1. Risk Factors

1.1 Technical and Core Capability

  1.1.1 Investment Risk

PTTEP’s policy is to invest more, both domestically and internationally,
with a focus on promising projects and ones aligning 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
high petroleum potential. Nevertheless, since new investments carry
certain risk, the Company has risk mitigation measures designed for each
investment as part of its screening process – taking into account
petroleum potential, operating risk, operator’s capability, conditions
and clarity of fiscal regime, political stability, international
relations, economic and monetary stability, geographical conditions, and
project types and sizes. These risk factors are included in
profitability analyses.

  1.1.2 Exploration Risk

Exploration for new petroleum sources is vital to the exploration and
production business, by itself a high-risk, high-return business.
Exploration projects deal with petroleum reserves potentially lying
kilometers beneath the surface of the earth, making it difficult to
visualize and understand the petroleum geology at such depths. Absolute
geological certainty is therefore rare. As a rule, much geological
uncertainty prevails. As a result, in such ventures, PTTEP values the
acquisition of necessary data and suitable detailed studies, as these
could efficiently lower both the uncertainty and the risk.

Here are the major risk factors and uncertainty often stressed in
PTTEP’s detailed investigation before making exploration decisions.

(1) Assessment of the sizes of resources or reserves in each target area
    – through sufficient study, analysis, and interpretation of
    petroleum geological, geophysical, and petrophysical data

(2) Risk assessment and probability of success – depending on the
    likelihood of finding traps and reservoirs, to be decided by the
    Company’s standards

(3) Finding costs – operating cost reduction and work efficiency lead to
    lower finding costs, given enough information for the essential
    studies and analyses.

1.1.3 Project Development Risk

Recognizing the potential project development risk that could result in
delays and cost overruns, PTTEP has drawn up the following risk
mitigation measures to enable successful and timely project completion:

(1) Project Management: To ensure timely project implementation,
    suitable production costs, and maximum benefit to all parties
    involved, PTTEP focuses on sound project plans and engineering
    system designs, construction supervision management, and cost
    reduction efforts.

(2) Personnel and Systems: PTTEP values personnel development for
    project management skill while improving its procurement process for
    greater speed and flexibility.

1.1.4 Production Risk

Besides natural disasters and terrorist acts, already addressed by the
Company’s safety, security, health, and environment (SSHE) policy,
production risk can also result from operation disruptions caused by
declining qualities of production equipment and from operation errors.
In addition, delays in construction supervision management can cause
production delays.

To prevent production risk, PTTEP pays particular attention to
production platform structural design, production system, and production
control and preventive maintenance. Automatic detection and emergency
shutdown systems are in place to prevent potential losses, as are work
procedures and operation manuals, together with training programs to
instill greater understanding and efficiency of operation. In addition,
stringent Opersafe assessment is conducted by external agencies.

1.1.5 Commercial Risk

Since the Company’s main product (natural gas) relies primarily on the
domestic market, earning could drop if the domestic demand were lower
than forecast. As a result, PTTEP has expanded its investments in
overseas exploration and production projects, especially those with
crude oil potential, to increase its oil reserves and diversify its risk
of over-dependence on natural gas.

Although PTT Public Company Limited is its sole natural gas customer,
PTTEP has entered into long-term gas sales agreements with PTT to
guarantee income for 25-30 years, thereby mitigating the risk from the
buyer refusing to take delivery of the gas. Under these contracts, a
take-or-pay condition is included in case buyers cannot take at least
the Net Annual Contract Quantity (Net ACQ), which serves as a guarantee
for the Company’s revenue.

1.1.6 Organization Capability Risk

Personnel and business processes are keys to any organization’s success,
and so PTTEP has taken the following actions to enhance its
organizational capability:

(1) Leadership along with decision-making at all levels

(2) Talent – recruitment, development, and retention of talented
personnel

(3) Collaboration – PTTEP hopes to achieve collaboration through the
Boundariless Organization Project; the project aims for a
large-organization work culture, but with the agility and speed of a
small organization – without isolating individual personnel or
departments, but with the willingness to exchange information and
knowledge with one another to achieve initiatives.

(4) Strategic unity – instilling of appreciation in all units of
corporate directions and strategies, so that they may complement one
another while enabling corporate objectives to be met.

Concerning business processes, PTTEP has taken the following actions:

(1) Project management process – containing details on project
development

(2) Procurement and hiring process – during the year, extensive training
was provided to related personnel on new systems and processes, which
were streamlined

(3) Subsurface evaluation process – PTTEP values the development of
geoscientists through training and mentoring programs indicated by
individual competency; knowledge management programs were instituted for
the benefit of information and knowledge exchange with a view to
improving further in this area.

1.2 Inherent Risk

1.2.1 Political Risk in Other Countries

Under PTTEP’s policy to expand internationally to supply the expanding
domestic demand and sustain its own growth in the long term, the Company
has focused on investing in high-potential Middle Eastern countries as
well as those countries regarded as emerging markets, such as northern
African countries. Some of these countries bear substantial political
risk. PTTEP therefore coordinates with the Ministry of Foreign Affairs
in closely monitoring all these factors and periodically analyzing their
potential impacts on new investment projects, and at the same time takes
good care of existing ones. In addition, the Company liaises closely
with the Royal Thai Embassies in all these countries for up-to-date
developments.

1.2.2 Safety, Security, Health, and Environment Risk

Petroleum exploration and production is inherently associated with
various types of risk of commercial repercussions, such as blowouts and
gas pipeline leaks. Locating exploration and production equipment
offshore poses inherent risk from natural forces like severe storms,
monsoons, and earthquakes. Other potential threats arise from terrorist
acts with potentially significant damage to PTTEP’s personnel,
properties, business, the surrounding environment, and its business.

In view of these, PTTEP has drawn up a clear policy on safety, security,
health, and environment with a commitment to compliance with governing
laws and regulations, or even going beyond them. The Company pays
attention to every step of operations, including the design of
production platform structures as well as production control and hazard
control. Work processes are managed and continuously improved. PTTEP
organizes regular personnel training in safety, security, health, and
environment to add to their familiarity with accident prevention
measures, safe working practices, and emergency preparedness.

To mitigate potential impacts and losses resulting from accidents, PTTEP
regularly assesses its safety management system under the International
Safety Rating System (ISRS) through independent assessment. On a scale
of 0 to 10, the Company achieved Level 7 for Bongkot, Level 6 for
Songkhla Logistics Base, and Level 6 for PTTEP1 Project. As for
environmental operations, the Company won ISO 14001 certification for
PTTEP1, S1, and Bongkot projects, Songkhla Logistics Base, and PTTEP
Office Building, with certification conducted 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.

1.2.3 Litigation Risk

Business conduct must comply with all related laws. Violations are not
only wrong, but also inflict tangible as well as intangible damage to
the Company. PTTEP has taken actions to ensure that no legal risk
occurs, and takes compliance matters seriously. All units are
responsible for audits, control, and ensuring strict compliance with all
related laws and regulations. Apart from their duties of auditing and
supervising work, they are charged with keeping all related parties
informed on new regulations.

Besides litigation risk, there is risk arising from contractual matters,
ranging from contract drafting, contract obligation, to contract
management. While these may lead to litigation and risk from
non-compliance with obligations, they can be controlled through
meticulous contract management by procurement units, clear understanding
of business conditions, and close consultation with Legal Department on
critical legal issues.

1.3 Financial Risk

1.3.1 Volatility of Product Prices

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

During the past year, the average world oil price took a giant leap,
resulting in higher product prices sold by PTTEP than the year before,
when they averaged $23.38 per barrel. For 2005, the corresponding
average was $ 29.37 per barrel.

When world oil prices drop, so do the prices of the Company’s oil and
condensate. However, the typical price of natural gas, its main product,
is not immediately affected thanks to gas pricing mechanisms built into
gas sales agreements, which cushion gas prices from high volatility in
oil prices. As a rule, PTTEP’s contractual gas prices are adjusted every
six or 12 months with reference oil prices. To a certain extent, the gas
price formulas reflect changes in reference oil prices to ensure buyers
that natural gas is a competitive fuel with fairly stable prices.

1.3.2 Exchange Rate Fluctuations

The Company’s proved reserves can be brought up and sold to generate
revenue. The prices at which such oil and gas is sold are tied to
prevailing world market prices, normally in US dollars. PTTEP borrows
mainly in US dollars to partly fund its investments and operations in
various projects; its loans and interests are likewise in US dollars.
Currency exchange rates therefore do affect the Company’s revenue and
expenditure structures.

Under its accounting standard, PTTEP must record assets and liabilities
in its financial statements by converting US dollar amounts to Thai
Baht. Fluctuations in exchange rates naturally affect PTTEP’s financial
statements. For 2005, PTTEP realized a net profit (loss) of 203,282,913
Baht due to currency exchange rates.

1.3.3 Interest Rate Fluctuations

At present, all liabilities of PTTEP are of fixed interest rates. Rises
in interest rates do not affect its interest payment, but will raise the
cost of future borrowing.

As for deposited of surplus cash, changes in interest rates do affect
PTTEP’s interest income. The Company manages its surplus cash by
depositing it in the form of short-term deposits and instruments, taking
into consideration their rates of return and levels of risk. The bottom
line, however, is preservation of the Company’s liquidity.