1. Risk Factors

The major risks associated with the Company’s petroleum exploration and
production result from internal and external factors.

1.1 Internal Risk Factors

1.1.1 New Project Investment Risks

PTTEP’s policy is to invest more, both domestically and internationally,
with a focus on promising projects and those aligning with its strategic
plan of increasing petroleum production and reserves. To achieve solid,
long-term growth, it therefore focuses on investments made in
territories of high petroleum potential. Since new investments carry
risks, the Company has instituted risk mitigation measures designed for
each investment as part of its screening process – taking into account
petroleum potential, operating risks, operators’ capability, conditions,
and clarity of benefit allocation, contract adherence, political
stability, geographical conditions, and project types and sizes. These
risk factors are taken into account in profitability analyses.

In the past year, the Board of Directors made it a prerequisite that all
new investments in all projects, including farming in and out, should
undergo the approval process by the Risk Management Committee first
before securing the Board’s approval. Before this step, a given new
project must undergo the screening process of either the Exploration
Committee, the Development Project Screening Committee, or the
Investment Screening Committee – depending on which part of the value
chain that project lies. For the year, six new projects secured approval
from the Risk Management Committee.

1.1.2 Exploration Risks

Exploration for new petroleum sources is vital to this business, by
itself a high-risk, high-return one. Exploration projects deal with
petroleum reserves potentially lying kilometers beneath the surface of
the earth. Given the current level of advanced technology, it is still
difficult to visualize and understand the petroleum geology at such
depths. Absolute geological confidence is therefore rare and
considerable geological uncertainty prevails. Still, the availability of
sufficient data and detailed geological analyses could reduce this
uncertainty and exploration risks to acceptable levels.

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

(1) Risk assessment or probability of success, which depends on the
likelihood of finding traps and reservoirs, as well as the volume of
petroleum generated

(2) Assessment of the sizes of resources or reserves in each target
area, which relies on drilling data, analytical findings, and
sufficiently detailed interpretation of geological, geophysical, and
petrophysical data

(3) Finding costs, in particular those of geophysical surveys and
drilling – typically the bulk of such costs – need to be controlled to
keep tabs on operating costs and raise drilling and exploration
efficiency. As a rule, the more data one commands, the more effective
one’s investigation and analysis.

To minimize the risks associated with these factors, PTTEP values
capability development of relevant personnel, such as through knowledge
management efforts and further E&P database development to store best
practices and lessons learned from projects for everyone’s reference and
applications. In addition, an expert directory has been prepared for
reference by everyone. To achieve efficient decision-making, PTTEP set
up an exploration committee of experienced and competent personnel to
review and recommend exploration projects to the President.

1.1.3 Project Development Risks

In line with the elevated oil prices, several new projects came into
existence this past year. Recognizing potential project development
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,
the Company focuses on related policy formulation, sound project
planning and engineering system designs, contract administration,
monitoring, and construction supervision management.

(2) Personnel and procedures: This is achieved through a development
focus on project management, application of knowledge management
procedures for data and experience sharing among projects, and
improvement of its procurement processes for greater flexibility.

(3) Commercial contract: There exist risks arising from contractual
matters, ranging from contract drafting, contract obligation, to
contract management. These risks are controllable, starting at the
negotiation stage, which calls for knowledgeable and competent personnel
attached to related units. For instance, in negotiating production
platform construction agreements, knowledge and competence of civil
engineering is required for technical detail perusal. In addition,
procurement people need to examine contractors’ qualifications and
compare prices; finance and accounting people need to consider tax and
insurance matters; law personnel need to ensure compliance with laws,
duties and responsibility of the parties, etc.

It is believed that prevailing risks for new projects tend to be in the
construction phase, and the selection of contractors will be fiercely
contested as in past years. Having learned from its experience and
developed a body of knowledge, the Company has set up a central unit to
look after all production platform matters. This unit will now play a
central role in procurement planning and construction cost management.

Prudent contract management lessens risks and damage potentially
resulting from delays, which could not only affect company plans and
performance at large, but result in potential litigation and disputes.
Therefore, departments charged with contract management must ensure that
PTTEP personnel master contractual terms and conditions and that they
consult the Legal Department.

1.1.4 Production Risks

Production disruption (Production risks) tends to result from ageing
production equipment and operation errors. Production risks can cause
unachievable production target.

To prevent such risks, the Company emphasizes in every details starting
from production platform designs, production systems, and production
control and preventive maintenance. Automatic detection and emergency
shutdown systems are in place to prevent losses. Work procedures and
operation manuals, together with training programs to instill greater
understanding and efficiency of operation, are similarly in place. In
addition, stringent Opersafe assessment is conducted by external
agencies. And because of the prudent prevention and maintenance planning
systems, these risks are now minimized.

1.1.5 Commercial Risks

Since the Company’s main product is natural gas, which relies mainly on
the domestic market, its revenue could drop if the domestic demand
proved lower than projected. As a result, PTTEP has expanded its
investments in overseas E&P projects, in particular those with crude oil
potential, to increase its oil reserves and diversify any risk of
excessive dependence on natural gas.

Although PTT Plc is the sole customer of natural gas, PTTEP has
concluded long-term gas sales agreements (GSAs) with PTT to guarantee
income over 25-30 years, thereby mitigating the risks if PTT should
refuse to take delivery of the gas. Under these GSAs, a take-or-pay
clause is included in case buyers cannot take delivery of at least the
net annual contract quantity (ACQ), which serves as a guarantee for
PTTEP’s revenue.

1.1.6 Organization Capability Risks

Personnel and business processes dictate any organization’s success. The
Company has taken the following actions to enhance its business process
and organization capability:

(1) Develop personnel recruitment and development plans through
competency models for core professionals; develop competency assessment
to define training programs and knowledge management so that PTTEP
personnel can attain the desired capability

(2) Set up a talent management plan to develop high-potential personnel
to take on greater responsibility

  (3) Raise the efficiency for risk-prone processes:

1.  Procurement processes

2.  Project management processes

3.  Subsurface evaluation processes and knowledge management

4.  Investment decision-making and risk management processes.

    1.1.7 Safety, Security, Health, and Environmental Risks

In view of SSHE risks, PTTEP has drawn up a clear SSHE policy with a
commitment to strict compliance with governing laws and regulations, or
even exceeding them. The Company pays attention to every step of
operations, including the design of rigs, production platforms,
production processes, production control, vigilance and monitoring, and
hazard control.

For efficient and effective policy implementation for PTTEP as a whole,
the Company has not only defined operating procedures, but regularly
updated its data. Training is continually provided to enhance employees’
potential and educate them about accident prevention and safe work
practices, as well as emergency responses through drills, including
joint ones with relevant outside agencies.

To achieve the Company’s objectives and sustainable business operation,
PTTEP has internally implemented the ISO 14001:2004 environmental
management system and the International Safety Rating System (ISRS) in
PTTEP’s safety management in support of the SSHE policy, as well as risk
prevention and remedy.

Since the Company and its subsidiaries engage in the E&P business, it is
inherently associated with assorted risks not caused by human beings.
For instance, offshore operations face natural risks in the form of
waves, storms, and earthquakes, while onshore operations could also
suffer from earthquakes and flashfloods. Other potential threats arise
from sabotages and terrorist acts. Besides external factors, of course,
human beings could cause risky situations. All these need preventive and
mitigating measures.

1.2 External Risk Factors

1.2.1 Political Risks in Other Countries

Under the Company’s foreign investment policy to supply the expanding
domestic energy market and sustain its own growth in the long term,
PTTEP has focused on investing in high-potential Middle Eastern
countries as well as countries regarded as emerging markets, including
northern African countries. Some of these bear substantial political
risks, and therefore PTTEP appointed a geopolitical risk team to monitor
all these factors and periodically analyze their developments. Scenarios
are developed to complement decision-making on new investments and
assess the risks in countries of existing investments. In addition, the
Company liaises closely with the Ministry of Foreign Affairs and Thai
embassies in all these countries for the latest intelligence.

1.2.2 Litigation Risks

Since non-compliance is illegal and directly causes all forms of damage
– monetary and otherwise – PTTEP strictly complies with all laws and
regulations relating to its operations.

All Directors, management, and employees are responsible for audits,
control, and strict compliance with all related laws and regulations,
and for keeping all parties informed of new and upcoming regulations.

1.2.3 Price Risks

The Company’s product prices vary with those of world oil, 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 affect revenue and investment
planning.

When oil prices drop, so do the prices of PTTEP’s oil and condensate.
However, because of built-in gas pricing mechanisms found in GSAs, which
cushion gas prices from oil price volatility (Natural Hedge), the
typical prices of natural gas, its main product, do not immediately
drop. Most of the Company’s contractual gas prices are adjusted every 6
or 12 months. A reference oil price is usually found in each gas price
formula, and should this price rise or fall, the gas price will move
correspondingly to a certain degree.

PTTEP has realized price impact to its revenue and profit, therefore,
the risk mitigation plan is routinely reviewed by Risk Management
Committee. The plan would be endorsed by Board of Directors for further
action accordingly.

In 2007, world oil price had been volatile of which Brent had climbed up
from $ 49/bbl, at beginning of the year, to $ 96/bbl, at ending of the
year. This resulted in favorable average product prices for PTTEP when
comparing year-on-year basis, $ 36.52/bbl VS $ 39.78/bbl (2006 VS 2007).

Given the high volatility of oil price and its impact to revenue, the
company has committed to hedging contracts with objective of assuring
target Net Income.

1.2.4 Exchange Rate Risks

In 2007, Baht appreciated against US dollars. The exchange rate started
from Baht 35.96/USD, at the beginning of the year, to Baht 33.65/USD, at
the end of the year. (Reference Bank of Thailand)

In accordance with the accounting standard, the Company has to record
its USD assets and USD liabilities in Thai Baht. Foreign exchange rate
fluctuations will therefore affect the Company’s financial statements.

PTTEP has Proved Reserves which can be produced and sold as the main
source of revenue for the Company. The pricing of PTTEP’s petroleum
sales is linked to the global oil price denominated in USD. At the same
time, part of the Company’s capital and operating expenditures,
including its debt obligations, are also in USD. This tends to curtail
the impact of foreign exchange rate fluctuations on the company’s
revenue and expenditure structures (natural hedge).

1.2.5 Interest Rate Risks

  The interest rate fluctuation affects both interest revenue and
  interest expense of PTTEP.

At present, approximately 70 percent of PTTEP’s long term debts have
fixed interest rates which will not be affected by market volatility.
However, approximately 30% of PTTEP’s debts are now subject to floating
interest rates as a result of the Interest Rate Swap (IRS) transaction
effective from September 4, 2007 for the Baht 6,000 million 3-Year
Debenture issued on June 15, 2007. Interest rate fluctuations may
therefore lead to higher or lower costs of borrowing.

For the deposits of surplus cash, interest rate fluctuations will affect
their interest income. The Company’s policy is to invest in short term
deposits and instruments, with consideration of return and risk.
However, liquidity is considered a priority.