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  3. Risk Factors

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Apart from the risks typically associated with petroleum exploration and
production, primarily consisting of geological and operational risks,
PTTEP’s risk profile included the following aspects:

1.  Business Operational Risks

3.1.1 Risks from hazards in business operations

Petroleum exploration and production is inherently associated with
various types of commercial risk e.g., blowouts, gas pipeline leaks, and
other unpredictable incidents. Locating exploration and production
equipment offshore poses risk from natural phenomena, e.g., storms,
monsoons, and earthquakes. Other potential threats arise from terrorist
acts with significant damage to PTTEP personnel, properties, business,
and the surrounding environment.

In view of this, PTTEP has drawn up a clear policy on health, safety,
environment, and security – with a commitment to compliance with
governing laws and regulations, or even transcending them. The Company
closely monitors every step of its operations, including the design of
production platform structures as well as production, hazards control,
and warning systems. Work processes are managed and continuously
improved for optimum practicality and technological advancement. PTTEP
organizes regular personnel training in health, safety, environment, and
security – leading to a high level of familiarity with accident
prevention measures, safe working practices, and emergency preparedness.

To mitigate potential impacts and losses, PTTEP regularly assesses its
safety management system under the International Safety Rating System
(ISRS) through its external auditor’s evaluation. On a 0 to 10 scale,
the Company achieved Level 7 for Bongkot, Level 6 for Songkhla Logistics
Base, and Level 6 for the PTTEP1 Project. As for environmental
operations, the Company won ISO 14001 certification for PTTEP1, S1, and
Bongkot projects, Songkhla Logistics Base, and the PTTEP Office
Building. The assessment was carried out by AJA Registrars Ltd., an
agency under United Kingdom Accreditation Service (UKAS). PTTEP
continues to pass all required site surveillance audits performed by
that company.

3.1.2 Petroleum Commercial

Because natural gas -- the Company’s main product -- relies primarily on
the domestic market, earnings will be affected if domestic demand varies
from expectations. As a result, PTTEP has expanded its investments in
overseas petroleum exploration and production projects, especially those
with oil, to increase its oil reserves and diversify its risk, thereby
reducing dependence on the domestic market.

Regarding gas sales, despite having PTT Plc as its major customer, PTTEP
entered into long-term gas sales agreements with PTT to guarantee sales
for 25-30 years, thereby mitigating the risk from the buyer (PTT) not
purchasing the gas. Under these contracts, a take-or-pay condition was
stipulated in case buyers cannot take at least the Net Annual Contract
Quantity (Net ACQ), which serves as a guarantee for the Company’s
revenue.

3.1.3 Project Development

Natural gas production from the Arthit Project -- one of PTTEP’s
upcoming fields -- is scheduled to begin in early 2007 at a rate of 330
million cubic feet per day. PTTEP and PTT signed a Gas Sales Agreement
for Arthit on 23 January 2004, guaranteeing a market for petroleum from
the Arthit Project. The Company conducted and assessed environmental
impacts of the project and, on 29 January 2004, won approval from the
Office of the Natural Resources and Environmental Policy and Planning,
to commence operations.

In recognition of the potential risk associated with development of the
project, PTTEP drew up the following risk mitigation measures to enable
successful and timely project completion:

-   Project Management: The Company focused on sound project plans and
    engineering system designs, construction supervision management, and
    cost reduction program to ensure timely project implementation,
    project cost within budget and maximum benefit to all parties.

-   Personnel: The Company prepared an organizational structure to
    facilitate the project’s operations and secured competent staff
    skilled in operations.

-   Investment: Investment plans were formulated and investment budgets
    allocated to meet actual market conditions, including PTT’s actual
    timing for its 3^(rd) gas transmission pipeline, which was designed
    to transport Arthit gas to shore.

-   Monitoring: PTTEP submitted periodic project development updates to
    the Board of Directors for their information and remedial actions if
    necessary.

3.1.4 Investment Risks

PTTEP’s policy is to expand its investment -- both domestically and
internationally -- with a focus on promising projects and projects
aligned with its strategic plan of increasing petroleum production and
reserves. To achieve solid growth in the long run, it therefore focuses
on investment in areas with promising petroleum potential. Since
overseas investments carry certain risk, the Company has risk mitigation
measures designed for each investment as part of its evaluation process
-- allowing for political stability, international relations, economic
and monetary stability, geographical conditions, and project
characteristics and sizes. These risk factors are incorporated into the
investment analysis. PTTEP also coordinates with the Ministry of Foreign
Affairs in closely monitoring all these factors and analyzing their
potential impacts on current investments.

3.2 Administration and Management Risks

3.2.1 One Major Shareholder of shares exceeding 50%

As of 31 December 2004, PTT held 65.98% of PTTEP’s shares and had a key
role in shareholders’ meeting matters dealing with connected
transactions. In accordance with the rules of the Stock Exchange of
Thailand (SET), “Connected Persons” with a direct or indirect interest
to a proposal at the shareholders meeting will not have the right to
vote. Unconnected shareholders must get sufficient votes to counter
them.

Despite the dominance of one single shareholder, PTTEP has protected the
benefits of all stakeholders through the use of good corporate
governance in its management. To illustrate, the Company has made
corporate governance a policy for the Board of Directors to abide by and
independently exercise their judgment in the best interests of PTTEP and
its stakeholders. Note that PTTEP’s independent directors comprise more
than one-third of the composition of the Board of Directors, which
exceeds the requirements of SET.

3.2.2 Management Risks

Mistakes made in administration and management may prevent PTTEP from
achieving its business objectives. Since the petroleum exploration and
production business requires significant investment capital, management
must have swift and prudent decision-making procedures for investments
of all sorts, including exploration, development, and production. To
ensure healthy returns, a sound management decision-making process has
been the Company’s priority.

Therefore, PTTEP’s management processes are systematic and efficient,
encompassing elements such as a strategic planning process, a
comprehensive risk management program covering all principal business
processes throughout the organization, and a management system that
optimizes the organization’s knowledge and expertise.

3.3 Financial Risks

3.3.1 Fluctuations in Oil Price and Petroleum Products

The prices of the Company’s products vary with oil prices, which are
subjected to factors beyond its control, including market demand and
supply, political and economic stability in various countries, OPEC’s
production policy, oil reserves in individual countries, and global
weather. Fluctuations in oil prices inevitably affect the Company’s
revenue and investment planning.

In 2004 the average product price rose along with very high oil prices
to $23.38 from $20.62 a barrel in 2003, whereas the price of natural gas
varied only slightly.

When oil prices fall, so do the prices of the Company’s crude price and
condensate. However, the price of natural gas – its main product – would
not be immediately affected because of the gas pricing mechanism built
into gas sales agreements, which protect gas prices from fluctuations in
oil prices. PTTEP’s contractual gas prices are adjusted every six or
twelve months reflect with referenced oil prices. The gas price formulas
reflect changes in reference oil prices to a certain extent, thereby
ensuring that natural gas is a competitive form of fuel with fairly
stable prices.

3.2.2 Exchange Rate Fluctuations

PTTEP’s policy is to borrow money in the currency that matches its
revenue. Since its earnings from petroleum sales is linked to the US
dollar, it borrows mainly in US dollars to reduce the risk from exchange
rate fluctuations. However, since the Company has to record its account
in Thai Baht, all of its US dollar debts will create unrealized gain
(loss) on foreign exchange rate.

As of December 31, 2004, PTTEP and its subsidiaries’ total debts
consisted of bonds in the amount of USD 393.28 million and Baht 2,500
million, or total of approximately Baht 17,915 million.

3.3.3 Interest Rate Fluctuations

A volatile interest rates environment will affect the Company’s interest
obligations on debts which carry floating interest rates, since the
interest expense on long term debts cannot be determined accurately. To
mitigate this uncertainty, all of the Company’s long term debts
currently have fixed interest rates.

For the deposits of surplus cash, interest rate fluctuation will affect
its interest income. The Company policy is to invest in short term
deposits and instruments, with consideration of returns and risks.
However, it considers liquidity as a priority.

As of December 31, 2004, all of the Company’s long term debts carried
fixed interest rates, consisting of bonds in the amount of USD 393.28
million and Baht 2,500 million, or total of approximately Baht 17,915
million.