3. Business Operation of PTTEP and its subsidiaries

3.1 Products Features

PTTEP and its subsidiaries performed the petroleum exploration and
production business (crude oil, natural gas, LPG and condensate). On
December 31, 2006, PTTEP has 34 petroleum exploration and production
projects and 4 investment projects as mention in item 2.2.1. The
definitions of the products are as follows:

3.1.1 Petroleum

Petroleum means crude oil, natural gas, condensate, related products and
other hydrocarbon products which are free in nature.

Crude oil means crude mineral oil and bitumen of all kinds which is
liquid in nature and is obtained from an oil well and may be obtained
through gas separation equipment but has not yet been refined or
purified

Natural gas means hydrocarbon which is gas or vapor at the normal
temperature and pressure, and which normally has methane as it major
constituent

Condensate means hydrocarbon which condenses in natural gas, and which,
when separated from natural gas, is transparent and has low specific
gravity (high API)

LPG means petroleum product which is obtained from crude oil refinery or
natural gas separation processes and which primarily consists of butane
and propane.

The characteristic of the crude oil and condensate is liquid in nature
and has a measurement in barrel while the natural gas is measured by
cubic foot. All petroleum products could be given into the heat
measurement in Barrel of Oil Equivalent (BOE). 1 cubic foot of natural
gas has approximately 1,000 BTU while 1 barrel of crude oil has
6,000,000 BTU

2.  Gas Transportation Pipeline:

PTTEPO has other major investment in other companies as well such as a
25% of the investment in Moattama Gas Transportation Company (MGTC) and
19.31784% in Taninthayi Pipeline Company (TPC) to conduct the business
of pipeline laying from Yadana and Yetagun projects from Myanmar to Thai
borders.

3.2 Factors affecting the opportunity or restriction in business

PTTEP does its petroleum exploration and production in the Kingdom and
abroad. The investment in foreign countries shall comply with conditions
and concession laws of those countries i.e. Production Sharing
Agreement/Contract or Services Agreement. Inside the Kingdom, PTTEP
shall comply with the Petroleum Act B.E. 2514 which sets out the details
and procedures for applying for and awarding petroleum concessions, the
period of production and also provides for various forms of benefits to
the government as owner of its petroleum resources. These forms of
benefits include royalty, petroleum income tax and other benefits. The
important points in the Petroleum Business Operation are as follows:

3.2.1 Issue of Concession Areas

The Department of Mineral Fuels, Ministry of Energy, which is the
responsible agency, delineates exploration blocks, and then invites oil
companies to submit applications for concessions. The Petroleum
Committee considers applications for concessions. In this connection,
the sub-committee will initially screen the information stated in the
applications, and the Minister of Energy is empowered to award and sign
the concessions. The government considers the qualifications of each
applicant and will take into account the proposed work program, adequacy
of the investment funds to be brought in and used in the exploration,
the transfer of technology, employment of Thai nationals, and also the
utmost benefits offered to the Kingdom.

3.2.2 Role of the Operator

A petroleum concession may be awarded to one concessionaire or to a
joint venture of two or more co-concessionaires. Since the petroleum
exploration and production business is associated with relatively high
risk, it is common for companies to join together in joint ventures in
order to spread the risks. In a joint venture, one company will be
designated “operator” to conduct the exploration and production
operations on behalf of the other co-venturers under the supervision of
a management committee composed of representatives of each company.
Other companies who participate in the joint venture are called
“non-operators”. The operators manage operations and make cash calls on
all co-venturers to finance the work program. Non-operators through
their representation on the management committee participate in
technical and financial decisions. Generally, an oil company as it grows
in experience, seeks to become an operator in order to assume a greater
role in management and operations.

3.2.3 Nature of Operations and Investment Decisions

Before oil company decides to invest in petroleum exploration in the
Kingdom and abroad, it has to consider its chances of exploration
success as well as other investment risk factors.
A study of information available is made to determine whether the area
has high petroleum potential. In addition, there must be a chance of
finding a source of petroleum that has commercial viability. The success
ratio of drilling of exploration wells in neighboring areas is taken
into account. If the company decides to invest, it will apply for a
petroleum concession or will “farm in” to an existing petroleum
concession.

After the oil company is awarded a concession area for exploration of
petroleum, an exploration program will be conducted, and may take 2-3
years. If the petroleum reserves are found, the amount of investment
funds required for the development stage and the value of sale of the
petroleum in the quantity of reserves expected to be recovered will be
evaluated. If such study indicates that the reserves are worth investing
in, that petroleum field will be considered to have sufficient
commercial viability to justify further investment in development. The
operator shall apply for an approval of petroleum production and shall
start its production at the same time. The operation is still able to
explore the rest of the existing areas if it is within the time frame of
exploration mentioned in the concession. At this stage, the operator
must have a certain degree of confidence about the investment because
the investment required for such development is very high. The operator
will normally identify buyers of petroleum in advance, and a long-term
sales agreement for petroleum to be produced will be signed. At present
the PTT is the biggest petroleum buyer in Thailand. The principal
elements of the sales agreement for petroleum are the method of
determination of the sales price and quantity of petroleum to be
delivered. In this regard, when the commencement period in the
contracted is reached, the buyer must be responsible the petroleum
produced immediately after the production commences. The sale of natural
gas from any domestic areas is presently made at the well-head while the
sale of natural gas from any foreign areas is made at the Thai borders,
in which case PTT must install gas pipe-lines sufficient for the
production amount specified in the gas sale agreement. The sale of the
crude oil is made at the buyer’s refinery while the sale of the
condensate is made at the Floating Storage Unit (FSU) near the
well-head.

3.2.4 Description of law relating to the business

At present, the operation of petroleum business in Thailand is governed
by two major enactments, namely, the Petroleum Act, B.E. 2514, and the
Petroleum Income Tax Act B.E. 2514, as amended. Several major features
of these laws are:

(1) an applicant for a concession must be limited company or a juristic
    person which has the same status as a limited company established
    under the law of Thailand or foreign law. However the concessionaire
    must be a limited company established under the law of Thailand;

(2) the concessionaire, the co-concessionaire(s) and the co-venturer(s)
    must pay royalty which is normally paid by cash. However, the
    Minister may authorize a payment in kind of petroleum by a notice of
    at least not less than 6 months. The royalty can be credited against
    income tax (Thailand I) or be deducted as expenses (Thailand III
    terms);

(3) the rate of petroleum income tax may be prescribed not less than 50%
    but not over than 60% of the net interest from the petroleum
    business;

(4) interest paid cannot be deducted as expenses for income tax
    purposes;

(5) a concessionaire may not obtain concessions for more than 4
    exploration blocks except the case where the Minister considers
    appropriate to authorize an additional exploration block.

  Thailand I for the petroleum concessions issued by the Ministry of
  Industry⁴ from B.E. 2514 to B.E. 2532 and the onshore petroleum
  concession issued before B.E. 2525

  Thailand II⁵ for all onshore petroleum concessions issued by the
  Ministry of Industry⁴ from B.E. 2525 to B.E. 2532

  Thailand III for the petroleum concessions issued by the Ministry of
  Industry⁴ from B.E. 2533

  _________________________

⁴ Now is the Ministry of Energy

  ⁵ According to the Article 36 of the Petroleum Act (Issue 4) B.E.
  2532, all the holders of the petroleum in Thailand II have already
  moved to Thailand III.

Details of Thailand I, II and III Terms

  ---------------- ---------------- ---------------- ----------------------
  Term             Thailand I       Thailand II      Thailand III

  Royalty Rates    12.5% of income  12.5% of income  progressive rate at
                   from sale or     from sale or     sliding scale 5-15%,
                   disposal of      disposal of      deemed to be expenses
                   petroleum which  petroleum which  which could be
                   may be treated   may be treated   deducted in tax
                   as tax credit    as tax credit    calculation

  Petroleum Income 50% of net       50% of net       50% of net profit from
  Tax              profit from      profit from      petroleum business
                   petroleum        petroleum        operation
                   business         business         
                   operation        operation        

  Special Benefits -                annual benefits, special remunerator
                                    and annual       benefit which may be
                                    production bonus taken as deduction

  Exploration      8 years with 4   8 years with 4   6 years with 3 year
  Period           year extension   year extension   extension

  Production       not exceeding 30 not exceeding 30 not exceeding 20 years
  Period           years from       years from       from expiry date of
                   expiry date of   expiry date of   exploration, with
                   exploration,     exploration,     extension not
                   with extension   with extension   exceeding 10 years
                   not exceeding 10 not exceeding 10 
                   years            years            

  Concession areas not exceeding    not exceeding    not exceeding 4,000
                   10,000 sq. km    10,000 sq. km    sq. km per exploration
                   per exploration  per exploration  block, up to 5
                   block, up to 5   block, up to 5   exploration blocks
                   exploration      exploration      
                   blocks           blocks           
  ---------------- ---------------- ---------------- ----------------------

1.  Marketing

In 2006, PTTEP and its subsidiaries averagely sold 169,348 BOED of crude
oil, natural gas, LPG and condensate, 10.30% higher than in the previous
year. Annual sales revenue amounted to 86,339 million Baht, a 30%
increase from 2005.

  ---------------------- ----------------------- -------------------------
  Product                Volume                  Value (Million Baht)

  Crude Oil (MMBBL)      13                      30,076

  Natural Gas (MMSCF)    254,916                 39,810

  LPG (Metric Tons)      96,518                  1,060

  Condensate (MMBBL)     6.64                    15,393
  ---------------------- ----------------------- -------------------------

3.3.1 Marketing Policy and Characteristics

PTTEP has a vision and policy of supplying its products from both
domestic and overseas sources primarily to Thai domestic market. PTT is
currently the major buyer for all products which, after processing, find
utilization in power plants, petrochemical industry, transportation,
industries and households (in the form of cooking gas).

(1) Natural Gas

PTTEP sells all its regionally produced natural gas to Thai domestic
customers under long-term (20-30 year) contracts. Gas from offshore
Thailand is delivered through three PTT-owned pipelines in the Gulf,
while that from Myanmar goes through MGTC and TPC pipelines, in which
PTTEPO holds 25.5% and 19.3% equity interest, respectively. In addition,
a couple of onshore projects, namely E5 and Phu Horm, produce natural
gas for consumption at Nam Phong power plant; S1 Project supplies its
associated gas to Lan Krabue power plant.

To guarantee revenue from gas field developments, PTTEP stipulates
take-or-pay conditions in its GSAs, which provide for minimum sales
volumes each year (annual contract quantity: ACQ) together with
formulated prices. Such formulae factor in economic indices and fuel oil
prices to ensure that the gas prices reflect production costs and remain
competitive with alternative fuels over the entire contractual periods.

As regards overseas investments, PTTEP may consider selling products to
a market or a regional market closest to the point of production of
commercial gas reserves if transportation to Thailand makes no economic
sense. Therefore, market characteristics vary with the countries where
PTTEP operates. For example, PTTEP OM sells gas from Oman 44 Project to
the Omani government under the 2005 GSA, whereas the condensate and
crude oil under the same project is still sold to PTT to supply to
Thailand.

In 2006, PTTEP reached the following GSAs.

-   On January 17, PTTEPS signed a GSA with Ratchaburi Energy Co., Ltd.,
    for associated gas derived from oil production at Pratu Tao-A. The
    expected gas sales amount is 0.4 MMSCFD for eight years and the test
    run is expected to begin in the second quarter of 2007.  This is a
    major achievement for PTTEP in using the gas by-product instead of
    burning it off.

-   On September 1, PTTEPI and joint-venture partners under Yadana
    Project in the Gulf of Moattama, Myanmar (namely Total E&P Myanmar,
    Unocal Myanmar Offshore Co., Ltd., and Myanmar Oil and Gas
    Enterprise), signed an amendment agreement to the export gas sales
    agreement with PTT to raise the DCQ from 525 to 565 MMSCFD. The
    equity interest of PTTEPI in this project is 25.50%.

Moreover, during the year, PTTEP began production and sale of natural
gas from one project:

-   Phu Horm (with 20% equity). Production began in November for
    delivery to PTT under the GSA signed on July 19, 2005. During the
    initial start-up, the average production amounted to 60 MMSCFD.

(2) Crude Oil and Condensate

PTTEP sells crude oil and condensate principally to Thai domestic
buyers, with selling prices tied to those traded in the region to
reflect their market values. A major portion of the oil and condensate
is under long-term contracts, with some short-term and spot sales to
capture available market channels and expand opportunities of creating
value for these products.

In 2006, PTTEP signed agreements to sell oil and condensate from the
following new projects.

-   On August 4, PTTEP, PTTEPS and other joint-venture partners of Phu
    Horm Project, namely Hess (Thailand) Ltd., Apico LLC, and Exxon
    Mobil Exploration and Production Khorat Inc., entered into an
    agreement with PTT to sell the by-product condensate. The sale began
    in the fourth quarter of 2006. During the initial stage, the
    production rate will average 420 BPD.

-   On August 26, PTTEP OM signed an agreement with PTT to sell crude
    oil from Oman 44 Project for one year. This is the first time PTTEP
    will be producing and selling crude oil from overseas to PTT.

3.3.2 Competition

In Thailand, petroleum exploration and production is mild. Markets for
natural gas and condensate are typically secured through long-term sales
agreements, while crude oil sales can be conducted through long-term
contracts, short-term contracts, or exported to spot markets. Although
the market is partially protected by long-term contracts, indigenous
produced oil still holds advantages over imports because of lower
transportation costs and superior tax privileges under Petroleum Income
Tax Act B.E. 2514. And with domestic oil demand exceeding indigenous
supply, competition among domestic producers is insignificant.

As a result of the rapid rise in the domestic demand for natural gas,
PTT plans to import liquefied natural gas (LNG) from 2012 onward. LNG
imports, however, are unlikely to pose serious competition to existing
producers, since gas demand is likely to outgrow the available regional
supply. Besides, because of its lower costs, piped gas is likely to
compete well with LNG.

To justify overseas investments, PTTEP conducts market studies for each
country of interest in advance. Oman 44 is going to enter commercial
phase in 2007, and will sell natural gas under a take-or-pay contract to
the Omani government and sell crude oil under short-term contracts.
Incidentally, because of the continually high demand from Thai
refineries, Thailand is a critical market for the Oman Blend crude oil.

3.4 Production

3.4.1 Exploration and Production Stages and Technology

Exploration and production stages may generally be divided into 4 major
stages as follows:

(1) Exploration Stage

-   Primary geology and geophysics survey

-   Seismic survey

-   Interpretation of information from seismic survey

-   Drilling

(2) Appraisal/Delineation Stage

-   Studied petroleum geology in detail and additional seismic survey

-   Well log interpretation

(3) Development Stage

-   Set the plan for the appropriate development

-   Construct the platforms, provide production facilities and drill the
    development wells.

-   The development of the production facilities in the sea includes
    Well head Platform, Processing Platform, and Living Quarter

(4) Production Stage

-   The production of crude oil or natural gas must be made through the
    Christmas tree and other production equipment including gauge so
    that the rate of production of each well may be ascertained

-   The follow up of the production proportion of the water and
    petroleum, proportion of crude oil and natural gas, the decline of
    pressure in the petroleum levels and the forecast of the production
    in the future

-   Workover must be performed regularly to improve the rate, the
    duration and effectiveness of the production

-   In the Gulf of Thailand, the natural gas which is produced will be
    sent to the natural gas refinery and electricity power plant while
    condensate will be sent to Floating Storage Unit before the
    refinery.

PTTEP is ready with its personnel, technology and equipment to do its
business effectively to achieve its company mission very well.

3.4.2 Petroleum Reserves

Reserves are those quantities of petroleum which are anticipated to be
commercially recovered from known accumulations from a given date
forward. All reserve estimates involve some degree of uncertainty. The
uncertainty depends chiefly on the amount of reliable geologic and
engineering data available at the time of the estimate and the
interpretation of these data. The relative degree of uncertainty may be
conveyed by placing reserves into one of two principal classifications,
either proved or unproved. Unproved reserves are less certain to be
recovered than proved reserves and may be further sub-classified as
probable and possible reserves to denote progressively increasing
uncertainty in their recoverability.

(1) Proved reserves are those quantities of petroleum which, by analysis
of geological and engineering data, can be estimated with reasonable
certainty to be commercially recoverable, from a given date forward,
from known reservoirs and under current economic conditions, operating
methods, and government regulations. Proved reserves can be categorized
as developed or undeveloped.

If deterministic methods are used, the term reasonable certainty is
intended to express a high degree of confidence that the quantities will
be recovered. If probabilistic methods are used, there should be at
least a 90% probability that the quantities actually recovered will
equal or exceed the estimate.

  (2) Unproved reserves

-   Probable reserves are those unproved reserves which analysis of
    geological and engineering data suggests are more likely than not to
    be recoverable. In this context, when probabilistic methods are
    used, there should be at least a 50% probability that the quantities
    actually recovered will equal or exceed the sum of estimated proved
    plus probable reserves.

-   Possible reserves are those unproved reserves which analysis of
    geological and engineering data suggests are less likely to be
    recoverable than probable reserves. In this context, when
    probabilistic methods are used, there should be at least a 10%
    probability that the quantities actually recovered will equal or
    exceed the sum of estimated proved plus probable plus possible
    reserves.

The Proved Reserves are reviewed annually by company’s earth scientists
and reservoir engineers to ensure rigorous professional standards. The
Proved Reserves are reported on a gross basis, which includes the
company’s net working interest and related host country’s interest. As
of December 31, 2006, the total Proved Reserves of all PTTEP and
subsidiaries projects are 156Million Stock Tank Barrels (MMSTB) for
crude oil and condensate, and 5,001 Billion Standard Cubic Feet (BSCF)
for gas. The total Proved Reserves (Consolidated Companies) in term of
oil equivalent is 923 Million Barrels (MMBOE). No reserves quantities
have been recorded for the company on Blocks B, 48/95, 52/97, 16-1
Projects in offshore Vietnam, Block G4/43 in Gulf of Thailand , Myanmar
M7 & M9 in Gulf of Mataban and Blocks 433a & 416b in Algeria because no
commercial arrangement has been established for the discoveries.

3.4.3 PTTEP Petroleum Production

In 2006, the total production of PTTEP and Subsidiaries projects is 71
MMBOE or equivalent to the production rate of approximately 194,000
Barrels of Oil Equivalent per Day (BOED), approximately 10,000 BOED or
5% increase from last year. The production increase was mainly
attributed to the increase of petroleum production from B8/32 & 9A,
Pailin, and Bongkot projects, the initially putting on production from
Phu Horm and Oman 44 project in 2006.

5.  Environmental Impact

For a petroleum exploration and production operation, an effective
environmental management system is developed to minimize the following
potential environmental impacts: -

(1) Land use and marine organism impact from sound vibration, which is
    the main environmental impact during seismic surveys.

(2) Water and soil contamination from discharges of drilling fluid and
    produced water, release of sludge and contaminated solid wastes, and
    accidental spills of oil and condensate during drilling and
    production activities.

(3) Air pollution from hydrocarbon releases and atmospheric emissions
    from gas flaring, gas venting and fuel gas combustion during
    drilling and production activities.

Currently, the above environmental impacts are directly under the
control of the Department of Mineral Fuel under Ministry of Energy,
which is the direct permitting agency, and the Office of Natural
Resources and Environmental Policy and Planning (ONEP) under the
Ministry of Natural Resources and Environment, which issues the
requirement that an environmental impact assessment must be conducted
prior to any commencement of exploration and production projects

PTTEP has clearly initiated efforts to reduce environmental impacts, and
has maintained a constant and continuous follow-up of this initiative,
including the following:

(1) Implementation of the ISO14001 Environmental Management System (EMS)
Standard for all operational sites and the PTTEP office building. In
accordance with ISO14001 requirements, an environmental management
system is followed in compliance with company policy, legislation and
other requirements in order to prevent pollution to environment, and to
ensure improvement in effective company performance. As a result, PTTEP
became the first petroleum exploration and production company in
Thailand and the Southeast Asian region to achieve ISO 14001
Certification.

(2) Study of environmental impact assessment prior to commencement of
new exploration and production projects, which is legally required in
order to ensure on-going monitoring and measurement programs to mitigate
any environmental impacts for operations in Thailand and overseas.

(3) Re-injection of produced water (wastewater separated from the
production process) into subsurface reservoirs to ensure no overboard
discharging which might affect the environment.

(4) Monitoring of discharged wastewater quality from the production
process and the quality of seawater, sediment, benthic fauna and fish
around platform vicinity to ensure there is no exposure to health and
environmental hazards.

(5) Recovery of flare gas for electricity generator and sales.

(6) Oil Spill Equipment and response are provided to ensure
environmentally sound operations from any oil spill incident, joining
the Oil Industrial Environmental Safety Group (IESG) for Tier 2 oil
spill response incident (20-1000 tonnes) and EARL/OSRL (East Asia
Response Limited/ Oil Spill Response Limited) for Tier 3 Oil Spill
Response (>1000 tonnes).

(7) Provision of appropriate technology for waste disposal and treatment
(e.g. Mercury contaminated waste, oil contaminated waste) for
environmental impact abatement.

(8) Promotion of Safety, Security, Health and Environmental awareness
through a number of means, e.g., training, and monthly SSHE bulletins,
etc.

(9) Coordination and provision of support to other exploration and
production companies, the Petroleum Institute of Thailand, government
agencies and related associations in order to expand experience and
solve environmental problems for further improvement.

During the past 3 years, PTTEP strictly complied with both Thai and
International legislation and other requirements concerning Safety,
Security, Health and Environment. In addition, PTTEP has been
continuously improving its sound environmental practices in maintaining,
developing and reducing environmental impacts by achieving the ISO 14001
certification for Environmental Management System Standard from AJA
Registrars LTD. under UKAS (United Kingdom Accreditation Service)
accreditation, for all its operational sites as detailed below:

(1) PTTEP1 Project in the scope of “Exploration and production”

(1) PTTEP Building in the scope of “Building management and maintenance
    services”

(1) Bongkot Project in the scope of “Exploration and production of
    natural gas and condensate”

(2) Songkhla Logistics Base in the scope of “Provision of logistics
    services to offshore oil and gas operations”

(3) S1 Project in the scope of “Exploration and production of petroleum”

(4) Core research centre and logistics support for storage of core lab
    samples.

Just last year, PTTEP developed its Environmental management System to
comply with requirement of ISO 14001 version 2004, and all PTTEP
operating units were certified for that standard.

For its Safety management system, PTTEP is committed to its policy to
conduct its activities without undue impact on the personnel and
properties of the company and its contractors. In addition, the Lost
Time Injury Frequency Rate (The number of Lost Time Injury per 1,000,000
hours worked) for the years 2004, 2005 and 2006 were 1.03, 0.41 and 0.31
respectively. This tendency of LTIF reduction in the past 3 years has
been reflected in the strengthened Safety, Security, Health and
Environment (SSHE) standards and measures implementation in the company
management system.

In addition, last year PTTEP conducted its SSHE case program to assess
the Safety, Security Health and Environmental Risk of Bongkot Production
Platform and Drilling activities. In the SSHE Case, risks in each
activities were assessed; and will further be reduced by proactive
measures, so that they are as low as reasonably practicable (ALARP).

Regarding spill incidents, spills in 2004, 2005 and 2006 were 1.30, 4.45
and 0.64 tonnes/ million tonnes of production respectively. From these
figures, it can be seen that spills in the past years have decreased as
a result of the company’s continuous improvement in safety, security,
occupational health and its environment management system. PTTEP planned
to continuously mitigate the consequence of any accident through regular
drills and exercises and providing specific training courses for all
staff to ensure better understanding and awareness in prevention of
accidents and incidents and prompt response.

Additionally, as part of its commitment to protect the environment,
PTTEP has increased its spending on environmental improvement programs
by 14.7, 67.2 and 78.7 million baht in the years 2004, 2005 and 2006
respectively.

Regarding sustainable development, PTTEP is one of the companies under
consideration for the potential project on Green House Gas reduction.
Although it is not mandatory for Thailand to reduce green house gases,
according to Kyoto Protocol under United Nations Framework Convention on
Climate Change (UNFCCC), PTTEP is voluntarily encouraging green house
gas emission reduction in its operations through both a Clean
Development Mechanism (CDM) and the search for other opportunities for
economical projects.

Finally, PTTEP’s project, the “Gas Recovery Unit”, was installed for
green house gas emission reduction from Bongkot platform operation and a
feasibility study on CDM projects for operations in the Bongkot
concession area was also conducted to identify even more potential green
house gas reduction projects in the future.