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  14. Financial Position and Results of Operation for Year 2004

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14.1 Auditor and Significant Accounting Policies

  14.1.1 Auditor

  PTTEP has appointed Office of the Auditor General, as the external
  auditor of the Company and subsidiaries the appointment has been
  approved by the Office of Securities and Exchange Commission and has
  also been approved by the annual General Shareholders’ meeting meeting
   In 2004 the Company and subsidiaries agreed to pay audit fee Baht 
  2.6 million and non-audited fee Baht 0.26 million. The audit fee
  charged for PTTEP was Baht 900,000.  

14.1.2 Summary Auditors’ Report in the past 3 years

  The auditor expressed clean opinion in the Auditors’ Report in the
  past 3 years and expressed the additional opinion are as follows:

1)  Assets, liabilities and expenses of the joint venture have not been
    audited by the Company’s auditor however they have been audited by
    the joint ventures’ auditors.

    2) The Group recorded a provision of decommissioning costs for the
    year 2003. A provision is recognized, and provided at the onset of
    production of the project, for the estimate of the eventual costs
    that relate to the removal of the production facilities. These costs
    were included as part of the oil and gas properties and were
    amortized based on proved reserves on a unit of production basis.
    The effect of this change affected to restatement of the comparative
    financial statement for the year 2002, and the auditor expressed an
    opinion to the restated financial statements for the year 2002.

14.1.3 Significant Accounting Policies

1) Basis for Preparation of Financial Statements

  The consolidated and the Company financial statements have been
  prepared in accordance with Generally Accepted Accounting Principles
  in Thailand under the Accounting Act B.E. 2543, being those Accounting
  Standards in Thailand endorsed under Accounting Professions Act B.E.
  2547, and the financial reporting requirements of the Securities and
  Exchange Commission.

  The Company presents financial statements in compliance with
  notification of Department of Commercial Registration dated September
  14, 2001 under the third paragraph of section 11 of Accounting Act
  B.E. 2543.

  Since 1998, the Group has applied International Accounting Standard 12
  “Income Taxes”.

  The consolidated and the Company financial statements are use of
  estimates and assumptions that affect the assets, liabilities,
  revenues and expenses reported in the financial statements. While the
  Group uses its best estimates and judgments, actual results could
  differ from these estimates as future confirming events occur.

  The consolidated and the Company financial statements have been
  prepared under the historical cost convention except as disclosed in
  the accounting policies below.

2) Subsidiary Undertakings

  Subsidiary undertakings, which are those entities in which the parent
  company in the Group has an interest of more than one half of the
  voting rights and has power to exercise control over subsidiaries’
  financial policies and operations. Subsidiaries are consolidated from
  the date on which control is transferred to the parent company and are
  no longer consolidated from the date that control ceases. All
  intercompany transactions, balances and unrealized gains on
  transactions between the Group are eliminated; unrealized losses are
  also eliminated unless cost cannot be recovered. Where necessary,
  accounting policies for subsidiaries have been changed to ensure
  consistency with the policies adopted by the Group.

3) Associated Undertakings

  Investments in associated undertakings are accounted for by the equity
  method of accounting. These are undertakings over which the Group
  generally has between 20% and 50% of the voting rights, and over which
  the Group has significant influence, but which it does not control.
  Unrealised gains on transactions between the Group and its associated
  undertakings are eliminated to the extent of the Group’s interest in
  the associated undertakings; unrealised losses are also eliminated
  unless the transaction provides evidence of an impairment of the asset
  transferred. The Group’s investment in associated undertakings
  includes excess on acquisition. Equity accounting is discontinued when
  the carrying amount of the investment in an associated undertaking
  reaches zero, unless the Group has incurred obligations or guaranteed
  obligations in respect of the associated undertaking.

4) Joint Ventures

  The Group’s interest in jointly controlled entities are accounted for
  by proportionate consolidation. Under this method the Group includes
  its share of the joint ventures’ individual income and expenses,
  assets and liabilities in the relevant components of the financial
  statements.

  The Group’s interest in jointly controlled assets are accounted for by
  proportionate consolidation. Under this method the Group includes its
  share of the assets, liabilities and expenses based on Joint Operating
  Agreement in the relevant components of the financial statements.

5) Related Parties

Enterprises and individuals that directly, or indirectly, through one or
more intermediaries, control, are controlled by, or are under common
control with, the Company, including holding companies, subsidiaries and
follow subsidiaries are related parties of the Company. Associates and
individuals owning, directly or indirectly, an interest in the voting
power of the Company that gives them significant influence over the
enterprise, key management personnel, including directors and officers
of the Company.

In considering each possible related party relationship, attention is
directed to the substance of the relationship, and not merely the legal
form.

6) Foreign Currency Transactions

  Foreign currency transactions are translated into Baht at the exchange
  rates ruling on the transaction dates. Monetary assets and liabilities
  denominated in foreign currency remaining at the year-end date are
  translated into Baht at the average buying and selling rates,
  respectively, as determined by the Bank of Thailand. Such gains or
  losses are recognized as revenues or expenses in the period in which
  they occur.

  The monetary assets and liabilities of subsidiary companies are
  translated into Baht using average buying and selling rates determined
  by the Bank of Thailand at year-end, whereas the income statement is
  translated using the exchange rates ruling on the transaction dates.
  Gains or losses from such translation are recognized as revenues or
  expenses in the period in which they occur.

  The assets and liabilities of overseas jointly controlled entities are
  translated into Baht using average buying and selling rates determined
  by the Bank of Thailand at year-end, whereas the income statement is
  translated using average exchange rates during the period. Differences
  from such translation have been shown under the caption of “Currency
  Translation Differences” in shareholders’ equity.

  7) Cash and Cash Equivalents

  Cash and cash equivalents comprise cash on hand and at banks, and
  other short-term highly liquid investments with maturities within 3
  months.

8)  Trade Accounts Receivable

  Trade accounts receivable are carried at anticipated realizable value.
  An estimate is made for doubtful receivables based on a review of all
  outstanding amounts at the year end. Bad debts are written off during
  the year in which they are identified.

9) Inventories

  Inventories are valued at the lower of weighted average cost or net
  realizable value. Cost is determined by the weighted average method.
  Net realizable value is the estimated selling price in the ordinary
  course of business, less the costs of completion and selling expenses.

10) Materials and Supplies

  Materials and supplies are valued on the average cost basis.
  Allowances have been provided for obsolete and unserviceable items.

11) Borrowing Costs

Interest costs on borrowings to finance the construction of property,
plant and equipment are capitalized, during the period of time that is
required to complete and prepare the asset for its intended use. All
other borrowing costs are expensed.

  12) Property, Plant and Equipment

  General properties

  Property, plant and equipment are presented at cost, after deducting
  accumulated depreciation and provision for impairment of assets.

  Depreciation of general properties is determined on the straight-line
  method at rates ranging from 5% to 20% per annum.

  Oil and Gas Property

  The Company follows the Successful Efforts Method in accounting for
  its oil and gas exploration and production activities as follows:

  Cost of Properties

Cost of properties comprising total acquisition costs of concession
right or the portion of costs applicable of properties, drilling,
development, equipment and operating costs of support equipment as well
as the decommissioning costs. If exploratory wells establish proved
reserves, and are included in the plan to develop in the near future,
exploratory drilling costs (both tangible and intangible) are initially
capitalized otherwise the related costs are charged as expenses.

Exploratory costs, comprising geological and geophysical costs as well
as are reservation fees during the exploration stage, are charged to
expenses as incurred.

Development costs, irrespective of whether relating to development wells
or unsuccessful development wells, are capitalized.

  Depreciation, depletion and amortization

Capitalized of acquisition costs of concession right are depleted and
amortized on the unit of production method, which is based on estimated
proved recoverable reserves. Depreciation, depletion and amortization of
exploratory wells, development equipment and operating costs of support
equipment as well as the decommissioning costs, except unsuccessful
projects are calculated on the unit of production method, which is based
on estimated proved recoverable reserves and proved development
reserves. Changes in reserve estimates are recognized prospectively.

Proved recoverable reserves and proved development reserves are
calculated by the Group’s own engineers and information from the joint
ventures.

Depreciation of transportation pipeline of Yadana and Yetagun project is
calculated on the straight-line method with an estimated useful life of
30 years.

Where the carrying amount of an asset is greater than its estimate
recoverable amount, it is written down immediately to its recoverable
amount.

Gain and losses on disposal are determined by reference to their
currying amount and are taken into account in operating profit.

Expenditure for addition, renewal and betterment which result in a
substantial increase in an asset’s current replacement value, are
capitalized. Repair and maintenance costs are recognized as expenses
when incurred.

  13) Intangible Assets

  Expenditures on acquired licenses for computer software are
  capitalized and amortized using the straight-line method over the
  lives of contract, maximum of 10 years. The carrying amount is
  reviewed annually and adjusted for impairment where it is considered
  necessary.

  14) Deferred Income Taxes

  Deferred income tax is provided in full, using the balance sheet
  method, on temporary differences arising between the tax bases of
  assets and liabilities and their carrying amounts in the financial
  statements. The principal temporary differences arise from
  depreciation on property, plant and equipment, amortization of
  decommissioning costs, tax losses carried forward and, on the
  difference between the fair values of the net assets acquired and
  their tax base.

  Tax rates enacted or substantively enacted by the balance sheet date
  are used to determine deferred income tax.

    Deferred tax assets are recognized to the extent that it is probable
    that future taxable profit will be available against which the
    temporary differences can be utilized.

  Deferred income tax is provided on temporary differences arising on
  investments in subsidiaries, associates and joint ventures, except
  where the timing of the reversal of the temporary difference can be
  controlled and it is probable that the temporary difference will not
  reverse in the foreseeable future.

  15) Borrowings

Borrowings are recognised initially at the proceeds received.
Transaction costs incurred are recognized as deferred assets and
amortized through the income statement over the period of the
borrowings.

  16) Provision for Decommissioning Cost

  The Group recorded provision for decommissioning cost whenever it is
  probable that there is an obligation as a result of the past event and
  reliable amount of obligation.

  The Group recognizes provision for decommissioning costs, which are
  provided at the onset of production of the project, for the estimate
  of the eventual costs that relate to the removal of the production
  facilities. These costs were included as part of the oil and gas
  properties and were amortized based on proved reserves on a unit of
  production basis. The estimates of decommissioning costs have been
  determined based on reviews and estimates by the Group’s own engineers
  and managerial judgment.

  17) Reserve for Expansion

  The Group sets aside a reserve for expansion for the purpose of
  investing in new exploration-phase projects, which are generally
  susceptible to high risk, and for the purpose of finding additional
  petroleum reserves. The reserve for expansion is set aside at the rate
  of 35% of the net profit on tax basis after tax from exploration and
  production activities.

  18) Income Recognition

  Sales are recognized upon delivery of products and customer
  acceptance.

  Interest income is recognized on the basis of percentage of period,
  taking into account the effective yield on the asset.

  Revenues other than the above mentioned are recognized on an accrual
  basis.

  19) Income Taxes

  The Group’s expenditures and revenues for tax purposes comprise:

-   Current period tax which is calculated in accordance with the
    Petroleum Income Tax Act B.E. 2514 and Amendment B.E. 2532 and the
    Revenue Code

-   Income tax in the Union of Myanmar

-   Deferred income taxes.

20) Earnings per Share

  Basic earnings per share is calculated by dividing the net profit
  attributable to shareholders by the weighted average number of outside
  ordinary shares in issue during the year.

  For the diluted earnings per share the weighted average number of
  outside ordinary shares in issue is adjusted to assume conversion of
  all dilutive potential ordinary shares. The Company has one category
  of dilutive potential ordinary shares: share options.

  21) Provident Fund and Provision for Employee Benefits

  The Company established a provident fund under the name of "Employee
  of PTTEP Registered Provident Fund".

  The provident fund is funded by payments from employees and by the
  Company which are held in a separate trustee-administered fund. The
  Company contributes to the fund at a rate of 15 % of its employees’
  salaries which are charged to the income statement in the period to
  which the contributions relate.

  The provision for employee benefits is determined from the different
  of compensation and benefits under provident fund and compensation and
  benefits under the old pension scheme. The provision is assessed by
  the Company's management. The provision is based on the old pension
  scheme which is determined by length of years of service, and current
  salary of employees. The provision is presented under Non-current
  liabilities.

22) Deferred Income under Take-or-Pay Agreements

    The Group has certain obligations in respect of the supply of gas
    under gas purchase agreements with its customer. Under these
    agreements customer is required to pay for certain minimum
    quantities of gas in a given year. Should customer be unable to take
    the minimum contracted quantities in a given year, certain volumes
    of gas that the customer has paid for but has not taken in that year
    can take for free of charge in subsequent years subject to certain
    conditions in the agreements. The Group recognizes its obligations
    under Take-or-Pay agreements on an accrual basis based on its best
    estimate of volumes taken in the year. Received in advance under
    these agreements are recognized as deferred income. The deferred
    income, when subsequently taken, is recognized in the income
    statement.

    The Group made prepayment for royalty related to cash received in
    advance under Take or Payment agreement to government of Myanmar.
    Prepayment will be amortized when the deferred income is recognized.

  14.1.4 Bonds issuing Liabilities

  1) The Company issued 2,500,000 unsecured unsubordinated bonds with a
  face value of Baht 1,000 each, totaling Baht 2,500 million. The bonds
  bear interest at a rate of 4.625% per annum, payable every six months
  on March 27 and September 27 of each year, and have a maturity period
  of 15 years, to be redeemed on March 27, 2018.

  2) PTTEPI issued 200,000 unsubordinated bonds with a face value of USD
  1,000 each, totaling USD 200 million, guaranteed by the Company. The
  bonds bear interest at a rate of 7.625% per annum, payable every six
  months on April 1 and October 1 of each year, and have a maturity
  period of 10 years, to be redeemed on October 1, 2006.

  3) The Company issued 230 unsecured unsubordinated bonds with a face
  value of Yen 100 million each, totaling Yen 23 billion. The bonds bear
  interest at a rate of 3.35% per annum and have a redemption period of
  10 years, to be redeemed on September 19, 2007. On the date of the
  bond issuance, the Company entered into a swap agreement with a
  foreign bank to swap Yen for USD 193.28 million. Under this agreement,
  interest is charged at the rate of 7.86% per annum, payable every six
  months on March 19 and September 19 of each year.

2.  Summary PTTEP and its subsidiaries Financial Statements

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3.  

4.  Summary significant financial ratio table

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14.4 Management’s Discussion and Analysis on Operating Results for Year
2004

1.  PTTEP Performance

  In 2004, Thailand’s economy demonstrated continuous growth at a rate
  below the targeted forecast. This was caused by several unexpected
  factors such as the Southern region issue, the recurrence of bird flu
  outbreak, and the high world oil prices throughout 2004. These factors
  depressed Thai economic growth. However, the Bank of Thailand (BOT),
  and the National Economic and Social Development Board (NESDB),
  projected economic growth in 2004 to be around 6.0 -6.3%. This
  economic growth led to increases in demands for natural gas and power,
  increases of 4.0% and 7.7% respectively, when compared with the year
  of 2003.

  Regarding business results in 2004, PTTEP was successful in
  implementing its strategic direction as follows:

  Concerning the first strategic direction, value creation in the
  existing projects, notable aspects are summarized here:

  - PTTEP achieved impressive results. Firstly, actual sales volume was
  134,070 Barrel of Oil Equivalent per Day (BOED), which was higher than
  the target of 129,119 BOED by 3.8%. The major contributors to
  increases in sales volume came from higher sales volume in the
  Bongkot, Pailin, and Yetagun projects. Secondly, the 2004 performance
  yielded a Return on Capital Employed (ROCE) of 24.4%, which was higher
  than the target of 23%. Regarding the long term Debt-to-Equity ratio,
  the PTTEP ratio was at 0.4, lower than the target of 1.0.

  - PTTEP, the operator of the Arthit project and the other joint
  venture partners, (the sellers), signed the Gas Sales Agreement (GSA)
  with PTT Public Company Limited or PTT (the buyer) on January 23,
  2004. This is a major PTTEP achievement in expanding its production
  base, enabling it to reduce petroleum imports and to secure a
  long-term gas supply for the nation. In addition, this is also a key
  milestone transform the Arthit project into a full development phase.
  Currently, the Arthit project is progressing as planned. Significant
  tasks have been completed, such as the 3rd Appraisal Drilling Campaign
  for Arthit Development in May 2004.

  - PTTEP successfully concluded the preliminary GSA of block B-17 in
  the MTJDA project with PTT. This GSA is in the process of submission
  to the Thai and Malaysian governments for approval prior to the
  expected signing in 2005. This event clearly confirms the driving
  forward of the MTJDA project development.

  - PTTEP accelerated initial oil production in the Nang Nual Project,
  B6/27, to gain an upward trend of oil price. The Nang Nual project is
  expected for first oil production in the first quarter of 2005.

  - PTTEP initiated the first exploration well in Shams in the Oman44
  project, the first overseas project in which PTTEP served as an
  operator, on December 17, 2004. The concluded Sham’s GSA is in
  process. The expected GSA signing will be in the first quarter of
  2005.

  - PTTEP International Limited, a subsidiary of PTTEP which has 15%
  participation interest in G4/43 project located in the Gulf of
  Thailand, and Chevron Offshore (Thailand) Ltd., as an operator with
  85% participation interest, have had initial success in proving the
  petroleum potential of Block G4/43 from the discovery results of the
  first 2 exploration wells. It revealed that the Lanta1 was drilled to
  a measured depth of 10,358 feet and 280 feet of oil and gas pay was
  discovered, in addition, the Lanta2 was drilled to a measured depth of
  10,040 feet and 194 feet of oil and gas pay was discovered.

  - PTTEP has received Thai Cabinet approval on December 28, 2004 to
  hold 20% equity in Block EU-1 in the Phu Horm project, located in Udon
  Thani and Khon Kaen Provinces. The project has been very successful in
  the past 2 years of exploration. It revealed that Phu Horm is expected
  to be the next significant onshore gas resource for the country.

  Regarding the second strategic direction - growth - several
  significant investment expansions, both domestic and overseas, were
  implemented in line with corporate strategy. The key investment events
  in 2004 are detailed below;

  - PTTEP was awarded concession blocks from the invitation to the 18th
  Petroleum Concession Bidding Round. PTTEP became the concessionaire
  and the operator for the whole of concession Blocks L53/43 & L54/43.
  Both concession blocks are noted to have potential oil reserves, which
  are located in Suphanburi province nearby the existing company project
  PTTEP1. This led to the synergy approach with the existing operating
  project PTTEP1.

  - PTTEP completed share purchasing of Thai Shell Exploration and
  Production Company Limited and became the operator with 100% interest
  in Project S1, Blocks L22/43 and B6/27. By purchasing Thai Shell,
  PTTEP not only extends its domestic investment expansion, but also
  immediately locks in sales revenue from this field. In addition,
  PTTEP’s oil production and oil reserves will also increase
  significantly.

  - PTTEP International Limited (PTTEPI) and PC JDA, an affiliate of
  PETRONAS of Malaysia, with 50% interest each, signed the Production
  Sharing Contract (PSC) of Block B-17-01 with Malaysia-Thailand Joint
  Authority (MTJA) on September 30, 2004. Block B-17-01 is a part of the
  Malaysia-Thailand Joint Development Area (MTJDA) and used to be an
  area in Blocks A-18, B-17 and C-19, in which the concessionaires have
  relinquished parts of the concession to the MTJA. This concession is
  projected to have oil and gas potential reserves from the past
  successful exploration in Block B-17. This investment will enhance the
  value of petroleum exploration projects in the Gulf of Thailand and
  the MTJDA, and increase PTTEP’s petroleum reserves in accordance with
  corporate growth strategy.

  - PTTEP signed a Memorandum of Understanding (MOU) with the Ministry
  of Petroleum, The Islamic Republic of Iran on January 29, 2004. This
  MOU covers the cooperation between the two parties in the areas of
  petroleum exploration, development and utilization of petroleum and
  their products as well as training and other technical assistance in
  petroleum activities. This event clearly enhances PTTEP’s investment
  opportunities in this potentially petroleum rich country. In addition,
  PTTEP also submitted tenders for several petroleum exploration and
  production blocks in the Iranian 16 block bidding round.

  - PTTEP signed the Production Sharing Contract (PSC) on August 7, 2004
  to become the Operator, with 100% interest, in petroleum exploration
  project Blocks M-3 and M-4, in the Union of Myanmar. The blocks are
  located in the Gulf of Martaban, covering a total area of
  approximately 18,000 square kilometers. This investment is in line
  with the corporate strategy on overseas expansion to increase PTTEP’s
  petroleum reserves and to secure a petroleum supply for domestic
  demand.

  The third strategic direction, capability development, PTTEP has
  incorporated the Corporate Governance (CG) principle, organization and
  human development into its business execution. Notable aspects are
  summarized here;

  - In 2004, PTTEP, in its continued effort to improve corporate
  governance, signed a contract with Thai Rating and Information
  Services Co., Ltd., (TRIS), to evaluate PTTEP’s performance as well as
  to identify PTTEP’s ranking in Thailand in terms of corporate
  governance. PTTEP received a “Very Good” CG rating, or a score of
  8.14. This led PTTEP to gain several benefits from SEC (Securities and
  Exchange Commission, Thailand) and SET(Stock Exchange of Thailand)
  such as 50% annual fee reduction.

  - PTTEP received 2 awards from 2004 SET Awards. One award was the Best
  Performance Award, which was given to the listed company equipped with
  strong financial indicators and outstanding business performance in
  2003. PTTEP also received an award in the resources sector. Another
  award was the Best Corporate Governance Report Award, which was
  awarded to the top 10 listed companies in outstanding corporate
  governance report in accordance with SET regulations.

  - PTTEP has established PTTEP Services Limited in which its registered
  capital is 1,000,000 Baht, consisting of 100,000 ordinary shares at 10
  Baht each. Its main activity is to supply contracted personnel for the
  PTTEP group of companies, ensuring smooth and efficient operations of
  PTTEP.

  - PTTEP and the Vocational Education Commission (VEC) have agreed to
  establish the PTTEP Petroleum Training Centre to conduct training
  programs for petroleum technician trainees in order to reinforce
  international knowledge and expertise in the petroleum exploration and
  production industry. It is primarily intended to prepare around 40
  vocational school graduates who will work offshore at Arthit field,
  which is expected to go into gas production in 2006.

  - For the projects in which PTTEP is the operator, the company aims to
  be an operator, proud of its operational excellence, along with a keen
  awareness of Safety Security Health and Environment (SSHE) issues.
  Concurrently, organization and human resources development initiatives
  have also progressed. PTTEP has focused on adopting international best
  practices and world-class competitiveness in order to support its
  future growth. In this matter, PTTEP has developed an internal control
  system together with risk management to ensure implementation of this
  plan. The company had also incorporated the principles of organization
  management approaches such as Learning Organization, Knowledge
  Management, Efficiency-Based Organization, and Organization
  Capabilities to guarantee continued organizational development.

  14.4.2 Results of operations

  For the year 2004, PTTEP finances were strong due to higher sales
  volumes at 134,070 BOED compared with 107,299 BOED in 2003. The
  average petroleum price was also higher at USD 23.38 per BOE, compared
  with USD 20.62 per BOE in 2003. The Company had cash and cash
  equivalents of Baht 23,778 MM. at December 31, 2004, and invested its
  surplus cash in short-term financial instruments carrying low risks
  such as Treasury Bills, Promissory Notes, US. Treasury Bills, and
  deposits with commercial banks, where emphasis is given to security
  and liquidity.

  On April 28, 2004, the PTTEP 2004 General Shareholders’ Meeting
  approved the issuance and the offering of 2.8 million units of
  warrants to purchase the Company’s common shares for management and
  employees of the Company for the year 2004 (Exercise Ratio : 1 unit of
  warrant per 1 unit of common share) at the exercise price of Baht 183.

  On May 7, 2004, PTTEP paid a dividend to its shareholders of Baht 6.75
  per share, in compliance with the resolution of the 2004 General
  Shareholders’ Meeting on April 28, 2004.

  Concerning investor relations activities, the Company participated in
  the SET in the City event on November 11-14, 2004, hosted by The Stock
  Exchange of Thailand. The activity created a venue for disclosure of
  Company’s information to retail investors.

Full year 2004 compared with Full year 2003

  -------------------------------------------------- ---------- ----------
  Earning summary                                    Full Year  

  Millions of Baht except Baht per share amounts     2004       2003

  Income from continuing operations                             

  Exploration and production                         15,158     10,805

  Pipelines                                          2,601      2,256

  The others                                         (1,893)    (1,033)

  Total net income                                   15,866     12,028

  Diluted earnings per share – from continuing       24.26      18.43
  operations                                                    

  Total revenues - from continuing operations        48,417     37,014
  -------------------------------------------------- ---------- ----------

  For the results of operations for 2004, PTTEP and subsidiaries’ net
  profit was Baht 15,866 million or Baht 24.26 per share-diluted, an
  increase of Baht 3,838 million or 32% when compared with last year’s
  net profit of Baht 12,028 million, or Baht 18.43 per share-diluted.
  PTTEP and subsidiaries had a ratio of return on shareholders’ equity
  in this year of 30.88%.

  For this year, the total revenues of PTTEP and subsidiaries amounted
  to Baht 48,417 million, an increase of Baht 11,403 million or 31% when
  compared with Baht 37,014 million last year. This increase was mainly
  due to an increase in sales of Baht 12,161 million or 36%, resulting
  from the higher sales volume at 134,070 BOED this year, compared with
  107,299 BOED last year. In addition, the average petroleum price
  increased to USD 23.38 per BOE when compared with USD 20.62 per BOE
  for last year. The increased sales volume derived mainly from (1) the
  sales volume of crude oil from the S1 project as a result of the
  additional stakes from the acquisition, (2) an increase sales volume
  of natural gas and condensate from the Bongkot project, and (3) an
  increase sales volume of natural gas from the Yetagun and the Pailin
  project. However, the sales of the Yadana project decreased due to the
  decline in the benefits of cost recovery for the production sharing
  since the third quarter of 2003.

  Revenue from pipeline transportation, which was proportionately
  recorded from gas pipeline transportation that MGTC and TPC rendered
  to Myanma Oil and Gas Enterprise (MOGE), increased due to the higher
  gas transport volume of MOGE.

  PTTEP and subsidiaries realized their share of net income from
  associated companies for this year by Baht 209 million, consisting of
  the net income from Medco Energi through New Links of Baht 154
  million, and the net income from Thai Oil Power Co., Ltd., of Baht 55
  million.

  PTTEP and subsidiaries had a foreign exchange gain for this year
  amounting to Baht 112 million due to the stronger Baht when compared
  with the foreign exchange gain of Baht 870 million last year.

  For the year 2004, PTTEP and subsidiaries incurred expenses of Baht
  19,848 million, an increase of Baht 4,235 million or 27% when compared
  with Baht 15,613 million last year. This increase was the net effect
  of;

  (1) an increase in depreciation and amortization, mainly due to (a)
  the higher depreciation of the S1 project as a result of the
  additional stakes from the acquisition, and amortization of the excess
  of the cost of acquiring Thai Shell under the unit of production
  method, (b) higher depreciation of the Bongkot and Pailin projects due
  to an increase in production volume and completed oil and gas
  properties, and (c) a higher depreciation of the Yetagun project and
  TPC’s gas pipeline resulting from an additional stake of 5.1511% in
  the Yetagun project and the TPC’s gas pipeline since September 2003,
  and amortization of the excess cost of acquisition under the unit of
  production method.

  (2) an increase in petroleum royalties due to higher sales revenue,

  (3) higher operating expenses, which were mainly from the S1 project
  as a result of the additional stakes from the acquisition, and
  increases in maintenance expenses and improved operational efficiency
  in the Bongkot, the Pailin, and the Yetagun projects,

  (4) an increase in general administrative expenses, which were mainly
  from personnel expenses, the provision for retirement benefits, and
  from the new operating projects.

  (5) a decrease in exploration expenses, mainly due to the write-off of
  dry wells in the Vietnam 9-2 and the Vietnam 16-1 projects, and the
  geological and geophysical studies in the Oman 44 project last year,
  while most of exploration expenses of this year were attributed to the
  geological and geophysical studies in the Myanmar M7&M9, the G4/43,
  the Vietnam 9-2 and the Vietnam 16-1 projects.

  For this year, PTTEP and subsidiaries’ income tax expenses increased
  by Baht 3,382 million. The increase was mainly due to (1) additional
  income tax expenses of Baht 1,854 million in the S1 project as a
  result of the additional stakes from the acquisition, (2) an increase
  in income tax expense for PTTEP International Limited because of the
  utilization of tax losses carried forward from last year, (3)
  increased Myanmar income tax from the Yadana project resulting in a
  decline in the benefits of cost recovery for the production sharing.
  This, in turn, affected increasing in taxable profits, and (4) payment
  of Myanmar income tax for the Yetagun project & TPC after the end of
  tax holiday period in May 2003.

14.4.3 Financial position

  As of December 31, 2004, PTTEP and subsidiaries had total assets
  amounting to Baht 111,945 million, which was Baht 19,369 million
  higher than the end of 2003. This increase was mainly due to (1) an
  increase in oil and gas properties of Baht 10,559 million. This
  increase was from consolidation of oil and gas properties of the S1
  project amounting to Baht 3,880 million, as a result of the additional
  stakes from the acquisition, and the incurred net excess of the cost
  of the Thai Shell acquisition amounting to Baht 4,951 million. (2) an
  increase of cash and cash equivalents including short-term investments
  by Baht 7,361 million due to the higher ne Most of the current assets
  of PTTEP and its subsidiaries as of December 31, 2004 were in cash and
  cash equivalents, short-term investments, parent company receivables,
  and accounts receivables. A large proportion of the non-current assets
  were (1) assets used in joint-venture exploration and production,
  presented under the title of Property, Plant, and Equipment as well as
  (2) investments in associated companies, New Links and Thai Oil Power
  Co., Ltd., presented under the title of Investment Accounted for under
  Equity Method.

  PTTEP and its subsidiaries had total liabilities of Baht 54,846
  million. This was Baht 7,944 million higher than the end of 2003,
  mainly resulting from the following 3 factors: (1) an increase in
  income tax payable by Baht 3,864 million as a result of the
  consolidation of the acquired S1 project and a higher of net income,
  (2) higher provision for decommissioning cost of Baht 1,320 million,
  mainly due to the consolidation of the acquired S1 project , and (3)
  an increase in deferred tax liabilities of Baht 1,084 million, a
  temporary difference in the calculation of net assets between
  accounting and tax, resulting from a different method of calculating
  depreciation.

  PTTEP recorded the provision for retirement benefits as of December
  31, 2004, amounting to Baht 127 million, presented under the title of
  Other Non-current Liabilities.

  PTTEP issued warrants to directors, managements and employees in the
  amount of 2 million units on August 1, 2002, 2 million units on August
  1, 2003, and 2.8 million units on August 1, 2004 with the exercise
  prices of Baht 111 per share, Baht 117 per share, and Baht 183 per
  share respectively. As of December 31, 2004, the total numbers of
  shares exercised were 1.33 million shares and the outstanding number
  of warrants was 5.47 million units.

  On November 11, 2004, PTTEP registered the change in paid-up capital
  to Baht 3,266.66 million for the issuance and payment of 653.33
  million ordinary shares.

  As of December 31, 2004, PTTEP and subsidiaries had a net cash flow
  from operations amounting to Baht 26,236 million. Most of this was
  cash received from operating activities. PTTEP and subsidiaries had a
  net cash flow used in investment activities that amounted to Baht
  17,071 million. Most of this was from acquiring all of Thai t cash
  flow level from operations. Shell’s shares and the increase in oil and
  gas properties in the Arthit, Bongkot, and Pailin projects. In
  addition, PTTEP and subsidiaries had a net cash flow used in financing
  activities amounting to Baht 4,297 million for (1) dividend payment
  amounting to Baht 4,403 million and (2) cash received from the
  issuance of ordinary shares for the exercise of warrants amounting to
  Baht 106 million. As of December 31, 2004, PTTEP and its subsidiaries
  had cash and cash equivalents of Baht 23,778 million, an increase of
  Baht 4,715 million from the end of 2003.

  Regarding protection against potential risks which may affect its
  projects, PTTEP purchased insurance coverage by considering all types
  of perils and appropriate sum-insured related to each project. For
  2004, the premiums on these policies remained high relative to those
  of the year 2003. However, the Company continued to purchase
  sufficient insurance coverage as it has done in the past.

  As of December 31, 2004, PTTEP’s credit ratings were as follows;

-   Baa1 for its Long-term foreign currency rating by Moody’s Investors
    Service

-   BBB+ for its Long-term foreign currency rating, and

  BBB+ for its Long-term local currency rating by Standard and Poor’s
  Ratings Services

-   A- by Japan Credit Rating Agency, Limited

-   AA+ by TRIS Rating Company Limited

    4.  Impacts on Operational Results

  In 2004, although there were several negative factors which depressed
  Thai economic growth slightly under target, the growth at the ranges
  of 6.0 - 6.3% seems stable for Thai economy. Factors supporting stable
  Thai economic growth are the high current account surplus and fiscal
  reserves.

  For the economic outlook in 2005, all private and governmental
  organizations coincidently forecasted Thai economic growth at the same
  rate as the previous year. However, the economic overview in 2005 will
  be more variable from the chronic issue in the southernmost provinces,
  which influenced investor confidence. Concurrently, the return of bird
  flue and SARS (Severe Acute Respiratory Syndrome) have become regional
  diseases whose outbreaks directly influenced the Thai economy.

  In addition, there are new factors such as the downturn of the other
  national economies, in particular the forecast in continuous
  depreciation of the US dollar throughout 2005, along with other
  negative factors such as the US current account deficit and treasury
  deficit. These factors will directly influence the global economy.
  Simultaneously, the upward trend of world oil price, resulting from
  OPEC reducing its operation, and global terrorism, directly threaten
  the global economy. Moreover, the implementation of government policy
  in floating domestic diesel price may also have a negative impact of
  the Thai economy, as will reduced tourism to the 6 southern provinces
  affected by the Tsunami disaster. These factors may reduce economic
  growth in 2005.

  For business in 2005, PTTEP is continuing to focus on existing
  strategic directions, value creation, growth, and capability
  development. Firstly, regarding value creation, PTTEP enhances its
  efficiency and synergy through existing projects and assets. Secondly,
  concerning growth, PTTEP continuously expands its investment both
  domestic and overseas. Thirdly, as for capability development, PTTEP
  has incorporated the approach of efficiency based organization and
  organization capability to guarantee continued organizational
  development.

  However, concerning projects which are expected to be production in
  the near future such as the Arthit and Oman44 projects, or projects in
  the exploration phase such as the Myanmar M7&M9 and M3&M4, PTTEP has
  already initiated preparation for project development to meet
  scheduled plans. PTTEP has again targeted operational excellence in
  all its activities.

  Other factors, which may affect the company performance both in short
  and long term including fluctuation of oil price and revision of gas
  sales agreement are also elaborated in the section of risk factors to
  be disclosed on report 56-1.