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  5. Business Operation of PTTEP and its subsidiaries

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5.1 Nature of Petroleum Business Operation

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. At the present time, PTTEP has
the petroleum exploration and production in Myanmar, Vietnam, Indonesia
and the Sultanate of Oman. 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, 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 :

5.1.1 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 programmes,
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.

5.1.2 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 manages operations and makes cash calls
on all co-venturers to finance the work programmes. 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.

5.1.3 Nature of Operations and Investment Decisions

Before an 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 programme 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.

5.1.4 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 :

-   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;

-   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);

-   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;

-   interest paid cannot be deducted as expenses for income tax
    purposes;

-   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
  Industry¹ from B.E. 2514 to B.E. 2532 and the onshore petroleum
  concession issued before B.E. 2525

  Thailand II² for all onshore petroleum concessions issued by the
  Ministry of Industry from B.E. 2525 to B.E. 2532

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

  _________________________

1 now is the Ministry of Energy

  2 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.

  5.1.5 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
                                   from sale or                     from sale or                     at sliding scale
                                   disposal of                      disposal of                      5-15%, deemed to
                                   petroleum which                  petroleum which                  be expenses which
                                   may be treated as                may be treated as                could be deducted
                                   tax credit                       tax credit                       in tax
                                                                                                     calculation

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

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

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

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

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

5.2 Description of petroleum products

5.2.1 Petroleum

PTTEP and its subsidiaries performed the petroleum exploration and
production business (crude oil, natural gas, LPG and condensate). On 31
December 2003 PTTEP and PTTEPO had 21³ projects and 3 investment
projects as mentioned above. The definition of the products are as
follows :

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

5.2.2 Gas Transportation Pipeline : PTTEPO has other major investment in
other companies as well such as a 25% of the investment in Moattama Gas
Transportation Co. (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 Please see the project organization chart in page 10,36 and the
details in page126

5.2.3 Electricity : The Annual General Shareholders Meeting of 2000 on
6^(th) March 2543 (2003) had a resolution that PTTEP by PTTEPO invested
for 26% in the electricity business of Thai Oil Power Company Limited
representing the amount of 35.88 million US Dollars or 1,400 million
Baht.

Thai Oil Power Company Limited has the 41 MW electricity purchase with
the Electricity Generating Authority of Thailand (EGAT) for 25 years
under small power producers (SPP) and has the electricity and the vapor
purchase with Thai Oil Limited and its affiliated companies for 70.5 MW
and 136 ton/h respectively. Beside, Thai Oil Power Company Limited owns
the 56% of shares in the Independent Electricity Generating (Thailand)
Limited operating the 700 MW electricity business and selling all
electricity to EGAT for 25 years under the contract of Independent Power
Producer (IPP)

5.3 Production

5.3.1 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.

2.  Petroleum Reserves and Production[1]

The total Proved Reserves of PTT Exploration and Production Public
Company Limited (PTTEP) and its Subsidiaries as of December 31, 2003 are
shown in the attached table. 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.

No reserve quantities have been recorded for the company on Blocks B,
48/95, 52/97, 9-2, and 16-1 Projects in offshore Vietnam due to no
commercial arrangement has been established for the discoveries.

The total Proved Reserves (Consolidated Companies) as of December 31,
2003 of PTTEP and its Subsidiaries are 112 Million Stock Tank Barrels
(MMSTB) for crude and condensate, and 5,137 Billion Standard Cubic Feet
(BSCF) for gas. The total Proved Reserves (Consolidated Companies) in
term of oil equivalent is 882 Million Barrels (MMBOE).

The total production in 2003 (Consolidated Companies) is 44 MMBOE or
equivalent to the production rate of approximately 120,000 Barrels of
Oil Equivalent per Day (BOED), approximately 10,000 BOED or 9% increase
from last year. The production increase was mainly attributed to the
increase of petroleum production from Pailin projects and the increased
interest in Yetagun Project.

PTTEP indirectly holds 34.20% interest in PT. Medco Energi Internasional
Tbk. (Medco), an Indonesia upstream oil and gas exploration and
production company. PTTEP’s share of Medco’s Proved Reserves are 40
MMSTB for crude and condensate, and 93 BSCF for gas. The total Proved
Reserves in term of oil equivalent is 55 Million Barrels (MMBOE).
Medco’s Proved Reserves were certified by Gaffney, Cline & Associates
(Consultants) Pte. Ltd. (GCA) as of January 1, 2004.

The total PTTEP’s worldwide Proved Reserves as of December 31, 2003,
including investment in Medco are 152 MMSTB for crude and condensate,
and 5,230 BSCF for gas, or approximately 937 MMBOE.

3.  Projects Operation in Year 2003

The operating of PTTEP projects of which the Company is the operator or
the joint-venture is very successful and contented with the following
progress in year 2003:

Projects with PTTEP as Operator

1. Bongkot Project

-   Maintained field gas production above the gas sales obligation with
    PTT

-   Average production rates for natural gas and liquid hydrocarbons
    (condensate and oil) were 517 MMSCFD and 15,900 BPD respectively

-   Maintained re-injection of produced water at over 99%

-   Drilled 27 development wells

-   Drilled and successfully confirmed an additional 60 BSCF of gas
    reserves

-   Completed the installation and commissioning of the new Floating
    Storage and Offloading Vessel "Pathumabaha" in January 2003 as
    planned

-   Completed the installation of two new wellhead platforms of Phase 3C
    and Phase 3D as planned

-   Launched the detailed engineering and construction phase for the new
    Sour Process Platform (SPP). Installment is planned for the 4^(th)
    quarter of 2004

-   Completed the design study of the Mini wellhead platform, which
    represents the next generation of low-cost Bongkot platforms.

2. PTTEP1 Project

-   Produced crude oil at an average rate of 627 BPD

-   Injected all produced water back into underground formations

-   Worked over wells by adjusting pumping units to increase the
    production rate in U-Thong Field

-   Experimented with using natural gas derived from the production
    process as in generating electricity for use at Sang Khajai Field

-   Achieved the goal of Zero Lost Time Accidents (LTAs)

-   Retained ISO 14001 and ISRS Level 6 standards.

3. Arthit Project

-   The Production Area was officially granted to PTTEP on June 5, 2003,
    with a total area of 3,450.87 sq.km.

-   Heads of Agreement (HOA) was signed between PTT and PTTEP on
    November 24, 2003, to deliver natural gas from the field in mid-2006

-   Undertook detailed engineering design of the Arthit Central
    Processing Complex and Wellhead Platforms

-   Prepared the third drilling campaign with two exploration wells and
    five appraisal wells.

4. Block 44 Project

-   Launched the “PTTEP Middle East Co., Ltd.” office in Muscat on March
    24, 2003

-   Completed reinterpretation and re-evaluation of the Shams-3D area

-   Completed 3D seismic survey of Qamar with zero lost time injury

-   Began the seismic data processing for Qamar 3D and reprocessing for
    Shams 3D, to be completed by May 2004

-   Began a preliminary study for developing the Shams-1 structure

-   Conducted production re-testing of old Shams-1.

5. Block G9/43 Project

Acquired a petroleum concession for Block G9/43 on July 17, 2003.

6. Block M-7 & M-9 Project

-   Signed two Production Sharing Contracts of Blocks M-7 and M-9 with
    Myanmar Oil and Gas Enterprise on November 12, 2003, to become the
    operator of the two blocks and own 100% shares

-   Prepared and acquired information for the study and assessment of
    the potential under the obligations during a one-year study period.

Projects with Joint Operations

1. JDA Project

Submitted the B-17 Integrated Field Development Plan to the
Malaysia-Thailand Joint Authority. 

2. Block 16-1 Project

-   Drilled one appraisal well in the Voi Trang structure and one
    exploration well in the Voi Vang structure

-   Prepared to acquire around 450-550 sq.km. of additional 3D seismic
    data in the second quarter of 2004, covering E and H structures,
    located in the eastern part of the block. This 3D seismic
    acquisition will coincide with that for Block 9-2.

3. Block 9-2 Project

-   Drilled two appraisal wells in the Ca Ngu Vang structure

-   Commenced a pre-development preliminary study for the Ca Ngu Vang
    structure, with completion expected by the first quarter of 2004

-   Prepared to acquire around 100-250 sq.km. of additional 3D seismic
    data in the second quarter of 2004, covering CNX structures, located
    in the eastern part of the block.

Projects with PTTEP as Non-Operator

1. S1 Project

-   Sirikit Field entered its 21^(st) year of production with average
    output rates in 2003 of 17,545 BPD of crude oil, 52 MMSCFD of
    natural gas, and 304 TPD of LPG

-   Drilled four development wells, two water source wells, and four
    water injection wells

-   Fully implemented the Sirikit West Water Flood Project

-   Explored the potential of the field named "Tung Yai"

-   Established the production system optimization (POS) implementation

-   On December 30, 2003, PTTEP executed a Share Purchase Agreement to
    buy all the shares of capital from Thai Shell Exploration and
    Production Co., Ltd., thereby causing PTTEP and its subsidiaries to
    become the operator of and hold all the rights in Concession Block
    S1 since January 1, 2004.

 2. Pailin Project

-   Signed an agreement with PTT to increase the contractual gas sale
    from 330 to 353 MMSCFD, effective October 1^(st), 2003

-   Average gas sale and condensate production were 346 MMSCFD and
    13,700 BPD respectively

-   Drilled 25 development wells

-   Installed one additional wellhead platform.

3. Yadana Project

-   Average gas production exceeded 630 MMSCFD (DCQ of 525 MMSCFD)   

-   Completed the basic engineering study of Wellhead Platform 3 (WP-3)
    for the development of Sein Field   

-   Conducted the basic engineering design of the Medium Compression
    Platform (MPC).

4. Yetagun Project

-   Average gas production exceeded 294 MMSCFD

-   Constructed and installed facilities for Phase III Development

-   Prepared for drilling four development wells in early 2004.

5. E5 Project

-   Nam Phong Field entered its 13^(th) year of production with an
    average output rate of 49 MMSCFD in 2003

-   Drilled one exploration well in the South Phu Horm Structure of the
    E5 North block and submitted a Production Area Application to the
    Department of Mineral Fuels.

6. Unocal III Project

-   Average gas sale and liquid petroleum (oil and condensate)
    production were 368 MMSCFD and 27,200 BPD respectively

-   Drilled two appraisal wells, three delineation wells, and 60
    development wells

-   Installed two additional wellhead platforms.

7. Block B and 48/95 Project

-   Petrovietnam granted a Development Area of 888.5 sq.km. on December
    2, 2003

-   Petrovietnam approved a Retention Area for five years after the end
    of exploration period on August 27, 2003, with a work commitment of
    drilling two more wells plus geological and geophysical studies

8. Block 52/97 Project

-   Drilled four exploration and delineation wells

-   Petrovietnam granted a Development Area of 813.43 sq.km. on December
    2, 2003.

9. G4/43 Project 

  Together with Chevron Offshore (Thailand) Limited, acquired petroleum
  concession block G4/43on July 17, 2003. PTTEP has a participating
  interest of 15%.

10. L22/43 Project

-   Together with Thai Shell Co.,Ltd, acquired petroleum concession
    block L22/43 on July 17, 2003. PTTEP has a participating interest of
    35%.

-   On December 30, 2003, PTTEP signed the Agreement for Transfer of
    Interest in Concession Block L22/43, thereby causing PTTEP and Its
    Subsidiaries to be the operator of and hold all the rights in
    Concession Block L22/43 upon the approval of the government.

11. B6/27 Project

-   On December 30, 2003, PTTEP signed the Share Purchase Agreement to
    purchase all shares of Thai Shell Exploration and Production Company
    Limited, thereby causing PTTEP to hold all the rights in Concession
    Block B6/27 from January 1, 2004 onwards. At present the project
    temporarily stop producing.

12. Block 433a & 416b Project

-   On October 8, 2003, PTTEP signed an Assignment Agreement with
    Petrovietnam Investment & Development Company (PIDC) with a
    participating interest of 35%

-   The joint investment is subject to consent and approval from
    SONATRACH (Algeria’s national oil company) and Algerian authorities.

Investments

1. Medco Energi Project

-   In May 2003, Medco successfully issued seven-year bonds in the
    amount of USD 250 million with a coupon rate at 8.75% due in 2010 to
    fund the company’s exploration and production business. S&P and
    Moody’s assigned bond ratings of B+ (above Indonesia’s sovereign
    rate) and B3 respectively.

-   In June 2003, PTTEPO received USD 14.2 million, or Baht 625 million,
    in dividends from New Links Energy Resources.

-   In July 2003, Medco, Pertamina, and Marathon signed a Memorandum of
    Understanding (MOU) for Liquefied Natural Gas (LNG) supply to the
    U.S. West Coast. The new LNG plant will be developed using Medco’s
    and Pertamina’s gas reserves in Sulawesi.

-   In August 2003, Medco successfully won a tender for Merangin -1 PSC,
    offered in Indonesia’s 2003 Petroleum Bidding Round. The block
    covers 3,247 sq.km. and is located in Sumatra, near Medco’s biggest
    producing oil field in Rimau PSC. It has potential oil and gas
    reserves of around 100 MMBOE.

-   In 2003, Medco signed three additional gas sales agreements with
    PLN, the state-owned power of company, to supply 37 MMSCFD for 10
    years with an aggregated value of USD 265 million.

2. Thaioil Power (TOP) Project

  PTTEPI received Baht 58.45 million in dividends from TOP in May 2003.

3. Gas Transportation Pipeline

Revenue from pipeline transportation, which was proportionately recorded
from gas pipeline transportation that MGTC and TPC rendered to Myanma
Oil and Gas Enterprise (MOGE), increased Baht 444 million. Such increase
was from the increase in the gas pipeline transportation price and the
increase in TPC’s gas pipeline transportation in relevant to the MOGE
gas sales volume.

  5.3.4 Environmental Impact

For Petroleum Exploration and Production operation, an effective
environmental management system is considered to be an integral part of
environmental impact reductions in several aspects as follow: -

(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 release and atmospheric emission from
    gas flaring, gas venting and fuel gas combustion during drilling and
    production activities.

Currently, above environmental impacts are directly under control of the
Department of Mineral Fuel under Ministry of Energy who 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 who announces the requirement that an environmental impact
assessment must be conducted prior to any commencements of exploration
and production projects

Thus, the initiative to reduce environmental impacts has been
established constantly and continuously improved by PTTEP, 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, environmental management
    system are followed in compliance with company policy, legislations
    and other requirements in order to prevent pollution to environment,
    and continuously improve to ensure 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. In addition, the International
    Safety Rating System (ISRS) has been developed for all operational
    sites as a tool for health and safety management system along with
    environmental management system.

(4) Study of environmental impact assessment prior to commencements 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.

(5) Developments and utilizations of depleted wells for re-injection of
    produced water (wastewater separated from the production process)
    into subsurface reservoirs to ensure no overboard discharging which
    might affect the environment.

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

(7) Provisions of Health Safety and Environmental training for all staff
    to ensure and increase competency in performing their jobs.

(8) Promotions of Health, Safety and Environmental awareness through
    number of means e.g., training, and monthly HSE bulletins, etc.

(9) Coordination and provisions of supports 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.

In the past year, PTTEP strictly complied with both Thai and
International legislations and other requirements concerning Health
Safety and Environment. It was found also that there were no major
incidents affecting to the environment of any kinds. In addition, PTTEP
has been continuously improving 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 operational sites as follows:

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

2.  PTTEP Building in the scope of “Building management and maintenance
    services”

3.  Bongkot Field Operations in the scope of “Exploration and production
    of natural gas and condensate”

4.  Songkhla Logistics Base in the scope of “Provision of logistics
    services to offshore oil and gas operations”

In 2003 the Lost Time Injury Frequency Rate (The number of recordable
incidents per 1,000,000 hours worked) was 0.50. 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. As a commitment to protect
the environment, PTTEP spent approximately 20.5 million baht in 2003 on
environmental improvement program.

5.4 Marketing

PTTEP and its subsidiaries derive their revenue from selling crude oil,
natural gas, LPG, and condensate with the following historical summaries
on production, price, and revenue.

  ------------------------------------------------- ----------- ----------
  รายการ                                            2002        2003

  Production (MMBOE)                                40          44

  Average Price (US$/BOE)                           18.59       20.62

  Sales Revenue (Million baht)                      29,587      34,038
  ------------------------------------------------- ----------- ----------

1.  Marketing Policy and the Product Market

Petroleum production in Thailand is conducted under the petroleum
concession system with the State. PTTEP sells its products to PTT Plc.,
which in turn sells them to power generators, petrochemical operators,
industries, and households (in the form of cooking gas).

Natural Gas

Gas sales agreements generally consist of long contract terms with
minimum annual contractual purchase volumes. To give buyers confidence,
producers must at least produce gas in the volumes mutually agreed in
advance; to guarantee sellers revenue, buyers must take the agreed
volumes of gas.

In 2003, the Thai gas market expanded with the recovering domestic
economy, with the following major marketing movements.

The consortia of the Pailin Project (45% held by PTTEP) and Unocal
I-II-III Projects (5% of Unocal III held by PTTEP) joined hands with PTT
to support the government’s policy in mitigating electricity tariff
burdens on the public and industries. Since natural gas serves as the
main power generation fuel, the consortia successfully used their price
discounts as a negotiation incentive with PTT. In other words, PTT
received discounts for use in electricity tariff reduction. In return,
PTT pledged to buy more gas from these projects to enhance Thailand’s
security of energy supply to meet Thailand’s growing demand for natural
gas.

As for the new Arthit Project in the Gulf of Thailand, in which PTTEP is
the major shareholder (80%) and operator, gas price negotiation had
proceeded with PTT since late 2002 and heads of agreement were concluded
in November 2003. All negotiations should be concluded by the first
quarter of 2004. Arthit is scheduled to produce its First Gas by the
middle of 2006 at a rate of 330 MMSCFD while PTT completes its third gas
trunk line to take the gas to its gas separation plants in Rayong. The
Arthit Gas has undoubtedly further enhanced long-term security of energy
supply for Thailand.

In addition, PTTEP (through PTTEP International Ltd. and PTTEP Offshore
Investment Co.,Ltd.) successfully concluded negotiations for additional
investment in the Yetagun Project, Republic of Myanmar, by exercising
its First Right of Refusal together with other joint-venture partners to
buy the remaining shares of Premier Petroleum Myanmar Limited. These
shares consisted of Premier’s investments in production sharing
contracts governing M-12, M-13, and M-14 in the Gulf of Moattama and
investment in the Yetagun gas pipeline. PTTEP now therefore commands
19.3178% of the equity in Yetagun Project (up from 14.1667%); this also
represented a rise in PTTEP’s gas market share in Thailand.

Crude Oil and Condensate

Both crude oil and condensate sales contracts are based on the prices of
world crude oil with comparable characteristics to those liquids
produced by a given company, so as to reflect the market values of
products. All projects under PTTEP are already under long-term sales
agreements with PTT.

In December 2003, PTTEP signed a Share Purchase Agreement with Thai
Shell Exploration and Production Co., Ltd., to buy all the shares
previously held by Thai Shell, the operator and 75% shareholder in the
S1 concession (also known as the Sirikit Oil Field) and the only
shareholder in the B6/27 concession in the Gulf of Thailand (the Nang
Nuan Oil Field). The PTTEP group is now the single shareholder and
operator of Thailand’s largest onshore oil field. The acquisition of
Thai Shell and its oil production assets has generated an immediate
income for PTTEP.

As for crude oil entitlement from Rimau production-sharing contract in
Indonesia, arising from PTTEP’s shares in Medco Energie, PTTEP requested
PTT to serve as its marketing agent. During the past year, PTT has
signed a one-year term contract with its customer, as a means to
guarantee a flow of positive revenue and a secured market. It is PTTEP’s
policy to collaborate with PTT in using crude oil derived from its
overseas investments to enhance Thailand’s security of energy supply.
What is equally important is that any procurement must be economically
viable.

5.4.2 Competition Environment

-   Exploration and Production Business and Gas Transportation Services

While it is true that there are several petroleum producers in Thailand,
including PTTEP, Unocal, Chevron, and Exxonmobil, for each concession
there are several joint-venture partners with different shareholding
proportions. One can say that the petroleum exploration and production
business here has several investors but only moderate competition, since
the domestic gas demand exceeds supply by all the producers.

Nevertheless, during the past year some issues regarding PTT’s limited
gas offtake arose, as both gas trunk lines in the Gulf of Thailand had
approached their maximum capacities. In the meantime, the third pipeline
is due to be commissioned by 2006. Clearly, with the current expansion
in the gas market and the existence of spare capacities on the part of
several gas producers, marketing competition among the producers had
taken shape in order to take whatever remaining market share before the
third pipeline comes into use.

As for competition between natural gas and other fuels for power
generation and industrial consumption, in 2003 EGAT decided to request
independent power producers for Bo Nok and Hin Krut (combined capacity
of 2100 MW) to switch their fuels from imported coal to natural gas.
Besides expanding future gas markets, power generation using natural gas
typically has lower production costs than other fuels (e.g., fuel oil or
imported coal), adding a competitive edge to power producers that use
natural gas. Environmentally, natural gas is cleaner and creates less
pollution than fuel oil and imported coal, and incurs no indirect costs.

Power Business

To add efficiency and competition while enabling more private-sector
involvement, the Thai government made it a policy to restructure the
power business and privatize electricity-related state enterprises in
the form of a Power Pool. On September 9, 2003, this Power Pool concept
was abolished by the Cabinet in favor of the Enhanced Single Buyer (ESB)
concept, proposed by the Ministry of Energy. ESB was approved on
December 9, 2003. Under the new scheme, EGAT remains the single buyer of
electricity, which is then transmitted to the Metropolitan Electricity
Authority (MEA) and the Provincial Electricity Authority (PEA). Some
units under EGAT will be transferred to a newly formed power-regulating
agency, which will supervise tariffs, new power plant bidding, fuel
types, plant locations, etc., for fairness to all parties. This is
because EGAT will be among eligible operators competing to sell
electricity into the system. A Board of Regulators, to be supervised by
the Ministry of Energy, will consist of seven experts in energy,
economics, finance, and law – from both public and private sectors.

As for the state-enterprise privatization issue, EGAT will be
corporatized and its shares floated on the Stock Exchange of Thailand
(SET) in the second quarter of 2004. For the sake of transparency and
operation efficiency, the financial accounts will be segregated between
the electricity generation and the transmission businesses. MEA and PEA
will operate distribution and retail businesses within their respective
areas, with accounts segregated between distribution and retail
operations. The shares of both MEA and PEA will be made available on the
SET in late 2004.

To enable efficient power exchange and save on power plant construction
costs, the government has made it a policy to promote Thailand as the
center of the ASEAN Power Grid through connecting ASEAN countries’
transmission and electricity generation systems. This is because
countries to the north of Thailand (e.g., Laos and Myanmar) have high
hydroelectricity potential while those south of Thailand (e.g.,
Indonesia and Malaysia) have numerous gas fields and coal resources for
use in power generation.

These policies will stimulate competition in electricity generation.
Nevertheless, existing small and independent power producers, including
Thai Oil Power and Independent Power Thailand, will continue to enjoy
protection under their long-term contracts with EGAT and other
customers. In short, the revenue of both entities will remain intact.
Producers with their own fuels will be allowed to use such fuels to
generate electricity for sale and distribution into the system, which is
regarded as a way to build market and add value to the fuels.

[1] Please see more details in FAS 69 on page 114