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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.  Risks in Business Operations

3.1.1 Risks from fluctuations in crude oil and petroleum product prices

As a rule, PTTEP’s product prices vary with world oil prices, which are
subject to factors beyond the Company’s control. These include demand
and supply; political and economic stability of various countries; crude
oil stockpiles; OPEC’s production policy; individual countries’ oil
reserves; and global climate.

In 2003 PTTEP’s average product price for oil exceeded the price for the
previous year, $20.62 versus $18.59 a barrel. With the rising prices of
crude oil in the world market, the Company’s condensate commanded higher
prices. At the same time, the price of natural gas, PTTEP’s main
product, was comparable to the price in 2002, relates to the gas pricing
mechanism, which traditionally yielded greater price stability than
those of crude oil. PTTEP’s gas price was contractually adjusted every
six or twelve months, thereby preventing immediate price shocks (for
consumers) stemming from oil price hikes.

In 2003 the government proposed amendments to gas sales agreements
between PTT (the buyer) and natural gas producers, which could
potentially affect the Company’s overall financial results.

However, in instituting such amendments, producers had a part in
formulating win-win solutions for all parties involved. In other words,
PTT would pay lower prices for a portion of PTTEP’s gas but would
purchase beyond the Daily Contract Quantities (DCQ), thereby enabling
producers to sell more gas.

  3.1.2 Risks from hazards in business operations

The petroleum exploration and production business is characteristically
associated with risks of potential commercial repercussions, e.g.,
blowouts, gas pipeline leaks, and other unpredictable incidents.
Locating exploration and production equipment offshore poses risks from
natural phenomena such as storms, monsoons, and earthquakes. Other
threats could arise from terrorist acts that might cause significant
damage to the Company’s personnel, properties, business and the
surrounding environment.

Realizing the significance of these risks, PTTEP drew up a clear policy
on health, safety, environment, and security -- with a commitment to
comply with various laws and regulations, or go beyond them. The Company
organized regular training in these areas so that its personnel would
become more aware of accident prevention measures and safe working
practices, as well as becoming more prepared to remedy emergency
situations to mitigate potential impacts and losses. Through the
external auditor evaluation, PTTEP assessed its safety management system
under the ISRS (International Safety Rating System); the Company was
achieved a Level 7 and a Level 6, on a 0-10 scale, for the Bongkot
Project and Songkhla Logistics Base respectively. As for environmental
operations, PTTEP won certification under the ISO 14001 system for the
PTTEP 1 Project, PTTEP Office Building, Bongkot Field Operations, and
Songkhla Logistics Base, carried out by AJA Registrars Ltd., which
functions under UKAS (United Kingdom Accreditation Service); the Company
passed all required site surveillance audits as well.

PTTEP acquired risk insurance for all significant properties used in its
business operations in accordance with the standards practiced by
companies in the petroleum industry; it also purchased additional
insurance to cover possible business interruptions of the Bongkot
Project Operations, PTTEP’s principal project.

3.1.3 Risks in natural gas marketing and sales

Natural gas, PTTEP main product, relies entirely on the domestic market.
If the domestic demand varies, Company earnings are affected. 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 risks – thereby reducing
dependence on the domestic market.

As for gas sales, despite having PTT as its sole customer, PTTEP entered
into long-term gas sales agreements with PTT to guarantee sales for
25-30 years to mitigate risks arising from the buyer not taking the gas.
Under such contracts, a Take-or-Pay condition was typically stipulated
in case buyers could not take at least the DCQ. This served as a
guarantee for PTTEP’s revenue.

3.1.4 Risks in gas production from new fields

The Company signed Arthit’s Heads of Agreement with PTT in November
2003, with a projected contract signing date in January 2004 to
guarantee market certainty for the project. The Arthit Project is due to
start gas production in mid-2006 at a rate of 330 MMSCFD.

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

-   Project management: PTTEP focused on sound project plans and
    engineering system designs, construction supervision management, and
    cost reduction efforts to ensure timely project implementation
    aligned with proper production costs for the maximum benefit of all
    parties.

-   Personnel: The Company restructured the organization and maintained
    efforts to secure an outstanding staff with operational expertise.

-   Investment: Periodic 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, designed to
    transport Arthit gas to shore.

-   Monitoring: The Company submitted periodic progress reports on
    project development to the Board of Directors for their information
    and remedial action, if necessary.

3.1.5 Risks from oversea Investment

PTTEP’s policy was to expand its investment with a focus on
high-potential projects and those projects in line with its strategic
plan to increase production and petroleum reserves to meet the growing
domestic demand. As a result, it focused on investment in regional areas
with high petroleum potential to achieve solid growth in the long run.
Since investment in overseas countries carries certain risks, for each
investment PTTEP drew up risk mitigation measures allowing for political
stability, international relations affairs, economic and monetary
stability, geographical conditions, and project types and sizes for its
investment return analysis. The Company also coordinated with the
Ministry of Foreign Affairs in analyzing and monitoring all these events
closely.

3.2 Risks in Administration and Management

3.2.1 Risks from major shareholder of shares exceeding 50%

As of December 31, 2003, PTT held 63.61% of the Company’s shares and had
a significant role in shareholders’ meeting matters dealing with
connected transactions. Under the Stock Exchange of Thailand rules,
therefore, if minor shareholders did not get sufficient votes, proposals
were unlikely to be approved by the shareholders (without the
concurrence of PTT).

Despite the dominant role of one single shareholder, PTTEP protected the
benefits of all stakeholders through the use of good corporate
governance in its administration. To illustrate, the Company made
corporate governance a policy for the Board of Directors, so that they
strictly abide by its precepts and independently exercise their judgment
with complete freedom for the maximum benefit of the Company and its
stakeholders. Furthermore, PTTEP has a number of independent directors,
accounting for a third of all Board of Directors, which exceeded the
requirement of the SET.

3.2.2 Risks in Administration

Administration risks may result from mistakes made in administration and
management that may cause PTTEP not to meet its set business objectives.
Since the petroleum exploration and production business requires
significant investment capital, the management must have swift and
prudent decision-making procedures for investment in various projects to
ensure healthy returns. Therefore, risk management has been the
Company’s priority. In 2003 PTTEP implemented a systematic risk
management policy covering all principal work processes throughout the
organization, regarding the risk identification, assessment and
mitigation activities, held workshops on risk assessment, measurement
and management. All these activities proceeded under the supervision of
the Risk Management Committee and periodical reports were submitted to
the Board of Directors.

3.3 Risks Financial risks

1.  Risks in fluctuations in exchange rate

PTTEP has the policy of borrowing in the currency which matches its
revenue. Since the earnings of PTTEP from petroleum sales is linked to
the USD, the Company also borrowed mainly in USD to reduce risks from
exchange rate fluctuation to a certain extent. However, with liabilities
in USD, the accounting booking of the liabilities will fluctuate with
the exchange rate, resulting in the Company’s unrealized gain (loss) on
the foreign exchange rate.

As of December 31, 2003, PTTEP and its subsidiaries have USD 393.28
million in outstanding bonds.

3.3.2 Risks in interest rate changes

The constantly changing interest rate environment will affect the
floating interest rate debts of the Company. The interest expense from
these debts will vary according to the market fluctuation, and cannot be
determined accurately. In order to mitigate this uncertainty, most of
the Company’s debts are based on fixed interest rates.

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

As of December 31, 2003, the Company’s debts consisted of USD 393.28
million and Baht 2,500 million with a fixed interest rate.