31st Annual Report

31ST TERM ANNUAL REPORT (FOR FISCAL YEAR 1998)

From April 1, 1998 To March 31, 1999

JAPAN DRILLING CO., LTD. Nishi Azabu Annex 3-20-16, Nishi Azabu Minato-ku, Tokyo 106-0031 Japan Telephone 81-3-5411-9870

BUSINESS REPORT (April 1, 1998 to March 31, 1999) I. GENERAL OUTLOOK 1. BUSINESS ACTIVITIES AND RESULTS The offshore drilling rig market had continued to be brisk in the first half of this fiscal year. Lingering low crude oil prices, however, began to force oil companies to cut exploration and production budgets and the trend of the market declined rapidly in the latter half of this fiscal year. The worldwide rig utilization rate has fallen from 95% to 75% during this one year. Following this trend, the number of idle rigs has quickly increased and competitions to secure future drilling contracts among contractors have been intensified. JDC, under such severe business environment, has exerted itself to win new drilling contracts and has also accomplished installation of a topdrive system on the HAKURYU-Ⅲ and extension of the legs on the HAKURYU-Ⅶ. As a result, JDC has achieved 89% of the average utilization rate through this fiscal year. In the field of newly developed business other than offshore drilling, JDC has continued to promote engineering services, onshore drilling services and horizontal land-drilling services targeted at civil works and achieved noteworthy increase in domestic revenue in this term. JDC has earlier implemented an emergency cost-saving plan in order to cope with the aggravated offshore rig market. Such actions include enhancement of marketing activities, reduction in repair and maintenance expenses as well as in personnel, local operation and general administrative expenses. The operating revenue of this fiscal year has reached \11,066 million (an increase of \1,846 million or 20.0% over the previous fiscal year). The main reasons for this increase are that all rigs have been operated nearly as planned except HAKURYU-Ⅴ’s stand-by around end of the fiscal year and that average exchange rate of Japanese Yen fell to \128.76 against US $ by \5.37 compared with the previous year. The operating expense has increased to \8,962 million (an increase of \1,664 million or 22.8% over the previous fiscal year). The ordinary earnings has increased to \2,024 million (an increase of \100 million over the previous year). The earnings before tax is \1,886 million. As a result, the net profit for the fiscal year 1998 has reached \1,052 million after deductions of ¥834 million for corporate and other taxes. Rig activities for this fiscal year were as follows:

－The semi-submersible rig "HAKURYU-Ⅲ" continued to operate offshore Taiwan until late May and then drilled two wells offshore Niigata, Japan from early July to early November. After moving to Singapore for

maintenance and refurbishment, the rig operated offshore Indonesia from mid January 1999 to early March. －The semi-submersible rig "HAKURYU-Ⅴ" continued to operate offshore Angola, West Africa until the end of May and then operated offshore Namibia from mid June to mid January, 1999. Thereafter, the rig has been standing by offshore Walvis Bay, Namibia until the end of this fiscal year. －The jack-up rig "HAKURYU-Ⅶ" continued to operate offshore Vietnam until early November and then moved to Singapore for maintenance and refurbishment. Thereafter, the rig has been operating in South Pars gas field offshore Iran from early February, 1999 until the end of this fiscal year under a bare-boat charter contract with Sagadril, Inc., 100% Panamanian subsidiary of JDC. In November, 1998 prior to the long-term bare-boat charter to Sagadril, Inc., the rig was renamed "SAGADRIL-2". －The jack-up rig "HAKURYU-8" has continued to operate offshore Qatar in the Arabian Gulf through this fiscal year. －The jack-up rig "SAGADRIL-1" (ex. the "HAKURYU-9"), which is owned by Sagadril, Inc., 100% Panamanian subsidiary, has continued to operate in Sirri oil field offshore Iran through this fiscal year.

2. COMPANY OBJECTIVES The offshore drilling rig market is expected to remain shrunk for some time though some forecasts suggest upward swing in the comparatively near future as crude oil prices are improving gradually following OPEC’s new agreement on quotas of oil production. Under such market environment, JDC is determined to strengthen marketing activities to keep its rigs busy and continue to carry out the cost-saving measures steadily in accordance with the said action plans. JDC also aims to exert more efforts to materialize the businesses other than offshore drilling business in order to increase domestic revenue and to make the most efficient use of its human resources. JDC is proud of the international reputation for the quality of performance and will continue its commitment to develop and maintain the most advanced technology and equipment in offshore drilling. JDC will also extend the market for its new business relating to drilling technology, with the aim of fulfilling the requirement of its customers around the world.

3. TRANSITION OF BUSINESS RESULTS AND ASSETS Fiscal Year (Year ended March 31 following year)

1995

1996

1997

1998

Revenues from Operations

7,128

6,575

9,219

11,066

Revenues from Domestic Operations

2,865

1,857

1,887

2,730

(40.2%)

(28.2%)

(20.5%)

(24.7%)

4,263

4,718

7,332

8,336

(59.8%)

(71.8%)

(79.5%)

(75.3%)

505

298

434

Net Profit/Loss per Share

63.15

37.35

54.31

Total Assets

9,222

8,958

11,407

12,918

Net Assets

5,109

5,408

5,842

6,894

Revenues from Overseas Operations

Net Profit/Loss

1,052 131.51

(Japanese Yen in Millions, except for "Net Profit/Loss per Share" in Japanese Yen)

4. INVESTMENT IN EQUIPMENT AND FUND RAISING Total investment in equipment during this fiscal year reached ¥1,864 million. Such investments include installation of a top-drive system and fair leaders on the HAKURYU-Ⅲ, replacement of deck crane turn tables of the HAKURYU-Ⅴand extension of the legs and related reinforcement of the SAGADRIL-2 (ex. the HAKURYU-Ⅶ). The loan of \600 million was obtained during this fiscal year as shortterm fund to allocate for the above investments.

II. GENERAL OUTLINE OF THE COMPANY (as of March 31, 1999) 1. MAIN BUSINESS (prescribed in the Articles of Association) Contract drilling and construction work relating to exploration and development of petroleum and natural gas, and other contract work applying drilling techniques.

2. MAIN OFFICES Head Office Japan

3-20-16, Nishi Azabu, Minato-ku, Tokyo,

Hakuryu-3 Operations Office Singapore Hakuryu-5 Operations Office Walvis Bay, Namibia Qatar Operations Office

Doha, Qatar

Dubai Operations Office

Dubai, United Arab Emirates

Singapore Office

Singapore

3. SHARES (1) Number of Shares to be issued :

20,000,000

(2) Number of Issued Shares

:

8,000,000

(3) Number of Shareholders

:

21

(4) List of Main Shareholders (big 13 shareholders) Name of Main Shareholders Japan Petroleum Exploration Co., Ltd. Mitsubishi Materials Corporation Mitsubishi Heavy Industries, Ltd. Teikoku Oil Co., Ltd. Mitsubishi Corporation Ishikawajima-Harima Heavy Industries Co., Ltd. Mitsui & Co., Ltd. Mitsui Engineering & Shipbuilding Co., Ltd. Marubeni Corporation NKK Corporation Itochu Corporation Kawasaki Heavy Industries, Ltd. Nissho-Iwai Corporation

Number of Shares

Percentage

2,660,000 986,000 703,750 576,000 563,000 280,000

33.25 12.32 8.80 7.20 7.04 3.50

182,400 182,400

2.28 2.28

182,400 182,400 182,400 182,400 182,400

2.28 2.28 2.28 2.28 2.28

4. EMPLOYEES

Men Women Total/Average

Number of

From last

Average

Employees

Term

Age

Average Years of Service

168

+ 10

40.6

15.2

15

+2

28.8

6.9

183

+ 12

39.6

14.5

(Part-time employees and locally-hired employees are excluded)

5. MAIN CREDITORS (1) The Japan Development Bank (2) The Long-term Credit Bank of Japan, Ltd. (3) The Mitsubishi Trust & Banking Corporation (4) The Bank of Tokyo-Mitsubishi, Ltd. (5) The Industrial Bank of Japan, Limited.

6. DIRECTORS AND AUDITORS Representative Director & President

Tatsuo Yoshii

Representative Director & Senior Managing Director

Takuo Sasaki

Representative Director & Senior Managing Director

Hiroichi Hayashi

Managing Director

Masayoshi Sano

Managing Director (Mgr., Business Dept. & Mgr., Singapore Office) Minoru Murata Director (President, Japan Petroleum Exploration Co., Ltd.) Wakasugi Director (Chairman, Mitsubishi Materials Corporation)

Kazuo

Masaya Fujimura

Director (Senior Managing Director, Japan Petroleum Exploration Co., Ltd.) Susumu Nakayama Director (Managing Director, Mitsubishi Materials Corporation) Suzuki Director (President, Teikoku Oil Co., Ltd.)

Hideo

Akira Isono

Director (Managing Director, Ishikawajima-Harima Heavy Industries, Ltd.) Masahiro Miyazaki Director (Director, Kawasaki Heavy Industries, Ltd.) Hironobu Hashiguchi Director (Managing Director, Mitsui & Co., Ltd.) Full-time Auditor

Jun Tashiro Jiro Muraoka

Auditor (Senior Managing Director, Japan Petroleum Exploration Co., Ltd.) Sugio Hatanaka Auditor (Managing Director, The Tokio Marine and Fire Insurance Co., Ltd.) Makoto Akutsu

BALANCE SHEET FOR FISCAL 1998 (31ST TERM) (as of March 31, 1999) Figures in Yen (\) Current Assets Cash/Bank Deposits Accounts Receivable Securities Works in process-construction Inventories Prepaid Expenses Short-term Loans Sundry Receivables Other Current Assets Reserve for Bad Debts

5,713,763,398 1,708,032,776 1,764,145,524 371,880,772 20,462,573 1,321,581,158 131,655,840 3,528,600 217,445,394 215,653,761 (-) 40,623,000

Fixed Assets (Tangible Fixed Assets) Buildings Machinery & Equipment Vessels Vehicles Tools & Fixtures Construction in Progress (Intangible Fixed Assets) Telephone Rights (Investments) Securities Investments Stocks of Subsidiaries Long-term Loans Long-term Prepaid Expenses Long-term Sundry Receivables Other Investments Reserve for Bad Debts Total Assets

7,204,975,922 (6,305,332,795) 12,084,352 1,546,924,209 3,862,297,133 1,955,634 51,604,281 830,467,186 (717,183) 717,183 (898,925,944) 122,910,918 29,314,075 86,116,200 67,248,792 413,336,366 448,435,593 (-) 268,436,000 12,918,739,320

Current Liabilities Accounts Payable-Trade Short-term Debts (Bank Loans) Accounts Payable for Fixed Assets Accrued Liabilities for Corporate Tax, etc. Accrued Liabilities for Consumption Tax, etc. Accrued Expenses Deposit Received Reserve for Bonus

5,443,123,728 819,620,939 2,459,768,000 739,584,056 520,260,000 16,778,796 575,587,152 54,142,785 257,382,000

Fixed Liabilities Long-term Debts (Bank Loans) Reserve for Retirement Allowances Reserve for Legal Periodic Repairs Total Liabilities

580,748,000 308,232,000 126,675,000 145,841,000 6,023,871,728

Capital Capital Stock Surplus Profit Unsettled for the Term (Profit for the Term) Total Capital Total Liabilities and Capital

4,000,000,000 4,000,000,000 2,894,867,592 2,894,867,592 (1,052,109,343) 6,894,867,592 12,918,739,320

STATEMENT OF PROFIT AND LOSS FOR FISCAL 1998 (31ST TERM) (April 1, 1998 - March 31, 1999) Figures in Yen (\)

(OPERATING PROFIT & LOSS) Operating Income

11,066,340,002

Operating Income

11,066,340,002

Operating Expenses

8,962,374,815

Operating Expenses General & Administrative Expenses Operating Profit

7,700,654,184 1,261,720,631 2,103,965,187

(NON-OPERATING PROFIT & LOSS) Non-Operating Income Interest & Dividends Non-Operating Expenses Interest Loss on Foreign Exchange Loss on Compensation for Lost Drill Pipes etc. Ordinary Profit

259,343,177 259,343,177 338,609,865 90,023,714 222,308,526 26,277,625 2,024,698,499

<EXTRAORDINARY PROFIT & LOSS> Extraordinary Loss Loss on Disposal of Fixed Assets Loss from Valuation of Securities Investments Loss from Valuation of Stocks of Subsidiaries Profit before Taxes Corporate Tax, Residential Tax and Enterprise Tax

138,183,389 41,508,591 75,646,952 21,027,846 1,886,515,110 834,405,767

Net Profit for the Term

1,052,109,343

Retained Profit Brought Forward

1,842,758,249

Profit Unappropriated at the end of the Term

2,894,867,592

STATEMENT OF APPROPRIATION OF PROFIT FOR FISCAL 1998 (31ST TERM)

Figures in Yen (\) Profit Unappropriated at the end of the Term

2,894,867,592

The above has been appropriated as follows:

Profit to be Carried Forward

2,894,867,592

AUDIT REPORT May 28, 1999 Mr. Tatsuo Yoshii President Japan Drilling Co., Ltd.

ASAHI & CO. Masayuki Takase, C.P.A. Representative Partner

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Akio Minawa, C.P.A. Representative Partner

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Teruhiko Tanaka, C.P.A. Partner

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1.

Outline of Audit Method We have examined the Balance Sheet, Statement of Profit and Loss, Business Report (limited to its sections related to accounting) and proposed Statement of Appropriation of Profit together with the Schedules of Financial Statements (limited to its sections related to accounting) for the 31st Fiscal Year of Japan Drilling Co., Ltd., started on April 1, 1998 and ended on March 31, 1999 in accordance with the provision of Article 2 in the "Law concerning Exceptions to the Commercial Law with regard to Auditing of Joint Stock Companies". Sections related to accounting in the Business Report and the Schedules of Financial Statements that have been audited are those descriptions that were made based on records of accounting books. Our examinations were made in accordance with generally accepted auditing standards and accordingly, included such auditing procedures as are usually considered necessary.

2.

Results of Audit Our opinion, as a result of the audit, is as follows: (1)The Balance Sheet and Statement of the Profit and Loss present correctly the financial situation of the Company, being drawn up in conformity with the applicable laws and regulations and with the Articles of Association of the Company. (2)The Accounting Policy on Reserve for Legal Periodic Repairs was changed in this fiscal year from the manner to represent the maximum amount permitted by the Corporation Tax Law to the manner to represent the amount to be accounted in this fiscal year out of the estimated repair expenses in future and such change is appropriate. (3) The Business Report (limited to its sections related to accounting) presents correctly the situation of the Company, being drawn up in conformity with the applicable laws and regulations and with the Articles of Association of the Company. (4) The proposed Statement of Appropriation of Profit is in conformity with the applicable laws and regulations and with the Articles of Association of the Company. (5) There is nothing in the Schedules of Financial Statements (limited to its sections related to accounting) needing to be pointed out under the provisions of the Commercial Law.

3.

Interests There are no interests between the Company and our firm and/or its partners engaged in this audit to be specifically noted herein, under the provisions of the Certified Public Accountants Law. Concluded

AUDIT REPORT The Board of Auditors has received reports from each member of the Board of Auditors regarding the manner and the results of their audit on the performance of duties of the Directors during the 31st fiscal year started on April 1, 1998 and ended on March 31, 1999, held conference, made this report and given an account as follows: 1.

Outline of Audit Method Each Auditor, in accordance with the policy and the work responsibility schedule etc. resolved by the Board of Auditors, attended meetings of the Board of Directors and other important meetings, inquired the business activities of the Directors and others, reviewed important documents used in decision making, surveyed business transactions and financial situation of the head office and other main offices and inquired of the subsidiaries concerning its business activities as it required. The Auditors also received reports and explanations from the appointed auditing firm, and examined the Financial Statements and the Schedules thereof. As regards to the transactions of the Directors with the Company, its subsidiaries or shareholders etc. if any, in addition to the above audit method as it required, obtained facts from the Directors and investigated into the details of such transactions.

2.

Results of Audit (1) The method and the results of audit done by the appointed auditing firm, ASAHI & CO. are appropriate. (2) The Business Report presents correctly the situation of the Company in conformity with the applicable laws and regulations and the Articles of Association of the Company. (3) There is nothing in the proposed Statement of Appropriation of Profit needing to be pointed out in view of the Company’s asset situation and other circumstances. (4) The Schedules of Financial Statements present correctly items to be noted, and there is nothing needing to be pointed out. (5) There has not been found any grave fact to indicate any malpractice in the performance of duties by the Directors as well as any violation of the applicable laws and regulations and the Articles of Association of the Company. It is also acknowledged that there has not been found any violation of duties by the Directors with regard to the transactions of the Directors with the Company, its subsidiaries or shareholders etc.

June 3, 1999 Japan Drilling Co., Ltd., Board of Auditors Full-time Auditor: Jiro Muraoka

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Auditor: Sugio Hatanaka

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Auditor: Makoto Akutsu

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(Notes) The Auditors, Jiro Muraoka, Sugio Hatanaka and Makoto Akutsu are all the external Auditors provided by Clause 1, Article 18 in the "Law concerning Exceptions to the Commercial Law with regard to Auditing of Joint Stock Companies". Concluded