12. Financial Position and Result of Operation

12.1 Auditor and Significant Accounting Policies

  12.1.1 Auditor

PTTEP has appointed Office of the Auditor General, as the external
auditor of the Company and subsidiaries and the appointment has been
approved by the Office of Securities and Exchange Commission.  PTTEP and
its subsidiaries have always appointed the Office of The Auditor General
to serve as its independent auditor. There are no relationships or
conflicts of interest among the independent auditor, the Company and its
subsidiaries, the executives, the shareholders, or others related to
those parties.   It was also approved by the Annual General
Shareholders’ meeting with the audit fee of Baht 0.9 million which is
equal to the fee for the years 2004 and 2005.

In addition, the Office of The Auditor General has serves as the
independent auditor for Company subsidiaries with an audit fee of Baht
2.25 million. There was no non-audit services fee for the previous year
because no other services were received from the independent auditor.

  12.1.2 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.

  12.1.3 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 under the Securities and Exchange Act. B.E. 2535.

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’s 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’s 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 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, follow
subsidiaries and associates are related parties 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 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 and recorded in the income statement.

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 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 Costs

The Group recorded provision for decommissioning costs whenever it is
probable that there are 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 completion 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 considers to set 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 not exceeding
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.

Diluted earnings per share is calculated by the weighted average number
of outside ordinary shares in issue, which 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.

12.1.4 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. On September 27, 2005, the
Company entered into a Cross Currency Swap transaction with a bank to
swap Baht for USD 60.82 million. Under this agreement, interest is
charged at the rate of 3.85% per annum with effective until the expiry
date, payable every six months on March 27 and September 27 of each
year.

(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. The bond was 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.  Summary significant financial ratio table

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12.4 Management Discussion and Analysis of Operation Results in 2006

12.4.1 PTTEP Performance

In 2006, the Thai business environment changed dramatically due to
political change and the volatility of oil prices, which rose
continuously from beginning of the year untill peaking in August and
then slightly fell until during the rest of the year. These factors led
to a difficult business year. However, the National Economic and Social
Development Board (NESDB) estimated an economic growth of approximately
5% for 2006.

Notable business developments at PTTEP and its subsidiaries in 2006 are
summarized here.

Regarding petroleum sales, PTTEP’s sales volume averaged 169,348 barrels
of oil equivalent per day (BOED) in 2006, which was lower than the
target of 179,000 BOED set earlier in 2006. The reasons for this
decrease can be traced to the decrease of sales volume in the Nang Nuan
project due to technical issues, and the postponement of gas production
in the Oman 44 project. PTTEP’s total revenue was Baht 91,723 million
and its net profit was Baht 28,047 million or Baht 8.53 per
share-diluted.

In 2006, PTTEP and its subsidiaries maintained impressive petroleum
discovery results with a success ratio at 18:26 exploration/appraisal
wells, which was higher than the international standard of 1:6.

Regarding value creation in the existing projects, the Phu Horm project,
in which PTTEP is a partner, initiated gas production in November 2006.
In addition, in 2006 PTTEP and its subsidiaries signed petroleum
agreements regarding the following projects: a Gas Sales Agreement (GSA)
for the S1 project with Ratchaburi Energy Company Limited, an Amendment
Agreement to the Export Gas Sales Agreement (EGSA) of the Yadana
project, and a Crude oil Sales Agreement for the Shams field in the Oman
44 project.

PTTEP and its subsidiaries continuously expanded its investment in E&P
business in both Thailand and overseas as following, 5 concession blocks
in Thailand (L21/48, L28/48, L29/48, G9/48, and G12/48), Block 58 in
Oman, Bengara-1 in Indonesia, in addition to receiving in principle as
the winners of Block 2 and Block 8 in Egypt.

PTTEP has always stressed the high importance of good corporate
governance and is determined to improve its standards at all times. In
2006, PTTEP was evaluated by the Thai Rating and Information Services
Co., Ltd. (TRIS) and received the rating of “very good” in good
corporate governance.

However, there was a setback in the Oman 44 project because of its
postponement of its first production from the second quarter of 2006 to
the first quarter of 2007.

12.4.2 Results of Operations

  In addition, on April 12, 2006 PTTEP amended its par value from 5 Baht
  to 1 Baht per share in accordance with the resolution of the 2006
  General Shareholders Meeting. The adjustment of the Company’s par
  value resulted in an increase in its ordinary shares from 664,400,000
  shares to 3,322,000,000 shares and also affected the Exercise Price
  and Exercise Ratio of the warrants under the Company’s Employee Stock
  Ownership Plan (ESOP) for the year 2002-2005; and for the year 2006 in
  which the 2006 General Shareholders’ Meeting approved the issuing and
  offering of 2.8 Million units of warrants to its management and
  employees at the exercise price of Baht 456.*

  In 2006, PTTEP paid an interim dividend based on its half-year
  performance to its shareholders at Baht 1.71 per share on August 28,
  2006. This complied with the resolution of the Board of Directors’
  Meeting dated 28 July, 2006.

  On October 2, 2006 PTTEPI redeemed its unsubordinated bonds- Yankee
  Bond which carried an interest rate of 7.625% per annum with a
  maturity of 10 years. The redemption included the principal of USD 200
  million. As of December 31, 2006 PTTEP and its subsidiaries have
  liabilities, comprised of Bonds at the amount of MM 254.11 USD or
  equivalent to Baht 9,503 MM

  Results of Operations – The Full Year Comparison

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

  (Unit : Millions of Baht excepting Baht per    2006        2005
  share amounts)                                             

  Income from continuing operations                          

  Exploration and production                     23,701      20,948

  Pipelines                                      4,214       3,437

  The others                                     132         (650)

  Total net income                               28,047      23,735

  Diluted earnings per share – from continuing   8.53        7.24
  operations                                                 

  Total Revenues - from Current Operational      91,723      69,583
  Results                                                    
  ---------------------------------------------- ----------- ------------

For the results of operations for the year 2006, PTTEP and its
subsidiaries’ net profit was Baht 28,047 million or Baht 8.53 per
share-diluted, an increase of Baht 4,312 million or 18% when compared
with the year 2005 net profit of Baht 23,735 million or Baht 7.24 per
share-diluted. Return on shareholders’ equity for this year was 35.01%

_____________________________

* In April 2006, PTTEP adjusted par value from 5 Baht to 1 Baht per
share, resulting in a change of

Exercise Price and Exercise Ratio of the warrants for the year 2002-2006
in page 56.

For the year 2006, total revenues of PTTEP and its subsidiaries amounted
to Baht 91,723 million, an increase of Baht 22,140 million or 32% when
compared with Baht 69,583 million for the previous year. This increase
was mainly due to an increase in sales of petroleum of Baht 19,981 or
30%, resulting from the higher average petroleum sales price to USD
36.52 per BOE when compared with last year at USD 29.37 per BOE and
sales volume increased to 169,348 BOED when compared with the last year
(153,531 BOED). The higher sales volume derived mainly from the crude
oil sales volume from the B8/32 & 9A and S1 projects and the natural gas
sales volume from the Pailin, Bongkot and Yadana projects.

For this year, the sales volume of the Yetagun project decreased in
relevant to the decrease in the benefit of cost recovery in portion of
production sharing since April 2006.

PTTEP and its subsidiaries received higher revenue from pipeline
transportation, which was proportionally recorded from gas pipeline
transportation in MGTC and TPC, and the rising interest income as a
result of a higher fixed deposit. In addition, the other income
increased mainly due to the revenue from the training center of PTTEP
Services, the service income from PTTEP Petroleum Development Support
Base and the management fee from Orange Energy Limited.

PTTEP and its subsidiaries incurred expenses for this year amounting to
Baht 40,937 million, an increase of Baht 13,083 million or 47% when
compared with Baht 27,854 million last year. This increase was the
effect of

(1) Higher depreciation and amortization expenses, mainly due to the
    additional completed assets in the B8/32 & 9A, S1 and PTTEP1
    projects, and the amortization of the excess of the acquiring cost
    in Orange Energy Limited and B8/32 Partners Limited.

(2) Increased exploration expenses, mainly due to the write-off of dry
    wells in the Myanmar M7&M9, Vietnam 16-1, L22/43 and G4/43 projects
    including the 3D seismic cost from the Bongkot, Myanmar M7&M9,
    Vietnam 16-1, Algeria 433a&416b and G12/48 projects, and 2D seismic
    cost from the Iran Saveh project.

(3) Rising operating expenses, mainly due to the cost from the B8/32 &
    9A, Phu Horm and Arthit projects, mainly as a result of higher
    operating activities. In addition, the logistic and maintenance cost
    from the Bongkot project including the maintenance cost from the S1
    project.

(4) Increased administration expenses, mainly due to higher operating
    activities from the B8/32 & 9A, PTTEP Petroleum Development Support
    Base, Algeria 433a&416b, Phu Horm, Oman 44, Iran Saveh, Indonesia
    Merangin-1 and Myanmar M7&M9 projects, including the amortization of
    up-front payment to PTT in accordance with Bongkot Gas Sales
    Agreement.

(5) Higher petroleum royalties and remuneration as a result of higher
    sales revenue and the cost of Special Remuneratory Benefits under
    Petroleum Act (No.4) B.E. 2532.

PTTEP and its subsidiaries had a foreign exchange gain for the year 2006
amounting to Baht 1,314 million when compared with the year 2005 at Baht
203 million because of the strengthened Baht.

For the year 2006, PTTEP and its subsidiaries incurred higher income tax
expenses of Baht 4,985 million as a result of higher taxable profits and
the additional revision of provisional decommissioning liability.

12.4.3 Financial position

As of December 31, 2006, PTTEP and its subsidiaries had total assets of
Baht 157,813 million, or Baht 14,496 million (10%) higher than at the
end of 2005. This increase was mainly due to an increase in oil and gas
properties of Baht 22,281 million, mainly from the higher investment in
the Arthit, Oman 44, S1, Pailin, Vietnam9-2, Vietnam 16-1, MTJDA and
Myanmar M7&M9 projects whereas the decreased current assets amounted to
Baht 7,587 million were mainly due to the lower cash and cash equivalent
from the investment in oil and gas properties, bond repayment, income
tax payment and dividend payment.

Most of the current assets as of December 31, 2006 were cash and cash
equivalents, 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, and (2) investments in associated
companies, Energy Complex Co., Ltd., and PTT ICT Solutions Co., Ltd.
presented under the title of Investment Accounted for under Equity
Method.

PTTEP and its subsidiaries had total liabilities of Baht 69,288 million,
which were lower than at the end of 2005 by Baht 2,332 million, mainly
resulting from bond repayment amounting to Baht 8,259 million. However,
there was additional revision of provisional decommissioning liability
amounting to Baht 3,693 million and the higher accrued expenses of Baht
2,236 million.

PTTEP issued warrants to directors, management and employees of 2
million units on August 1, 2002, 2 million units on August 1, 2003, 2.8
million units on August 1, 2004, 2.8 million units on August 1, 2005 and
2.8 million units on August 1, 2006, with the exercise prices of Baht
111 per share, Baht 117 per share, Baht 183 per share, Baht 278 per
share and Baht 456 per share respectively. As of April 12, 2006 the
company registered the change in its par value from Baht 5 each with
664.40 million ordinary shares to Baht 1 each with 3,322 million
ordinary shares. The change of its par value affected the exercise ratio
of the warrants from 1:1 to 1:5 including the exercise price from Baht
111, Baht 117, Baht 183, Baht 278 and Baht 456 to Baht 22.20, Baht
23.40, Baht 36.60, Baht 55.60 and Baht 91.20 respectively. As of
December 31, 2006, the total number of shares exercised was 26 million
shares and the outstanding number of warrants was 7.2 million units.

On November 10, 2006 the Company registered the change in its registered
paid-up capital to Baht 3,286.00 million for the issuance and paid-up
amount of 3,286.00 million ordinary shares.

As of December 31, 2006, PTTEP and its subsidiaries had a net cash flow
from operations of Baht 42,215 million. The majority of this was cash
received from operating activities.

PTTEP and its subsidiaries had a net cash flow used in investment
activities of Baht 35,166 million, mainly resulting from (1) the higher
investment in oil and gas properties in the Arthit , Oman 44, S1,
Pailin, Vietnam 9-2, Vietnam 16-1, MTJDA-B17 and Myanmar M7&M9 projects
(2) the investment in PTT ICT Solutions Co., Ltd. amounting to Baht 30
million.

PTTEP and its subsidiaries had a net cash flow used in financing
activities of Baht 18,691 million due to (1) bond repayment of Baht
8,235 million (2) a dividend payment for the second half of 2005 to
shareholders, Baht 8 per share, amounting to Baht 5,239 million (3) 2006
interim dividend payment to shareholders, Baht 1.71 per share, amounting
to Baht 5,616 million and (4) cash received from the issuance of
ordinary shares for the exercise of warrants of Baht 401 million.

As of December 31, 2006, PTTEP and its subsidiaries had cash and cash
equivalents of Baht 18,521 million, a decrease of Baht 11,986 million
from the end of 2005. The company invested its surplus cash in
short-term financial instruments carrying low risks such as Treasury
Bills, Promissory Notes, and deposits with commercial banks, where
emphasis is given to security and liquidity.

Regarding protection against potential risks which may affect its
projects, PTTEP purchased insurance coverage by considering all types of
perils and appropriate sum-insured policies related to each project. For
2006, the premiums on these policies remained high relative to those of
the year 2005. However, the Company continued to purchase sufficient
insurance coverage as it has done in the past.

On March 16, 2006, TRIS Rating upgraded the company rating and issue
rating of PTTEP from AA+ to AAA, the highest rating in Thailand. The
upgrade reflects the company’s strengthened financial profile, the
continued strong petroleum prices, the company’s ability to finance
growth without weakening its financial strengths, and the Thai
government’s support to the company in petroleum exploration and
production business. As of December 31, 2006, PTTEP’s credit ratings are
as follows;

-   A2 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

-   AAA by TRIS Rating Company Limited

12.4.4 Impacts on Operational Results

The petroleum exploration and production industry is a volatile
business. PTTEP has to monitor closely the situation in order to be able
to respond suitably. The risk factors that may influence PTTEP are
summarized as follows:

The first risk is concern about the increased cost of goods and services
in the E&P business and the shortage of service providers as a result of
the fierce competition currently existing in the E&P business,
particularly when oil prices are high. PTTEP has a mitigation plan to
effectively contain costs by applying several approaches. Firstly, PTTEP
has applied a concept of synergy and economy of scale for a long-term
procurement of long lead items necessary for supporting both onshore and
offshore projects. Secondly, PTTEP has applied the concept of sharing
operational facilities such as jetty and helicopter services. Thirdly,
PTTEP has applied engineering concepts to streamline well and wellhead
platform design to reduce costs.

The second risk is the volatility of oil prices which is a significant
factor for making decisions on investment. To deal with this volatility,
PTTEP has applied a risk management approach to handling the volatility
of oil prices by instituting a safeguard investment on the M&A of
producing assets with unit cost controls. In addition, PTTEP has closely
monitored and studied the best possible approach regarding unpredictable
oil prices, hedging with a clear direction on risk management of these
volatile oil prices and not just focusing on profitability.

Geopolitical uncertainty is the third risk that may affect PTTEP
investments. Geopolitical risk management matrix and mitigation has been
applied by employing scenario planning with a warning system that would
alert PTTEP of current events and trends that might impact the PTTEP
portfolio and investments.

The fourth is a human resources shortage risk. PTTEP realizes the
importance of a strong human resources team as a strategic partner for
its sustainable growth. PTTEP has continuously improved its capability
in terms of human resources. Key process improvements are a high
potential development system and a competency management system. In
addition, PTTEP is seriously considering the use of Thai contracted
personnel, expatriate secondees and contractors, and local personnel in
international assets to meet urgent requirements, given a shortage of
human resources in these locations.

Other factors, which may affect the company performance both in short
and long term are also elaborated in the section of risk factors.