on-site operations is expected

to enable the Company to quickly obtain a strong

position in the emerging fuel cell market.

Fuel cell technologies are among the most effi-

cient and environment-friendly energy technologies.

NOC is already engaged in the pilot operation of

compact stationary fuel cell systems and is working

to begin commercial marketing of those systems

in the near future. The Company is promoting

greater general awareness of the potentials of fuel

cells and is participating in various other fuel

cell-related activities, such as a project to establish

de facto standards for vehicular fuel-cell fuels.

To realize the innumerable potentials of oil,

NOC is concertedly marshaling its technological

capabilities to conduct R&D related to such

products as batteries, environmental protection

products, liquid crystal films, and carbon fiber

products. The Company is working to develop

the markets for such products, with the goal of

generating ¥10 billion in annual sales from those

products in the near future.

business

�Malaysia LNG-Tiga Project

While retail brands of its

predecessor new brand

strategies Japan’s largest

which is a contraction of

cenergy and means and

will be respectively.

20

As of October 2001, most of the NOC Group’s

shareholdings in E&P subsidiaries and affiliates,

which had been directly owned by the parent

company, were transferred to Nippon Oil Ex-

ploration Limited (NOEX), a wholly owned

subsidiary. This unification has enabled NOEX

to integrate and increase the efficiency of E&P-

related management.

The NOC Group is active in 10 countries and

currently produces oil and gas in Vietnam (operator),

the U.K. North Sea, Canada, Papua New Guinea,

the United States (operator in 16 blocks), and

Myanmar. The Group’s total share of production

is approximately 47,000 BOED, and the Group

is working to increase this figure to 150,000

BOED in the near future.

In addition to the production projects just des-

cribed, the Group has exploration and development

projects in Malaysia, Indonesia, and Australia.

In Malaysia, the Group, as operator, is now

developing the Helang Gas Field, which was dis-

covered in Block SK-10 in 1990. Plans call for

starting production at that field from October

2003. The natural gas is to feed the Malaysia

LNG-Tiga Project, Malaysia’s third LNG project.

In Indonesia, the Vorwata Gas Field was dis-

covered in 1997 and is now under evaluation for

development. The gas from Vorwata and other

gas fields in the area will be supplied to the

planned Tangguh LNG Project. It is envisaged

that it will come onstream in 2006.

The Group is seeking to optimize its E&P

asset portfolio by making new investments and

reorganizing assets through farm-in, farm-out, and

swap arrangements. Based on a thorough knowl-

edge of geological features, legal and tax systems,

and other factors, the Company is expanding

its assets while placing strategic emphasis on

such countries as the United Kingdom, the United

States, and Australia.

Review of Operations

Exploration & Production (Crude Oil and Natural Gas)

Crude Oil Imports by NOC� Production of Crude Oil and Natural Gas

�

1,500

1,000

0

500

60

40

0

20

(Thousand BD) (Thousand BOED)

2002200120001999FY 2001200019991998CY

21

TOKYO HEAD OFFICE HOUSTON OFFICE

LONDON OFFICE

North Sea (U.K.)

Myanmar

IndonesiaMalaysia

Vietnam

Papua New Guinea

Australia

KUALA LUMPUR OFFICEVIETNAM OFFICE

PERTH OFFICE

Gulf of Mexico (U.S.A.)

Canada

Area of productionArea of developmentArea of explorationOffice

Principal Projects

Date of Field Working Company Project/Companies Interest Award/ Oil and Gas Field Production Interest Entitlement

Acquisition (BOED) (%) (BOED)

VietnamJapan Vietnam Petroleum Oct. 1992 Rang Dong 44,500 46.5 11,100Co., Ltd.

U.K. North Sea MOC Exploration (U.K.) Ltd. July 1993 Andrew, Mungo, Monan, Pierce 142,100 3.75–11.18 9,500

Nippon Oil Exploration and Production U.K. Limited Dec. 1996 Magnus 56,400 7.50 3,800

United States Nippon Oil Exploration Dec. 1990 Orchard North, Fordham, 31,700 6.14–50.00 6,600U.S.A. Limited Virgo, others

CanadaMOCAL Energy Limited Jan. 1992 Syncrude 223,100 5.00 11,200

Papua New GuineaJapan Papua New Guinea July 1990 Kutubu, Moran, Gobe 57,600 6.78–12.50 2,700Petroleum Company, Limited (including South East Gobe)

MyanmarNippon Oil Exploration Sept. 1991 Yetagun 22,800 14.17 2,400(Myanmar), Limited

All of the upstream operations are managed by NOEX, a 100% subsidiary of NOC.Note: Figures represent average production during the calendar year of 2001.

�

� Principal E&P Operations

22

Slack demand for petroleum products in Japan

has depressed prices and forced Japanese oil com-

panies to redouble their efforts to boost refining

efficiency and reduce excess refining capacity.

The industry is estimated to have 15% to 20%

more capacity than it needs, and a significant rise

in domestic demand is not anticipated.

Against this backdrop, NOC has moved to

reduce costs and optimize its refining systems by

consolidating most of its refining activities within

a single subsidiary. The Company converted two

refining subsidiaries—Koa Oil Co., Ltd., and

Tohoku Oil Co., Ltd.—into wholly owned sub-

sidiaries on October 1, 2001, and then merged

those companies with Nippon Petroleum Refining

Co., Ltd. (NPRC), on April 1, 2002. The remain-

ing company, NPRC, is now one of the largest

refining companies in Asia, with a crude oil pro-

cessing capacity of 1.17 million barrels per stream

day (BSD). Rationalization moves due to the

merger are expected to reduce NOC’s annual

refining costs by approximately ¥7 billion.

In August 2001, NOC completed a raw xylene

production facility at the Muroran Refinery.

Refining

Xylene is a raw material used by Nippon Petro-

chemicals Co., Ltd. (NPCC), and other NOC

Group companies to produce paraxylene. The

new facility has enabled the Group to become

self-sufficient regarding xylene procurement and

is expected to help considerably reduce raw mate-

rials costs.

NPRC has been implementing its NOPIC-III

operating performance improvement program,

which reduced costs at five refineries by ¥25 bil-

lion in the three years through fiscal 2002. In line

with that program, the company made small-

scale investments principally designed to maxi-

mize the utilization of refining facilities’ potentials

through improved operating practices. As a

result, U.S.-based Solomon Associates, Inc., esti-

mates that NPRC has attained a level of efficiency

that is higher than the average for the entire

Asian region, including Japan.

NPCC and NPRC are engaged in a chemicals

refinery integration (CRI) project that is aimed at

reducing fuel procurement costs for petrochemi-

cals operations, refining and making better use of

petrochemical by-products, and using a portion

23

Refinery Numbers and Processing Capacities of Group Companies in Japan’s Oil Industry(As of April 1, 2002)

Topper Number of Capacity

Group Company Refineries (Thousand BSD)

NOC Group 7 1,227Idemitsu Kosan Group 7 865Exxon Mobil Group 5 932Cosmo Oil 4 595Japan Energy Group 3 572Showa Shell Sekiyu Group 3 515Others 3 262

Total 32 4,968

Source: Petroleum Association of Japan

�

NPRC

Nihonkai Oil

MURORAN (180 BSD)

SENDAI (145 BSD)

NEGISHI (360 BSD)

TOYAMA (60 BSD)

MIZUSHIMA(230 BSD)

MARIFU(127 BSD)

OSAKA (125 BSD)

Refining Facilities of the NOC Group

(As of April 1, 2002) (Thousand BSD)

�

Topper Capacity Utilization Rate ofNOC Group Refineries

�

of refinery fractions in petrochemicals operations.

For example, NPRC’s Negishi Refinery and

NPCC’s nearby plant in Kawasaki have begun

swapping different grades of naphtha, so that

lighter grades are used for petrochemicals opera-

tions and heavier grades for petroleum products.

The two facilities intend to swap roughly 1.5 mil-

lion kiloliters of naphtha, and plans call for

arranging such swaps involving other refineries

and petrochemicals plants. While the CRI project

is a long-term plan, it is expected to generate about

¥3 billion in benefits during its first three years.

NPRC has long been a leader in the develop-

ment of refining technologies, and it was able to

launch a sulfur-free (10ppm or less) gasoline in

April 2002 by improving the capacity utilization

ratio of existing desulfurization facilities. Facilities

for producing low-sulfur diesel fuel will be com-

pleted in late 2002, and such fuel can be supplied

from April 2003.

Since 2000, the Company has been working

with another oil company and three petrochemi-

cals companies to create a highly integrated petro-

chemicals complex in the Mizushima region of

Japan through the construction of pipelines and

other measures. This complex is scheduled to be

completed during 2003.

100

80

0

40

60

20

(%)

20022001200019991998

24

Marketing and Distribution

NOC operates the largest service station network

in Japan—approximately 12,000 facilities, all of

which now display unified ENEOS logos and

market ENEOS-brand products.

Recently, slack demand and intensified compe-

tition in retail markets for vehicular fuels have

depressed retail fuel prices. In response, NOC

has implemented a variety of programs aimed at

bolstering its marketing network with emphasis

on augmenting the capabilities of affiliated service

station operators and on strengthening the Com-

pany’s brand power.

The trends of weak demand and declining prices

have led to a sharp rise in the number of self-

service stations. This, in turn, has caused intensi-

fication of price competition and shrinkage in

affiliated marketing companies’ profit margins. In

light of this, NOC is placing strong emphasis on

quickly taking steps to increase the competi-

tiveness of affiliated marketing companies. The

Company is augmenting its retailing support pro-

grams, which encompass collaborative marketing

promotion campaigns and such programs as those

for the training of service station staff.

To strengthen brand power, the Company has

introduced a unified marketing brand, ENEOS,

which has replaced the two brands used by

NOC’s predecessor companies before the merger.

The launch of the ENEOS brand has entailed

the development of a new lineup of lubricant oil

products and new credit and cash cards. The out-

standing number of ENEOS Cards has surpassed

0.3 million, and more than 11 million ENEOS

cash cards have been issued. The upgrading of

service stations into Dr. Drive facilities is another

part of the Company’s strategy for building a pre-

mium service station brand. The number of such

facilities rose to approximately 1,300 during fiscal

2002, and plans call for creating more than 1,000

additional facilities in fiscal 2003.

Superior products and services are an impor-

tant aspect of NOC’s car life support concept.

During fiscal 2002, NOC introduced and proac-

tively promoted sales of a newly developed pre-

mium gasoline product, ENEOS Premium

Gasoline, which offers improved performance

regarding vehicular fuel consumption and accel-

eration. From April 2002, the Company intro-

duced an essentially sulfur-free (10ppm or less)

environment-friendly premium gasoline called

ENEOS VIGO in Japan’s two largest metropolitan

regions. Japanese regulations governing the sulfur

content of fuels are becoming increasingly strict,

and the introduction of a product that consider-

ably exceeds current environmental protection

requirements has been greatly appreciated by

NOC customers.

With an eye toward realizing the potentials of

new communications media, NOC has taken a

variety of initiatives in recent years. The Company’s

Website (www.eneos.com) provides customers

25

April 2002, the Company introduced a compre-

hensive system that handles all marketing and

distribution processes from order reception through

truck dispatching and sales accounting. The

Company has also developed a new point-of-sale

(POS) system called ERIX that enables the multi-

dimensional utilization of sales information and

provides a broader range of data. It can also han-

dle new transaction formats, such as those for

Dr. Drive services and electronic transactions.

Since the merger, NOC has worked to ration-

alize its distribution operations through such ini-

tiatives as those to increase shipping efficiency as

well as to barter products and share transport

depots with other companies. Such measures

have enabled the Company to reduce the number

of its transport depots from 109 at the time of the

merger to 62 as of April 1, 2002. The volume of

product barter transactions is projected to reach

13 million kiloliters during fiscal 2003.

with an increasingly broad variety of information

related to cars and NOC products and services.

For example, customers can use the Web site to

make reservations for vehicle checkups before

statutory vehicle inspections, and such checkups

are free at designated service stations. Moreover,

customers using various ENEOS Internet-based

marketing programs can pay for and pick up

their purchases at ENEOS service stations. The

Company previously participated in an Internet

marketing joint venture, E-Shopping Car Goods

Co., Ltd., that was liquidated in March 2002.

However, NOC is continuing to collaborate with

a number of other Internet-based marketing pro-

grams. From April 2002, the Company began

cooperating with a major Internet service provider,

BIGLOBE.

Following the merger, NOC continued to use the

electronics systems—such as those for handling

product orders and deliveries as well as perform-

ance and balance sheet accounting—inherited

from the Company’s predecessor companies. In

26

New Energy Business

Natural Gas

NOC is actively expanding its natural gas-related

business to meet the increasing demand in Japan.

NOC has an equity interest in Malaysia LNG

Tiga Sdn. Bhd., a joint venture with Petronas

(Malaysia’s government-owned oil company), the

state of Sarawak, Shell Gas B.V., and Diamond

Gas (Netherlands) B.V. The joint venture, which

will handle LNG production for the Malaysia

LNG-Tiga Project, plans to construct two gas

liquefaction plants with a combined annual produc-

tion capacity of 7.6 million tons. Two of NOC’s

upstream subsidiaries are cooperating with Shell

and Petronas to develop gas fields offshore Sarawak

to feed the LNG-Tiga Project. Commercial oper-

ation of the project is scheduled to begin in 2003.

NOC is arranging the sale of the LNG from the

project to customers in Japan. A considerable num-

ber of LNG Sale and Purchase Agreements have

been concluded, including those with Tohoku

Electric Power Co., Inc., Japan Petroleum

Exploration Co., Ltd., Tokyo Gas Co., Ltd.,

Toho Gas Co., Ltd., and Osaka Gas Co., Ltd.

NOC discovered a number of huge gas fields

off the northwest coast of Irian Jaya Province

in Indonesia. Preparations are under way for

the development of the fields, known as the

Tangguh LNG Project. Production is slated to

begin in 2006. In its early stages, the project is

expected to deliver six to seven million tons of

LNG annually. With huge reserves in the ground,

the Company envisages a substantial capacity

expansion in the future.

Through such intercompany cooperation as

tie-ups, NOC is working vigorously to build and

expand infrastructure and marketing routes for

LNG in various regions of Japan.

In April 2001, NOC and Teikoku Oil Co.,

Ltd., established a joint venture, NexT Energy

Co., Ltd., which focuses on domestic natural gas

operations. This plan brought together the local

gas production of Teikoku Oil and the technical

and marketing skills of the NOC Group to develop

natural gas demand along Teikoku Oil’s natural

gas pipelines.

In August 2001, NOC formed the joint venture

Hokuriku Erunesu Co., Ltd.—with Hokuriku

Electric Power Co., Inc., and Chubu Electric

Power Co., Inc.—as part of its efforts to develop

LNG demand in the Hokuriku region.

In December 2001, NOC and Chugoku Electric

Power Co., Inc., established a joint venture,

Mizushima LNG Company, Limited—which

will construct and operate a receiving terminal on

the grounds of the NPRC’s Mizushima Refinery.

In April 2002, Mizushima LNG Sales Co., Ltd.,

was founded to market LNG from the new

receiving terminal to utilities as well as to indus-

trial users in the Chugoku region of Japan.

27

Electric Business

NOC has undertaken a number of IPP projects

since the deregulation of Japan’s wholesale electric

power market began in late 1995. Besides offering

a new source of stable profits, IPP operations offer

a means of utilizing asphalt and other residual

products from refining operations as fuels. They

will thus help upgrade crude oil refining capabili-

ties and thereby enhance overall profitability.

The Company’s IPP facilities at its Osaka and

Yokohama refineries are already delivering elec-

tricity, and similar projects are in progress at the

Negishi, Muroran, and Marifu refineries. The

environment-friendly, gasified-asphalt-fueled

facility at the Negishi Refinery will be the only

facility of its type in Japan. When all these facilities

are on-line in 2004, they will have a combined sup-

ply capacity of no less than 700MW of power.

In November 2001, NOC and Tokyo Gas

established a joint venture that is conducting a

feasibility study about a 400–500MW natural

gas-fueled IPP plant at the Company’s Kawasaki

Terminal. While previous IPP facilities have con-

tracted to supply local power companies, the new

Kawasaki Plant will seek to take advantage of the

March 2000 deregulation of retail power market-

ing to high-volume power users.

NOC’s TES on-site operations provide diverse

highly efficient energy systems in line with cus-

tomer requirements regarding fuel type and elec-

tric power and heat-supply capacity.

Since 1986, NOC has pioneered the market

for petroleum-fueled cogeneration systems, which

it markets as the Nippon Oil Energy Retail Sys-

tem (NERS), and such systems with more than

200MW of capacity are currently in use. Having

developed such products as kerosene-fueled heat

pumps and low-NOx Nippon Oil Clean Burner

units, the Company’s marketing units are able to

offer individual customers proposals for a wide

variety of TES solutions. TES marketing units

have been based at all Group offices nationwide

since November 2000. The Company is aiming

to increase overall TES sales to ¥10 billion in fiscal

2003, and it is also planning to commercialize

innovative micro gas turbine and fuel cell prod-

ucts in the near future.

Fuel Cells

To promote the use of environment-friendly fuel

cells, NOC has undertaken fuel cell-related R&D

in cooperation with leading automobile manu-

facturers. The Company has participated in the

operational testing of fuel cell vehicles in February

2001. Also, it is preparing to commercialize sta-

tionary fuel cell products for business and resi-

dential use. In July 2001, the Company began

pilot operations at one of its service stations of a

compact stationary fuel cell system. This system is

used together with a regular electric power source

to supply electricity for fuel pumps and lighting in

the case of power outages or emergencies. NOC

will pursue additional fuel cell R&D programs,

with a view to quickly enabling the practical use

of fuel cells that use petroleum fuels.

28

Petrochemicals

Nippon Petrochemicals Co., Ltd. (NPCC), and

other NOC Group petrochemicals units faced an

increasingly harsh operating environment during

fiscal 2002, reflecting a decrease in domestic

demand for petrochemicals due to the domestic

economic slowdown as well as rising competition

resulting from the construction of ultramodern

petrochemicals plants in Asia and the Middle

East. These conditions caused a 4.8% drop in

Japan’s ethylene production volume.

Amid these conditions, NOC Group petro-

chemicals units sustained their proactive market-

ing campaigns and strove to maintain appropriate

price levels. They also endeavored to bolster their

competitiveness and strengthen their specialty

chemicals operations. NPCC is implementing a

detailed cost-cutting program designed to cut

labor, manufacturing, marketing, maintenance,

and other costs ¥9 billion during the four years

through fiscal 2005.

Owing to the slackness of domestic demand

and a drop in exports, net sales of Group petro-

chemicals units decreased from the level in the

previous fiscal year, to ¥206.8 billion. Despite

progress made in reducing costs, the drops in sales

volume and selling prices combined with the pro-

tracted elevation of prices for raw material naphtha

during the first half of fiscal 2002 to restrain oper-

ating income to ¥0.8 billion.

In addition, NPCC is seeking to boost its profit-

ability by expanding its high-margin operations

producing such products as the third ingredient

for synthetic rubber manufacturing, specialty

solvents, and non-woven textiles. Initiatives in

this regard include the creation of a new base in

the United States for manufacturing ENB (an

ingredient used in manufacturing ethylene-

propylene diene monomer (EPDM) rubber),

making NPCC the top ENB manufacturer and

marketer in the world.

Construction

During fiscal 2002, a drop in Japan’s civil works

budget, the financial difficulties of local govern-

ments, and a drop in private-sector capital invest-

ments due to the weakness of economic conditions

further increased the harshness of the operating

environment of Nippon Hodo Co., Ltd., and

other NOC Group construction units, particularly

with regard to obtaining new orders.

Despite assiduous efforts of NOC Group con-

struction units to obtain new orders, net sales

decreased ¥14.1 billion from the level in the pre-

vious year, to ¥330.5 billion. Reflecting progress

made in cost-cutting and profitability-boosting

programs, however, operating income declined

only ¥3.1 billion, to ¥7.8 billion.

Against the backdrop of Japan’s protracted

recession, it is projected that civil works spending

will drop considerably and a recovery in private-

sector capital investments will be delayed. The

NOC Group thus expects that the environment

for construction operations will continue to be

extremely severe. However, the Group intends to

proceed steadily with its programs aimed at

strengthening and broadening marketing activities,

reducing costs, and rationalizing administrative

departments so that it can boost its competitiveness

and ability to respond to socioeconomic changes.

29

R&D

NOC’s Central Technical Research Laboratory,

Research & Development Department, and other

departments conduct diverse R&D programs

to develop and improve petroleum products

and refining technologies, carbon fibers, cogener-

ation systems, biotechnologies, high-performance

polymers, petrochemical-related technologies,

and construction and environmental protection

technologies.

Regarding petroleum products, NOC developed

a new premium gasoline that improves vehicles’

acceleration and fuel economy and has various

other superior characteristics. The Company also

launched an environment-friendly gasoline with

sulfur content reduced to 10ppm or less.

NOC develops and markets engine oils that

increase fuel efficiency, hydraulic oils that can

help reduce electric power consumption, and

other energy-saving lubricant oils, as well as such

environment-friendly lubricants as chlorine-free

machining oil.

To increase the efficiency and environment

friendliness of petroleum fuel usage, NOC is

working to develop and commercialize such

products as low-NOx, high-efficiency, low-noise

catalytic oil combustion far infrared-ray heating

units and a kerosene-fueled garbage dryer. The

Company is also proceeding with research into

technologies for commercially utilizing the sulfur

produced as a by-product of refining operations.

Regarding new types of products, NOC is

developing an innovative LCD technology that

enables extremely sharp and clear images and is

expected to be in increasing demand for use with

such products as portable telephones. In the

specialty chemicals field, NPCC has established

technologies for encapsulating super aromatic

solvent with dye used for pressure-sensitive paper

solvents and other applications. NPCC has begun

operating a plant utilizing those technologies to

manufacture materials for pressure-sensitive paper

products and is working to develop the market

for such materials.

The NOC Group has worked to upgrade its

expertise in purifying contaminated soil and water.

Based on its accumulated expertise in soil remedi-

ation, the Group has developed a portable heat-

treatment plant for the on-site purification of soil

contaminated with oil or petroleum products.

The Group has also developed technologies for

purifying soil with microorganisms, and those

technologies have been proven effective in on-site

tests. The Group is sustaining its efforts to further

improve those technologies in light of projections

that they will be in surging demand.

30

President and Representative Director

Fumiaki Watari

Executive Vice Presidents andRepresentative Directors

Takao Suzuki

Shinji Nishio

Managing Directors

Tatsunosuke Okabe

Eiichi Sugiyama

Teruo Omori

Naokazu Tsuda

Makoto Satani

Directors

Kakugo Okamura

Ikutoshi Matsumura

Youichiro Shiozawa

Youjirou Taki

Yukihiro Matsuyama

Masahito Nakamura

Makoto Koseki

Michihiro Mouri

Yasushi Kimura

Shigeo Hirai

Yasuo Kamino

Standing Corporate Auditors

Takaya Maruta

Hideo Okazaki

Corporate Auditors

Toshio Sakaue

Mitsutake Okano

Masayuki Matsushita

Board of Directors(As of June 27, 2002)

Fumiaki Watari Takao Suzuki Shinji Nishio

Tatsunosuke Okabe Eiichi Sugiyama Teruo Omori

Naokazu Tsuda Makoto Satani

31

Financialsection

32

Management’s Discussion and Analysis of Operations

EnvironmentThe Japanese economy remained weak during the fiscal year ended March 31, 2002, as the employment

and income environments became more severe, personal consumption remained weak, and private capi-

tal investment began to decline from fall 2001 owing to deterioration in production and corporate prof-

its. Moreover, beginning in March 2001, a series of policies, principally to quantitatively relax monetary

conditions, were adopted but had no success in boosting the economy.

Income and ExpensesPetroleum Fuel and Crude Oil—Demand for oil in Japan fell below the level for the previous year

despite a slight increase in gasoline sales, as kerosene sales dropped owing to the warm winter weather

conditions and industrial fuels, including diesel fuel and heavy fuel oil C, declined because of the adverse

impact of the stagnation in the economy. In addition, competition at the retail level intensified signifi-

cantly, leading to a softening of petroleum product prices, while crude oil prices rose and the yen fell

rapidly in value. As a consequence of these adverse developments, Japan’s oil companies experienced

a shrinkage in profits.

NOC’s consolidated net sales for the fiscal year under review in the petroleum fuel and crude oil busi-

ness segment declined 2.7%, or ¥93.4 billion, to ¥3,346.4 billion ($25,162 million) owing to a slump in

demand for petroleum that depressed sales volume and to declines in product prices. Although the margin

on sales fell and one-time expenses were recorded for unifying NOC’s ENEOS brand, cost reductions,

together with a change in the Company’s method of accounting for inventories, resulted in a 14.1%, or

¥7.0 billion, increase in operating income, to ¥57.0 billion ($429 million).

Petrochemicals Operations—Domestic demand for and exports of petrochemical products

declined from the previous fiscal year because of the stagnation in the Japanese economy and the com-

mencement of full-scale operations at large-scale petrochemicals plants in Asia and the Middle East.

Amid this challenging environment, the NOC Group continued aggressive sales activities and endeav-

ored to set appropriate prices, while working to strengthen competitiveness through cost reductions in

all areas and placing emphasis on strengthening the Group’s specialty chemicals business.

33

As a result of declines in the volume of sales owing to the weakness in domestic demand and lower

exports, consolidated net sales in the petrochemicals operations segment were down 11.0%, or ¥25.6 billion,

to ¥206.8 billion ($1,555 million). However, despite such adverse factors as a decline in the volume of

sales, lower product prices, and high naphtha prices, principally in the first half of the fiscal year, operat-

ing income jumped 68.9%, or ¥334 million, to ¥819 million ($6.2 million) due to the positive impact of

thorough cost-cutting measures.

Construction—Investment in public works continued to shrink and private-sector capital investment

remained on a downward trend due to the prolonged recession, making it difficult for companies in the

construction sector to win new orders. The NOC Group worked aggressively to obtain new contracts,

while implementing thoroughgoing cost-cutting measures to enhance profitability.

Despite these efforts, consolidated net sales for the construction segment were down 4.1%, or

¥14.1 billion, to ¥330.5 billion ($2,485 million). Operating income declined 28.3%, or ¥3.1 billion, to

¥7.8 billion ($59 million) owing to the intensification of competition for new orders and reductions in

public works projects.

Other—Although the operating environment for the oil distribution business has become increasingly

challenging, as a result of aggressive efforts to market service station-related products along with the

introduction of the new ENEOS brand and increased revenues from real estate business, consolidated

net sales in the other business segment rose 9.9%, or ¥5.9 billion, to ¥65.6 billion ($494 million).

Operating income increased 11.2%, or ¥0.6 billion, to ¥6.1 billion ($46 million) owing to cost-reduction

activities and efforts to increase efficiency.

Financial PositionTo increase the efficiency of its asset utilization, the Group is proceeding with the streamlining

of its assets. Specifically, the Group is keeping the level of capital investment to below the level of

depreciation. Interest-bearing debt, which amounted to ¥1,409 billion as of March 31, 1999, stood at

¥1,094 billion as of March 31, 2002. The Group therefore attained its objective of reducing interest-

bearing debt ¥300 billion over the three-year period.

34

AssetsTotal assets decreased 13.3%, or ¥526.5 billion, to ¥3,444.7 billion ($25,900 million), primarily reflect-

ing a drop of 24.3%, or ¥455.9 billion, in total current assets. This was principally due to falls of

¥164.3 billion in cash and cash equivalents, ¥110.2 billion in time deposits, ¥110.2 billion in short-term

investments in securities, and ¥80.4 billion in notes and accounts receivable. Total investments and

long-term receivables decreased 12.1%, or ¥43.4 billion, to ¥315.9 billion ($2,375 million) owing prin-

cipally to falls of ¥30.8 billion in investments in other securities and ¥16.1 billion in long-term receiv-

ables. The net value of property, plant and equipment fell 2.7%, or ¥42.8 billion, to ¥1,552.0 billion

($11,670 million). This drop was due to the Company’s moves to restrain capital investment and sell

underutilized assets.

Liabilities and Shareholders’ EquityTotal current liabilities dropped 21.9%, or ¥395.7 billion, to ¥1,411.4 billion ($10,612 million), mainly

reflecting falls of ¥425.5 billion in short-term loans and ¥51.2 billion in notes and accounts payable.

Total long-term liabilities decreased 11.3%, or ¥127.6 billion, to ¥999.6 billion ($7,516 million). This

was owing to a drop of ¥122.9 billion in long-term debt, which reflected progress made in the repay-

ment of borrowings, and a ¥15.4 billion fall in deferred income taxes.

Total shareholders’ equity increased 2.9%, or ¥26.0 billion, to ¥924.1 billion ($6,948 million). This

reflected rises of ¥27.8 billion in the capital surplus and ¥14.3 billion in retained earnings, which offset

a ¥23.4 billion fall in unrealized holding gains on securities, net of deferred income taxes. The equity

ratio increased 4.2 percentage points, to 26.8%.

Cash FlowsAs net cash used in financing activities exceeded net cash provided by operating and investing activities,

cash and cash equivalents decreased ¥164.3 billion ($1,236 million) during the year and amounted to

¥235.0 billion ($1,767 million) at March 31, 2002.

Net cash provided by operating activities totaled ¥195.6 billion ($1,471 million), almost the same

level as in the previous fiscal year. Net cash inflow from income before income taxes and minority

35

interests and depreciation decreased ¥25.6 billion, to ¥157.1 billion. However, net cash inflow from

changes in receivables and payables rose ¥168.3 billion, to ¥89.1 billion, and the balance of cash flows

associated with gains and losses on the sale and disposal of property, plant and equipment changed by

¥20.8 billion, from a net outflow of ¥4.5 billion to a net inflow of ¥16.2 billion. Moreover, the balance

of cash flows associated with changes in inventories improved by ¥32.4 billion, from a net outflow of

¥22.1 billion to a net inflow of ¥10.3 billion. All these increases in net cash inflow were partially offset

by a ¥78.6 billion change in the balance of cash flows associated with the other item, from a net inflow

of ¥54.4 billion to a net outflow of ¥24.1 billion.

Net cash provided by investing activities amounted to ¥145.6 billion ($1,095 million), a ¥331.9 billion

change from the ¥186.2 billion of net cash used in investing activities in the previous year. This prin-

cipally reflected ¥215.4 billion in net cash inflow from decreases in time deposits and investments in

securities, compared to ¥190.9 billion in net cash outflow from increases in time deposits and invest-

ments in securities in the previous year. This rise in cash inflow was partially offset by a ¥31.2 billion

increase in net cash outflow owing to the acquisition and sale of property, plant and equipment. In addi-

tion, the balance of cash flows associated with the other item changed by ¥46.2 billion, from a net

inflow of ¥17.5 billion to a net outflow of ¥28.7 billion.

Net cash used in financing activities amounted to ¥509.4 billion ($3,830 million), an increase of

¥473.4 billion from the previous year, primarily due to the Company’s continued efforts to reduce

interest-bearing debt. Net cash outflow from the reduction of short-term loans was ¥425.7 billion,

compared with a ¥42.5 billion inflow from the increase of short-term loans in the previous period.

Net cash outflow from the changes in long-term debt was ¥69.1 billion, ¥0.9 billion more than that in

the previous period.

Six-Year Financial and Operating SummaryNippon Oil Corporation, Nippon Oil Company, Limited, Mitsubishi Oil Company, Limited and Consolidated Subsidiaries

36

Six-Year Financial Summary

Millions of yen

Years ended March 31 2002 2001 2000 1999 1998 1997

Net salesNOC ................................................................... ¥3,949,571 ¥4,076,890 ¥3,594,911 ¥ — ¥ — ¥ —NiSSEKI ............................................................. — — — 2,406,323 2,626,156 2,660,380Mitsubishi Oil .................................................... — — — 1,019,334 1,147,906 1,197,505

Cost of salesNOC ................................................................... 3,555,907 3,691,142 3,245,446 — — —NiSSEKI ............................................................. — — — 2,148,715 2,342,452 2,371,023Mitsubishi Oil .................................................... — — — 941,537 1,059,399 1,077,692

Selling, general and administrative expensesNOC ................................................................... 318,432 315,668 320,160 — — —NiSSEKI ............................................................. — — — 229,711 244,014 251,946Mitsubishi Oil .................................................... — — — 92,977 113,618 122,188

Operating income (loss)NOC ................................................................... 75,231 70,079 29,304 — — —NiSSEKI ............................................................. — — — 27,897 39,689 37,410Mitsubishi Oil .................................................... — — — (15,180) (25,110) (2,376)

Net income (loss)NOC ................................................................... 24,006 29,787 (4,858) — — —NiSSEKI ............................................................. — — — 9,722 11,483 12,574Mitsubishi Oil .................................................... — — — (20,234) (35,969) (10,412)

Total assetsNOC ................................................................... 3,444,742 3,971,252 3,760,800 — — —NiSSEKI ............................................................. — — — 2,914,617 2,853,780 2,958,201Mitsubishi Oil .................................................... — — — 892,859 971,802 985,640

Total shareholders’ equityNOC ................................................................... 924,140 898,083 840,971 — — —NiSSEKI ............................................................. — — — 656,349 655,766 653,490Mitsubishi Oil .................................................... — — — 182,563 187,023 224,525

Total current assetsNOC ................................................................... 1,419,282 1,875,218 1,611,852 1— — —NiSSEKI ............................................................. — — — 1,423,217 1,320,940 1,388,773Mitsubishi Oil .................................................... — — — 368,047 458,485 452,721

Total current liabilitiesNOC ................................................................... 1,411,434 1,807,176 1,614,001 — — —NiSSEKI ............................................................. — — — 1,439,384 1,315,607 1,286,351Mitsubishi Oil .................................................... — — — 350,435 439,704 401,875

37

(continued from the previous page)

Millions of yen

Years ended March 31 2002 2001 2000 1999 1998 1997

Working capitalNOC ................................................................... ¥ 7,848 ¥ 68,042 ¥ (2,149) ¥ — ¥ — ¥ —NiSSEKI ............................................................. — — — (16,167) 5,333 102,422Mitsubishi Oil .................................................... — — — 17,612 18,781 50,846

Capital expendituresNOC ................................................................... 79,561 54,811 78,833 — — —NiSSEKI ............................................................. — — — 107,784 107,929 73,934Mitsubishi Oil .................................................... — — — 36,720 30,187 60,118

R&D expendituresNOC ................................................................... 10,449 10,218 11,370 — — —NiSSEKI ............................................................. — — — 12,207 15,392 15,935Mitsubishi Oil .................................................... — — — 2,705 3,676 3,978

Six-Year Operating Summary

Years ended March 31 2002 2001 2000 1999 1998 1997

Crude oil imports (million kiloliters)NOC ...................................................................... 58.7 62.4 60.0 — — —NiSSEKI ................................................................ — — — 42.5 44.5 40.7Mitsubishi Oil ....................................................... — — — 20.9 21.8 20.8

Sales of petroleum products*1 (million kiloliters)NOC ...................................................................... 84.0 83.4 83.6 — — —NiSSEKI ................................................................ — — — 57.3 56.8 55.9Mitsubishi Oil ....................................................... — — — 30.0 31.4 31.9

Capacity of refining facilities (barrels per stream day)NOC ...................................................................... 1,227,000 1,227,000 1,348,000 — — —NiSSEKI ................................................................ — — — 893,000 893,000 872,000Mitsubishi Oil ....................................................... — — — 475,000 475,000 475,000

*1 Petroleum products include lubricants, LPG and others.

Consolidated Balance SheetsNippon Oil Corporation and Consolidated Subsidiaries

38

Thousands ofMillions of yen U.S. dollars (Note 2)

March 31, 2002 and 2001 2002 2001 2002

ASSETS

Current assets:

Cash and cash equivalents ..................................................................................... ¥ 235,044 ¥ 399,393 $ 1,767,248

Time deposits ......................................................................................................... 38,879 149,117 292,323

Short-term investments in securities (Note 4) .......................................................... 78,767 188,937 592,233

Notes and accounts receivable (Note 6) .................................................................. 556,021 636,473 4,180,609

Less allowance for doubtful receivables .................................................................. (5,785) (8,844) (43,496)

Inventories (Notes 5 and 6) ..................................................................................... 378,897 389,021 2,848,850

Deferred income taxes (Note 9) .............................................................................. 30,005 30,371 225,602

Other current assets ............................................................................................... 107,450 90,748 807,895

Total current assets .................................................................................... 1,419,282 1,875,218 10,671,293

Investments and long-term receivables:

Investments in unconsolidated subsidiaries and affiliates ........................................ 75,865 72,226 570,414

Investments in other securities (Notes 4 and 6) ....................................................... 201,198 232,095 1,512,767

Long-term receivables (Note 6) ............................................................................... 38,847 55,016 292,083

Total investments and long-term receivables .............................................. 315,911 359,339 2,375,271

Property, plant and equipment (Note 6):

Land ....................................................................................................................... 865,686 865,547 6,508,917

Buildings ................................................................................................................ 831,196 843,451 6,249,594

Oil tanks ................................................................................................................. 261,730 270,075 1,967,895

Machinery and equipment ...................................................................................... 1,388,520 1,400,648 10,440,000

Construction in progress ........................................................................................ 70,575 62,202 530,639

............................................................................................................................... 3,417,710 3,441,925 25,697,068

Less accumulated depreciation .............................................................................. (1,865,623) (1,846,945) (14,027,241)

Property, plant and equipment, net ............................................................ 1,552,087 1,594,980 11,669,827

Deferred income taxes (Note 9) .............................................................................. 33,467 19,856 251,632

Other assets ........................................................................................................... 123,994 121,858 932,286

Total assets ................................................................................................ ¥3,444,742 ¥3,971,252 $25,900,316

The accompanying notes are an integral part of the consolidated financial statements.

39

Thousands ofMillions of yen U.S. dollars (Note 2)

2002 2001 2002

LIABILITIES, MINORITY INTERESTS AND SHAREHOLDERS’ EQUITY

Current liabilities:

Short-term loans (Note 6) ....................................................................................... ¥ 209,965 ¥ 635,553 $ 1,578,684

Current portion of long-term debt (Note 6) .............................................................. 232,961 171,848 1,751,586

Notes and accounts payable .................................................................................. 485,628 536,852 3,651,338

Excise taxes payable (Note 10) ............................................................................... 307,334 300,601 2,310,782

Accrued income taxes (Note 9) ............................................................................... 14,672 12,542 110,316

Accrued expenses .................................................................................................. 46,807 51,808 351,932

Deferred income taxes (Note 9) .............................................................................. 1,014 27 7,624

Other current liabilities ............................................................................................ 113,048 97,941 849,985

Total current liabilities ................................................................................. 1,411,434 1,807,176 10,612,286

Long-term liabilities:

Long-term debt (Note 6) ......................................................................................... 731,155 854,151 5,497,406

Accrued retirement benefits (Notes 3 and 7) ........................................................... 102,007 100,793 766,970

Reserve for inspection of oil tanks, machinery and equipment, and ships ............... 37,911 31,815 285,045

Deferred income taxes (Note 9) .............................................................................. 76,400 91,863 574,436

Other long-term liabilities ........................................................................................ 52,187 48,692 392,383

Total long-term liabilities ............................................................................. 999,662 1,127,316 7,516,256

Minority interests in consolidated subsidiaries ................................................ 109,505 138,676 823,346

Shareholders’ equity (Note 8):

Common stock:

Authorized—2,000,000,000 shares

Issued—1,514,507,271 shares in 2002

1,469,303,871 shares in 2001 ............................................................. 139,436 137,176 1,048,391

Capital surplus ....................................................................................................... 274,829 247,011 2,066,383

Retained earnings (Note 17) ................................................................................... 492,236 477,911 3,701,023

Unrealized holding gains on securities, net of deferred income taxes (Note 4) ......... 23,503 46,994 176,714

Translation adjustments .......................................................................................... (5,529) (10,922) (41,571)

............................................................................................................................... 924,476 898,171 6,950,947

Less treasury common stock, at cost:

580,525 shares in 2002 and 139,159 shares in 2001 .......................................... (336) (88) (2,526)

Total shareholders’ equity ........................................................................... 924,140 898,083 6,948,421

Contingent liabilities (Note 12)

Total liabilities, minority interests and shareholders’ equity .............. ¥3,444,742 ¥3,971,252 $25,900,316

Consolidated Statements of IncomeNippon Oil Corporation and Consolidated Subsidiaries

40

Thousands ofMillions of yen U.S. dollars (Note 2)

Years ended March 31, 2002 and 2001 2002 2001 2002

Net sales (Notes 10 and 16) .................................................................................. ¥3,949,571 ¥4,076,890 $29,696,023

Cost of sales (Note 10) ......................................................................................... 3,555,907 3,691,142 26,736,143

Gross profit ........................................................................................................ 393,663 385,748 2,959,872

Selling, general and administrative expenses (Note 11) ................................... 318,432 315,668 2,394,226

Operating income (Note 16) ................................................................................ 75,231 70,079 565,647

Other income (expenses):

Interest expense ..................................................................................................... (34,880) (41,594) (262,256)

Interest and dividend income .................................................................................. 8,848 12,340 66,526

Foreign exchange gains .......................................................................................... 12,243 14,318 92,053

Asset rental income ................................................................................................ 10,564 10,402 79,429

Gain on sales of property, plant and equipment ...................................................... 17,547 26,736 131,932

Loss on disposal of property, plant and equipment ................................................ (33,838) (22,190) (254,421)

Write-downs of investments in securities and other assets ..................................... (5,966) (5,941) (44,857)

Gain on sales of investments in securities ............................................................... 4,516 1,348 33,955

Equity in earnings (losses) of unconsolidated subsidiaries and affiliates ................... 3,949 (1,137) 29,692

Provision for accrued retirement benefits (Notes 3 and 7) ....................................... — (1,435) —

Special allowances for early retirement plans .......................................................... (2,058) (728) (15,474)

Provision of reserve for inspection of oil tanks, machinery and equipment, and ships ... (6,816) — (51,248)

Write-down of real estate for sale ............................................................................ (3,154) (1,185) (23,714)

Other, net ............................................................................................................... (2,482) (1,541) (18,662)

....................................................................................................................... (31,525) (10,607) (237,030)

Income before income taxes and minority interests ....................................... 43,705 59,472 328,609

Income taxes (Note 9):

Current ............................................................................................................... 23,382 17,108 175,805

Deferred ............................................................................................................. (9,741) 4,427 (73,241)

Income before minority interests ...................................................................... 30,064 37,936 226,045

Minority interests in earnings of consolidated subsidiaries ............................ (6,058) (8,149) (45,549)

Net income ........................................................................................................... ¥ 24,006 ¥ 29,787 $ 180,496

Yen U.S. dollars (Note 2)

Years ended March 31, 2002 and 2001 2002 2001 2002

Net income per share:

Basic .................................................................................................................. ¥16.11 ¥20.28 $0.12

Diluted ................................................................................................................ 16.00 19.91 0.12

Cash dividends per share attributable to the year ........................................... 7.00 7.00 0.05

The accompanying notes are an integral part of the consolidated financial statements.

Consolidated Statements of Shareholders’ EquityNippon Oil Corporation and Consolidated Subsidiaries

41

Number of Thousands ofshares Millions of yen U.S. dollars (Note 2)

Years ended March 31, 2002 and 2001 2002 2002 2001 2002

Common stock:

Beginning of year ...................................................................... 1,469,303,871 ¥137,176 ¥137,176 $1,031,398

Increase resulting from an exchange of common stock (Note 8) ... 45,203,400 2,260 — 16,992

End of year ............................................................................... 1,514,507,271 ¥139,436 ¥137,176 $1,048,391

Capital surplus:

Beginning of year ......................................................................................................... ¥247,011 ¥247,011 $1,857,226

Increase resulting from an exchange of common stock (Note 8) ...................................... 27,817 — 209,150

End of year ...............................................................................................................