Idemitsu Kosan : New Year Message from Representative Director and CEO Takashi Tsukioka

Happy New Year!

According to the Chinese zodiac, 2018 is the year of Earth Dog. The designation has two contradictory connotations. The Chinese character for'Earth' implies luxuriant plants, while the one for 'Dog' suggests withering plants. When plants luxuriate too much, some leaves have little chance to receive sunlight directly. For further growth, excess branches and leaves must be cut off. This seems to suggest that all enterprises need to pluck up the courage to shed the shackles of the past if it wants to continue to evolve.

At the global level, society becomes increasingly fragmented as is witnessed by the rise of populism and a shift away from free trade to protectionism in some nations. Meanwhile, the world economy remains in good shape and global stock markets keep growing, driven by two major factors: the so-called fourth industrial revolution, i.e. innovation, and the easy monetary policy. Although the extension of the coordinated production cut props up crude oil prices, full attention should be given to the potential risk of a sharp drop in the prices, as West Texas Intermediate crude futures keep hitting a new high. As just described, with the global economy entailing a range of uncertainties, we need to always bear in mind the risk of a sudden downturn.

In Japan, demand for city infrastructure development and redevelopment is expected to continue rising, while consumer spending is picking up thanks to a recovery in consumer sentiment. I hope that the Abe administration will do its best to address essential challenges such as security enhancement and fiscal reconstruction, taking advantages of the long-term stable government and the economic recovery.

In the energy industry, legal separation of the power transmission/distribution sector as well as the gas pipeline sector is planned and this is likely to facilitate cross-border mergers and acquisitions. On the policy front, the discussion on how to achieve an 80% cut in green house gas emissions by 2050 from the current level has started. Also in reviewing the Basic Energy Plan, the focus is shifting to 'Discuss the 2030 framework, while looking ahead all the way to 2050.' Under these circumstances, the petroleum industry embarks on concrete actions in 2018 towards IMO's fuel sulfur content cap regulation scheduled to be enforced from 2020.

With the war of attrition deriving from excessive competition coming to an end, the petroleum business is currently building a sustainable revenue base. However, considering that domestic demand continues declining, we cannot stop here. Meanwhile other businesses are gaining competitive advantages to some extent as their growth strategies and structural reforms are bearing fruit.

On the other hand, earnings are at present supported largely by the improving external environment. Therefore, it is imperative that we continue to press ahead with business restructuring so as to build a strong profit structure that are not susceptible to fluctuating market conditions.

With regard to 'Brighter Energy Alliance' between Idemitsu Kosan and Showa Shell Sekiyu, we will not waste our time that elapses before the business merger to create synergy. This year, we will accelerate concrete merger efforts such as consolidation of business establishments of relevant Business Segments.

We are currently formulating the Fifth Consolidated Medium-term Management Plan. While technological innovation is advancing at a faster-than-expected pace and the business environment and society are changing dramatically, I consider this a great opportunity for the Company to re-examine how it should grow over the medium to long term, be harmonized with the global environment, etc. Although we are exposed to a wide variety of business risks including social demand for realization of low-carbon society and technological innovation, these changes in the environment may be taken as business opportunity in disguise. In addition, even if domestic demand decreases, demand for coal and oil is forecast to keep growing in areas with the potential for high economic growth such as Southeast Asia. I think it is important to review our strengths, including value chains we have established together with distributors and business partners, technology development to meet the needs of customers and business development in Southeast Asia, and set up extensive information networks, thereby always making pre-emptive moves to environmental changes. The Company has thus far contributed to a society in harmony with the environment as well as communities and cultures through pioneering initiatives such as the introduction of green belts to its refineries and the acquisition of the Eco Mark for the first time in the gasoline industry. It just so happens that amid rapid globalization, we are now entering an age which requires us as a company to make harmonious coexistence with the global environment as well as local communities and pay much attention to work styles and corporate governance. Such agenda will be reflected in the Fifth Consolidated Medium-term Management Plan.

In 2018, the year of Earth Dog, the Fifth Consolidated Medium-term Management Plan will be launched. We would like to continue to be a company which is, even in uncertain times, soundly aware of possible crisis and aggressive in tackling reform, thereby creating new values. Let us make a first step this year towards the creation of 'Next-Generation Idemitsu.'