12. Financial Position and Result of Operation

1.  Auditor and Significant Accounting Policies

    1.  Auditor

PTTEP has appointed Office of the Auditor General, as the external
auditor of the Company and its subsidiaries and the appointment has been
approved by the Office of Securities and Exchange Commission.  PTTEP and
its subsidiaries have always appointed the Office of The Auditor General
to serve as its independent auditor. There are no relationships or
conflicts of interest among the independent auditor, the Company and its
subsidiaries, the executives, the shareholders, or others related to
those parties.   It was also approved by the Annual General
Shareholders’ meeting with the audit fee of Baht 0.9 million which is
equal to the fee for the years 2006 and 2005.

In addition, the Office of The Auditor General has serves as the
independent auditor for Company subsidiaries of 27 companies with an
audit fee for the year 2007 amounting to Baht 2.65 million. There was no
non-audit services fee for the previous year because no other services
were received from the independent auditor.

2.  Summary Auditors’ Report in the past 3 years

The auditor expressed clean opinion in the Auditors’ Report in the past
3 years and expressed the additional opinion that assets, liabilities
and expenses of the joint venture have not been audited by the Company’s
auditor; however they have been audited by the joint ventures’ auditors.

3.  Significant Accounting Policies

1.  Basis for Preparation of Financial Statements

The consolidated and the Company’s financial statements have been
prepared in accordance with Generally Accepted Accounting Principles in
Thailand under the Accounting Act B.E. 2543, and the financial reporting
requirements of the Securities and Exchange Commission under the
Securities and Exchange Act. B.E. 2535

The Group has applied International Accounting Standard No. 12 “Income
Taxes”.

The consolidated and the Company’s financial statements have been
prepared under the historical cost convention except as disclosed in the
accounting policies below.

The consolidated and the Company’s financial statements are use of
estimates and assumptions that affect the assets, liabilities, revenues
and expenses reported in the financial statements. While the Group uses
its best estimates and judgments, actual results could differ from these
estimates as future confirming events occur.

The major inter-company transactions are eliminated from the preparation
of the consolidated Financial Statements that present the combined
numbers for subsidiaries, associates, and joint ventures

Subsidiary Undertakings

Subsidiary undertakings, which are those entities in which the parent
company in the Group has an interest of more than one half of the voting
rights and has power to exercise control over subsidiaries’ financial
policies and operations. Subsidiaries are consolidated from the date on
which control is transferred to the parent company and are no longer
consolidated from the date that control ceases.

Associated Undertakings

Investments in associated undertakings presented in the consolidated and
the Company’s financial statements are accounted for under equity
method. These are undertakings over which the Group generally has
between 20% and 50% of the voting rights, and over which the Group has
significant influence, but which it does not control.

Equity accounting is discontinued when the carrying amount of the
investment in an associated undertaking reaches zero, unless the Group
has incurred obligations or guaranteed obligations in respect of the
associated undertakings.

Joint Ventures

The Group’s interests in jointly controlled entities are accounted for
by proportionate consolidation. Under this method the Group includes its
share of the joint ventures’ individual income and expenses, assets and
liabilities in the relevant components of the financial statements.

The Group’s interests in jointly controlled assets are accounted for by
proportionate consolidation. Under this method the Group includes its
share of the assets, liabilities and expenses based on Joint Operating
Agreement in the relevant components of the financial statements.

Related Parties

Enterprises that directly, or indirectly, through one or more
intermediaries, control, are controlled by, or are under common control
with, the Company, including holding companies, subsidiaries; follow
subsidiaries and associates are related parties of the Company.

In considering each possible related party relationship, attention is
directed to the substance of the relationship, and not merely the legal
form.

2.  Foreign Currency Transactions

Foreign currency transactions are translated into Baht at the exchange
rates ruling on the transaction dates. Monetary assets and liabilities
denominated in foreign currency remaining at the year-end date are
translated into Baht at the average buying and selling rates,
respectively, as determined by the Bank of Thailand. Such gains or
losses are recognized as revenues or expenses in the period in which
they occur.

The monetary assets and liabilities of subsidiary companies are
translated into Baht using average buying and selling rates determined
by the Bank of Thailand at year-end, whereas the income statement is
translated using the exchange rates ruling on the transaction dates.
Gains or losses from such translation are recognized as revenues or
expenses in the period in which they occur.

The assets and liabilities of overseas jointly controlled entities are
translated into Baht using average buying and selling rates determined
by the Bank of Thailand at year-end, whereas the income statement is
translated using average exchange rates during the period. Differences
from such translation have been shown under the caption of “Currency
translation differences” in shareholders’ equity.

3.  Cash and Cash Equivalents

    Cash and cash equivalents comprise cash on hand and at banks, and
    other short-term highly liquid investments with maturities within 3
    months.

4.  Trade Accounts Receivable

Trade accounts receivable are carried at anticipated realizable value.
An estimate is made for doubtful receivables based on a review of all
outstanding amounts at the year end. Bad debts are written off during
the year in which they are identified.

5.  Inventories

Inventories are valued at the lower of weighted average cost or net
realizable value. Cost is determined by the weighted average method. Net
realizable value is the estimated selling price in the ordinary course
of business, less the costs of completion and selling expenses.

6.  Materials and Supplies

Materials and supplies are valued on the average cost basis. Allowances
have been provided for obsolete and unserviceable items.

7.  Borrowing Costs

Interest costs on borrowings to finance the construction of property,
plant and equipment are capitalized, during the period of time that is
required to complete and prepare the asset for its intended use. All
other borrowing costs are expensed.

8.  Property, Plant and Equipment

Property, plant and equipment are presented at cost, after deducting
accumulated depreciation and provision for impairment of assets.

Oil and Gas Properties

The Company follows the Successful Efforts Method in accounting for its
oil and gas exploration and production activities as follows:

Cost of Properties

Costs of properties comprise total acquisition costs of petroleum right
or the portion of costs applicable of properties as well as the
decommissioning costs.

If exploratory wells establish proved reserves, and are included in the
plan to develop in the near future, exploratory drilling costs (both
tangible and intangible) are initially capitalized otherwise the related
costs are charged as expenses.

Exploratory costs, comprising geological and geophysical costs as well
as area reservation fees during the exploration stage, are charged to
expenses as incurred.

Development costs; irrespective of whether relating to development wells
or unsuccessful development wells, are capitalized.

Depreciation, depletion and amortization

Capitalized of acquisition costs of petroleum right are depleted and
amortized on the unit of production method, which is based on estimated
proved recoverable reserves. Depreciation, depletion and amortization of
exploratory wells, development equipment and operating costs of support
equipment as well as the decommissioning costs, except unsuccessful
projects, are calculated on the unit of production method, which is
based on estimated proved recoverable reserves and proved developed
reserves. Changes in reserve estimates are recognized prospectively.

Proved recoverable reserves and proved developed reserves are calculated
by the Group’s own engineers and information from the joint ventures.

Depreciation of transportation pipeline of Yadana and Yetagun projects
is calculated on the straight-line method with an estimated useful life
of 30 years.

General properties

Property, plant and equipment are presented at cost, after deducting
accumulated depreciation and provision for impairment of assets.

Depreciation of general properties is determined on the straight-line
method at rates ranging from 5% to 20% per annum.

In consideration of impairment provision, where the carrying amount of
an asset is greater than its estimated recoverable amount, it is written
down immediately to its recoverable amount and recorded in the income
statement.

Gain and losses on disposal are determined by reference to their
carrying amount and are taken into account in operating profit.

Expenditure for addition, renewal and betterment which result in a
substantial increase in an asset’s current replacement value, are
capitalized. Repair and maintenance costs are recognized as expenses
when incurred.

9.  Carried Cost under Petroleum Sharing Contract

Under Petroleum Sharing Contracts in which the government has
participation interest, some contracts require the contractor parties
excluding the government to fund the costs of all exploration operations
until determination of the first development area. These costs are
incurred by the contractor parties at an agreed proportion for those of
the government’s share, carried cost. When the project commerce
production, such carried costs shall be fully recouped without interest
by the contractor parties under the agreed procedures from the
production of petroleum.

The Group recorded the transactions of carried costs through various
accounts, following the petroleum operations under the Successful
Efforts Method. They are mainly recorded in oil and gas properties in
balance sheet and exploration expense in the statement of income.

10. Intangible Assets

Expenditures on acquired licenses for computer software are capitalized
and amortized using the straight-line method over the lives of contract,
maximum of 10 years. The carrying amount is reviewed annually and
adjusted for impairment where it is considered necessary.

11. Deferred Income Taxes

Deferred income tax is provided in full, using the balance sheet method,
on temporary differences arising between the tax bases of assets and
liabilities and their carrying amounts in the financial statements. The
principal temporary differences arise from depreciation on property,
plant and equipment, amortization of decommissioning costs and, on the
difference between the fair values of the net assets acquired and their
tax base.

Tax rates enacted or substantively enacted by the balance sheet date are
used to determine deferred income tax.

Deferred tax assets are recognized to the extent that it is probable
that future taxable profit will be available against which the temporary
differences can be utilized.

Deferred income tax is provided on temporary differences arising on
investments in subsidiaries, associates and joint ventures, except where
the timing of the reversal of the temporary difference can be controlled
and it is probable that the temporary difference will not reverse in the
foreseeable future.

Deferred income tax assets and liabilities can be offset only when tax
assets and tax liabilities relate to the same tax agency.

12. Borrowings

Borrowings are recognised initially at the proceeds received.
Transaction costs incurred are recognized as deferred assets and
amortized through the income statement over the period of the
borrowings.

13. Provision for Decommissioning Costs

The Group recorded provision for decommissioning costs whenever it is
probable that there is an obligation as a result of the past event and
reliable amount of obligation.

The Group recognizes provision for decommissioning costs, which are
provided at the onset of completion of the project, for the estimate of
the eventual costs that relate to the removal of the production
facilities. These costs were included as part of the oil and gas
properties and were amortized based on proved reserves on a unit of
production basis. The estimates of decommissioning costs have been
determined based on reviews and estimates by the Group’s own engineers
and managerial judgment.

14. Reserve for Expansion

The Group considers a reserve for expansion for the purpose of investing
in new exploration-phase projects, which are generally susceptible to
high risk, and for the purpose of finding additional petroleum reserves.
The reserve for expansion is set aside not exceeding 35% of the net
profit on tax basis after tax from exploration and production
activities.

15. Income Recognition

Sales are recognized upon delivery of products and customer acceptance.

Revenues from Pipeline Construction Agreement are recognized on the
basis of Successful Efforts Method.

Interest income is recognized on the basis of percentage of period,
taking into account the effective yield on the asset.

Revenues; other than the above mentioned, are recognized on an accrual
basis.

16. Income Taxes

The Group’s expenditures and revenues for tax purposes comprise:

-   Current period tax which is calculated in accordance with the
    Petroleum Income Tax Act B.E. 2514 and Amendment B.E. 2532 and the
    Revenue Code

-   Income tax in the Union of Myanmar

-   Deferred income taxes, which are calculated as disclosed in Note 13.

    1.  Earnings per Share

Basic earnings per share is calculated by dividing the net income
attributable to shareholders by the weighted average number of outside
ordinary shares in issue during the year.

Diluted earnings per share is calculated by the weighted average number
of outside ordinary shares in issue adjusted to assume conversion of all
dilutive potential ordinary shares. The Company has one category of
dilutive potential ordinary shares: share options.

2.  Provident Fund and Provision for Employee benefits

The Group’s employee have been membership of the provident fund as
follows: “Employee of PTTEP Registered Provident Fund”, “Employee of
PTTEP Registered Provident Fund 2”, “Sinsataporn Registered Provident
Fund”, “TISCO Ruamtun1 Registered Provident Fund” and “TISCO Ruamtun2
Registered Provident Fund”

The provident fund is funded by payments from employees and by the
Company which are held in a separate trustee-administered fund. The
Group contributes to the fund at a rate of 3 -15 % of its employees’
salaries which are charged to the income statement in the period to
which the contributions relate.

The provision for employee benefits is determined from the different of
compensation and benefits under provident fund and compensation and
benefits under the old pension scheme. The provision is assessed by the
Company's management. The provision is based on the old pension scheme
which is determined by length of years of service, and current salary of
employees. The provision is presented under non-current liabilities.

3.  Deferred Income under Take-or-Pay Agreements

The Group has certain obligations in respect of the supply of gas under
gas purchase agreements with its customer. Under these agreements
customer is required to pay for certain minimum quantities of gas in a
given year. Should customer be unable to take the minimum contracted
quantities in a given year, certain volumes of gas that the customer has
paid for but has not taken in that year can take for free of charge in
subsequent years subject to certain conditions in the agreements. The
Group recognizes its obligations under Take-or-Pay Agreements on an
accrual basis based on its best estimate of volumes taken in the year.
Received in advance under these agreements are recognized as deferred
income. The deferred income, when subsequently taken, is recognized in
the income statement.

The Group made prepayment for royalty related to cash received in
advance under Take-or-Pay Agreement to government of Myanmar. Prepayment
will be amortized when the deferred income is recognized.

1.  Bonds issuing Liabilities

    1.  The Company issued 2,500,000 unsecured unsubordinated bonds with
        a face value of Baht 1,000 each, totaling Baht 2,500 million.
        The bonds bear interest at a rate of 4.625% per annum, payable
        every six months on March 27 and September 27 of each year, and
        have a maturity period of 15 years, to be redeemed on March
        27, 2018. On September 27, 2005, the Company entered into a
        Cross Currency Swap transaction with a bank to swap Baht for USD
        60.82 million. Then, on May 2, 2007, the Company swapped the
        transaction with the same back from USD to Baht amounting to
        2,500 million, which interest rate is at the rate of 3.30% per
        annum until the expiry date, interest payable every six months
        on March 27 and September 27 of each year.

    2.  The Company issued 3.50 million unsecured unsubordinated bonds
        with a face value of Baht 1,000 each, totaling Baht 3,500
        million. The bonds bear interest at a rate of 4.88% per annum,
        payable every six months on February 12 and August 12 of each
        year, and have a maturity period of 3 years, to be redeemed on
        February 12, 2010.

    3.  The Company issued 3 tranches of unsecured unsubordinated bonds
        to retail investors and institutional investors in the total
        amount of Baht 12,500 million, details as follows:

  ----------------------- ---------------- --------------- ---------------
                          Tranche 1        Tranche 2       Tranche 3

  Aggregate notes amount  6,000            3,500           3,000

  Tenor                   3 years          5 years         15 years NC5*

  Interest rate           6MFDR + 0.99%**  3.91 % per      5.13 % per
                                           annum           annum

  Maturity date           June 15, 2010    June 15, 2012   June 15, 2022

  Types of offering       Retail Investor  Retail /        Institutional
                                           Institutional   Investor
                                           investor        
  ----------------------- ---------------- --------------- ---------------

  * NC5 (Non Call 5 years): the Company has a right to redeem such
  debentures in Year 5 or the Year 2012.

  ** On September 4, 2007, the Company entered into Interest Rate Swap
  (IRS) for Tranche 1 of bonds amounting to Baht 6,000 million with a
  financial institution to change the interest rate from fixed rate at
  3.60% to floating rate at 6-month Fixed Deposit Rate plus 0.99%
  (6MFDR + 0.99%).

4.  The Company issued 230 unsecured unsubordinated bonds with a face
    value of Yen 100 million each, totaling Yen 23 billion. The bonds
    bear interest at a rate of 3.35% per annum and have a redemption
    period of 10 years, to be redeemed on September 19, 2007. On the
    date of the bond issuance, the Company entered into a swap agreement
    with a foreign bank to swap Yen for USD 193.28 million. Under this
    agreement, interest is charged at the rate of 7.86% per annum,
    payable every six months on March 19 and September 19 of each year.
    The Company totally redeemed the bonds on September 19, 2007.

2.  Summary PTTEP and its subsidiaries Financial Statements

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3.  Summary significant financial ratio table

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4.  Management Discussion and Analysis of Operation Results in 2007

    1.  PTTEP Performance

Year 2007 was another challenging year for PTTEP due to the economic
recession, high oil prices, the strengthening of the baht, and the
rising demand for goods & services within the E&P business, which
resulted in dramatic cost increases. PTTEP dealt with these challenges
by being committed to the philosophy of efficiency improvement, reducing
operating costs, and developing capabilities with the objective of
maintaining sustainable growth. This effort yielded satisfying operation
results as PTTEP total revenue for 2007 was 96,773 Million Baht and the
net profit amounted to 28,455 Million Baht or 8.63 Baht per share
diluted. The return of shareholders’ equity was 29%.

Regarding business results for the year, PTTEP and subsidiaries
succeeded in implementing most of the Company’s plans in accordance with
Company strategy and directions as summarized below:

Regarding its exploration activities, PTTEP maintained a good success
rate as there were 36 successful wells out of a total of 51 exploration
and appraisal wells drilled in 2007 which is higher than the worldwide
E&P standard. This is particularly true for exploration activities in M9
Block in Myanmar, as PTTEP was successful in all exploration and
appraisal wells drilled in 2007 including 4 exploration and 5 appraisal
wells. The wells were drilled and encountered natural gas bearing
formations with total thickness ranging between 46-161 meters per well.
The successful result of the exploration activities in Block M9 confirms
the potential of natural gas in the eastern part of M9 Block. PTTEP will
prepare a development plan along with an exploration and appraisal
program to verify additional potential in the Block.

PTTEP also accelerated the development activities of various projects.
For the Arthit Project, PTTEP successfully installed major facilities
including a central processing platform, a living quarters platform, six
wellhead platforms, ninety development wells, five gas pipelines, and a
condensate pipeline in 2007. Production is expected to start in the
first quarter of 2008. In addition, PTTEP also accelerated Arthit North
development and signed the Gas Sales Agreement with PTT Public Company
Limited to provide an additional volume of natural gas at approximately
120 million standard cubic feet per day (MMSCFD) for approximately 3
years. The production from Arthit North will tentatively start in the
third quarter of 2008. For MTJDA-B17 Project, PTTEP drilled a total of 7
exploration and appraisal wells in 2007 to verify additional reserves
and also accelerated the project development by committing the
procurement and construction work to support its first production in the
fourth quarter of 2009. For the Bongkot Project, The Cabinet approved a
production period extension for Bongkot for ten years, including Blocks
B15, B16, and B17. This extension allows PTTEP and its partners to
develop Greater Bongkot South (GBS) as well as to further explore and
develop the remaining potential in Greater Bongkot North (GBN) which
would greatly benefit the nation. The first phase of GBS development
will start in 2008 and production is expected to start in 2011 at an
initial production capacity of approximately 300 MMSCFD. GBS development
will push Bongkot production capacity to approximately 900 MMSCFD.
Regarding the development of other projects, construction of a wellhead
platform for the Vietnam 9 – 2 Project started in July 2007 and the
drilling of development wells progressed according to the development
plan.

Regarding production activities, PTTEP managed its projects to meet its
production targets. In addition, PTTEP officially started production
from the Sinphu Horm Project and the Oman 44 Project in the first
quarter of 2007. Moreover, PTTEP started to supply flare gas, a
by-product from the S1 crude oil process, to Ratchaburi Energy Company
Limited for electricity generation. This effort benefits the country as
a whole as it helps to exploit the natural resources at utmost benefit
and also helps the country in reducing imported energy.

Regarding petroleum sales, PTTEP’s sales volume averaged 179,767 barrels
of oil equivalent per day (BOED) in 2007, higher than the average sales
volume of 2006 of 169,348 BOED. In addition, the average sales volume
for each quarter increased steadily from 171,170 BOED in the first
quarter to 184,867 BOED in the fourth quarter. However, the average
sales volume of 2007, 179,767 BOED, was still lower than the sales
target of 187,713 BOED, which was initially set at the beginning of
2007. The reasons for the deviation from the sales target were due to
technical problems in the gas/condensate separation plant of Oman 44
Project and to the temporarily suspended production from Nang Nuan
Project due to well technical problems.

However, the first gas from Arthit Project was delayed from the
Contractual Delivery Date targeted in 2007. Under the Arthit Gas Sale
Agreement, if the seller fails to deliver on the Contractual Delivery
date, the buyer is entitled to take a deficient quantity (“Shortfall”)
at a price equal to seventy-five percent (75%) of the current price
applicable at the time the Shortfall occurred. In this case, PTT, as the
buyer, notified the seller about the daily contractual quantity in early
December 2007. PTTEP, however, could not deliver the nominated quantity.
PTTEP therefore may have to be responsible for the Shortfall amounting
to approximately 791 million Baht unless PTT is unable to accept
delivery of such natural gas. At the present, PTTEP and its joint
venture partners in Arthit Project are in the process of requesting
evidence from the buyer to verify the buyers’ readiness to accept the
natural gas. This transaction is disclosed in Notes to Financial
Statement under Contingent Liabilities.

Regarding its investments, PTTEP continued to expand its investment in
the petroleum exploration and production sector in both domestic and
overseas countries. For domestic investment, PTTEP was awarded the
concession blocks A4/48, A5/48, and A6/48 in the Andaman Sea and the
concession blocks G6/50, G7/50, and G8/50 in the Gulf of Thailand. For
overseas investment, PTTEP officially signed Concession Agreements for 2
exploration blocks with the Government of the Arab Republic of Egypt,
including Rommana Block and Sidi Abd El Rahman Offshore Block. These
blocks were awarded to PTTEP and its joint venture partners in the 2006
EGAS international bid round organized by Egyptian Natural Gas Holding
Company (“EGAS”). In addition, PTTEP and the consortia succeeded in
bidding for 6 petroleum blocks offshore south of New Zealand South
Island and were awarded the exploration of Block 2 offshore in the north
of Bahrain. PTTEP also participated as a joint venture partner in
Petroleum Permit AC/P36 located offshore of northwestern Australia. The
overall success of investments in various regions is well-aligned with
PTTEP’s investment strategy, which seeks to expand investments in high
petroleum potential regions.

To further expand its investment, PTTEP increased participating
interests in three existing projects, namely, the G4/43 Project in which
PTTEP’s participation interests was increased from 15 to 21.375, the
Cambodia B Project in which PTTEP participation interests was increased
from 30% to 33.333334%, and Merangin-I Project in which PTTEP
participation interests was increased from 39% to 40%.

To minimize risk exposure in petroleum exploration and production
activities, PTTEP signed an Assignment Agreement with Resourceful
Petroleum (Thailand) Limited or RPL to transfer 30% of participation
interests in Block L21, L28/48 and L29/48 to RPL. This transaction
resulted in a change of the participation interests of PTTEP (operator)
from 100% to be 70% and of RPL to be 30%. In addition, PTTEP’s Board of
Directors approved the farm-out agreement to transfer 40% of the
participation interests in Nang Nuan Project (Block B6/27) to Nippon Oil
Exploration Limited (NOEX). This transaction would change the
participation interest in the Nang Nuan Project (Block B6/27) from PTTEP
100% to be 60% and NOEX to be 40%. However, the transactions will be
effective after receiving an approval from the Thai government and the
Supplementary Concession is signed.

In addition, in 2007, to minimize risks from oil price volatility, PTTEP
conducted oil price hedging programs with the objective of ensuring
revenue to be generated as planned. However, as the oil price in the
fourth quarter of 2007 continuously increased to a level that was higher
than the committed price, PTTEP, therefore, experienced an opportunity
loss from oil price hedging amounting to 858 million Baht.

Regarding capability development, PTTEP continuously strived to improve
organization capability. In 2007, PTTEP accelerated both recruitment and
development of its people to support Company growth. To fulfill manpower
requirements, PTTEP looked for potential candidates from both domestic
and international sources. In addition, PTTEP has been using different
tools for fast track development of its people, e.g., Competency
Management System, High Potential Staff Development System, and also
Management Development System, in which 360 leadership assessments was
implemented for the first time in PTTEP.

In addition, PTTEP constantly improved its organization as well as its
internal work process to support the organization’s growth. In 2007,
PTTEP revised its organization structure and manpower allocation models
to be more efficient and to correspond with the current phase of
development and the corporate strategy. The concept is to have Projects
share services/resources from a central service function, which would
benefit the organization in terms of resource allocation and knowledge
management.

Regarding the controlling business philosophy, PTTEP always adheres to
Corporate Governance principles and is determined to constantly improve
its CG practices. In 2007, it was rated by the Thai Rating Information
Services Co., Ltd. (TRIS) as 8.37 out of 10, which is considered as
being “very good” regarding CG practices. The score was higher than 8.31
and 8.14 in 2006 and 2004 respectively.

2.  Results of Operations

Detailed discussion of financial results for the two years and quarters
ending 31 December 2007 are as follows:

  ---------------------------------------------------- ---------- --------- --
  Results of Operations – Full Year Comparison         31                   
                                                       December             

  (Unit : Millions of Baht except for Baht per share   2007       2006      
  amounts)                                                                  

  Net income                                                                

  Exploration and production                           24,491     23,701    

  Pipelines                                            4,428      4,214     

  Others                                               (464)      132       

  Total Net income                                     28,455     28,047    

  Diluted earnings per share                           8.63       8.53      

  Total Revenues                                       96,773     91,723    

  Total Sales                                          90,764     86,339    
  ---------------------------------------------------- ---------- --------- --

For the results of operations for the year 2007, PTTEP and its
subsidiaries’ net profit was Baht 28,455 million or Baht 8.63 per
share-diluted, an increase of Baht 408 million when compared with the
year 2006’s net profit of Baht 28,047 million (2006: Baht 8.53 per
share-diluted). Return on shareholders’ equity for this year was 29%
(2006: ROE at 35%)

For the year 2007, total revenues of PTTEP and its subsidiaries amounted
to Baht 96,773 million, an increase of Baht 5,050 million or 6% when
compared with Baht 91,723 million for the last year. This increase was
mainly due to an increase in sales of petroleum of Baht 4,425, resulting
from (1) the average petroleum sales price in USD currency in this year
rose to USD 39.78 per barrel of oil equivalent (BOE), which resulted
from the higher world market price, against last year at USD36.52 BOE;
however, the average sales exchange rate for this year decreased to Baht
34.77 per USD against last year’s Baht 38.24 per USD as a result of the
strengthened Baht (2) the higher sales volume for the year 2007 rose to
179,767 barrels of oil equivalent per day (BOED) compared with last year
(169,348 BOED). This increased sales volume mainly came from petroleum
production sales from the Oman 44 and Phu Horm projects (first
production began last year) including the crude sales from the S1
project and the natural gas sales from the Pailin and Yadana projects.
However, there was a decrease in petroleum production sales from the
B8/32&9A project.

PTTEP and its subsidiaries had a foreign exchange gain in this year
amounting to Baht 916 million, a decrease of Baht 398 million or 30%
when compared with last year (Baht 1,314 million) because of the
strengthened Baht. During 2007, the Company redeemed its Bond in foreign
currency and entered into a Cross Currency Interest Rate Swap – CRS from
foreign currency to Thai Baht.

PTTEP and its subsidiaries received higher revenue from pipeline
transportation, which was proportionally recorded from gas pipeline
transportation in Moattama Gas Transportation Company (MGTC) and
Taninthayi Pipeline Company LLC (TPC); and the lower interest income as
a result of the decreased interest rate return from fixed deposits and
short-term financial instruments. In addition, the other income
increased mainly as a result of construction service from the Arthit gas
export pipeline to customers.

PTTEP and its subsidiaries incurred expenses for this year amounting to
Baht 44,489 million, an increase of Baht 3,552 million or 9% when
compared with Baht 40,937 million last year. This increase was the
effect of

(1) Higher depreciation and amortization expenses, mainly from the
    Oman44, Phu Horm, Bongkot, Pailin and S1 projects as a result of
    higher production volumes; in addition, the recognition of
    impairment loss from the Nang Nuan project as a result of the
    decrease in net future cash flow.

(2) Rising operating expenses, mainly due to the construction cost from
    the Arthit gas export pipeline to customers, operating expenses from
    the Oman44 project (first production this year), pre-operating
    expenses from the Arthit project and the facilities re-location cost
    from the Nang Nuan project because of its suspended production.

(3) Increased selling and administration expenses, mainly from the Oman,
    Arthit, MTJDA and Algeria 433a&416b projects, resulting from an
    increase in operation activities.

(4) In the fourth quarter this year, there was loss on oil price hedging
    for the Group’s petroleum products because of the use of Dubai Oil
    as the underlying crude (as of 31 December 2007, the Company entered
    into an Oil Price Hedging agreement for the period from January –
    December 2008 for 2.33 Barrel volume million, and a valid oil price
    at 78-84 USD per BBL)

(5) Decreased exploration expenses, mainly the net effect of (1) lower
    seismic costs from the Bongkot, Myanmar M7&M9, Vietnam 16-1 and Iran
    Saveh projects; however, there was (2) higher write-off of dry wells
    which mainly came from the Vietnam 16-1 and Algeria 433a&416b
    projects.

(6) Lower remuneration (the cost of Special Remuneratory Benefits under
    Petroleum Act (No.4) B.E. 2532) as a result of decreased sales
    revenue from the B8/32 project

    1.  Financial position

  ------------------------------------ ------------------- ---------------
                                       31 December         

  (Unit: Million in Baht)              2550                2549

  Total Assets                         190,039             157,813

  Total Liabilities                    83,252              69,288

  Total Shareholders’ Equity           106,787             88,525
  ------------------------------------ ------------------- ---------------

As of 31 December 2007, PTTEP and its subsidiaries had total assets of
Baht 190,039 million, or Baht 32,226 million (20%) higher than at the
end of 2006. This increase was mainly due to an increase in oil and gas
properties for production, mainly from the Arthit, Oman 44, S1, Pailin,
Projects in Vietnam, MTJDA and Myanmar M7&M9 projects. In addition,
higher cash and cash equivalents from the bond issuance during the year,
in which the Company invested its surplus cash in short-term financial
instruments carrying low risk, such as Treasury Bills, Promissory Notes
and deposits with commercial banks, where emphasis is given to security
and liquidity.

Most of the current assets as of December 31, 2007 were cash and cash
equivalents, parent company receivables, accounts receivables and
material and supplies. A large proportion of the non-current assets were
(1) assets used in joint-venture exploration and production, presented
under the title of Property, Plant, and Equipment, (2) investments in
associated companies, Energy Complex Co., Ltd., and PTT ICT Solutions
Co., Ltd. presented under the title of Investment Accounted for under
Equity Method and (3) the loan to Energy Complex Co., Ltd presented
under the title of Long-term loan to related parties

PTTEP and its subsidiaries had total liabilities of Baht 83,252 million,
which were higher than at the end of 2006 by Baht 13,964 million, mainly
due to the net of Baht bond issuance and bond repayment in foreign
currency amounting to Baht 9,293 million; as a result, the Company’s
remaining debt profile amounted to Baht 18,500 million and the interest
rate changed from 100% fixed to 70% fixed and 30% floated.

Deferred income from pipeline transportation in Myanmar decreased in
accordance with gas volume which was gradually taken by the buyer during
the year.

Non-current liabilities increased Baht 1,190 million mainly due to the
commitment to pay Baht 1,084 million under the Gas Sales Agreement from
the Arthit project to PTT Plc. Co., Ltd. The payment will be settled in
the third quarters of 2009 and 2010.

On November 13, 2007 the Company registered the change in its registered
paid-up capital from Baht 3,296.04 million to Baht 3,297.42 million, as
a result of the exercised warrants from Management and Employees to
purchase the Company’s stock under the Employee Stock Option Program
(ESOP). The total number of shares exercised for this period was
1,384,800 shares at the par value of Baht 1 per share resulting in a
total of 1,384,800 Baht. As of December 31, 2007 the outstanding number
of warrants was 4,915,940 units.

For 2007, PTTEP and its subsidiaries had a net cash flow from operations
of Baht 45,141 million, a net cash flow used in investment activities of
Baht 39,709 million, a net cash flow used in financing activities of
Baht 63 million which mainly resulted from the higher investment in oil
and gas properties. In addition, the main financing activities consisted
of (1) net cash received from bond repayment and bond issuance of Baht
9,736 million (2) a dividend payment of Baht 10,236 million and (3) cash
received from the issuance of ordinary share for the exercise of
warrants of Baht 563 million.

In compliance with the resolution of the Board of Directors’ meeting
held 27 July 2007, PTTEP paid an inter-rim dividend based on its half
year performance to its shareholders at Baht 1.61 per share on 27 August
2007.

Regarding protection against potential risks which may affect its
projects, PTTEP purchased insurance coverage by considering all types of
perils and appropriate sums-insured related to each project. Insurance
premiums have been slightly changed, but the coverage is appropriately
maintained at the same level. In the third quarter of 2007, PTTEP, PTT
and 9 PTT subsidiaries jointly purchased insurance coverage for PTT
Group in order to gain bargaining power, resulting in an insurance
premium for a 2008 decrease of 30%; the period covered have been changed
from 1 January – 31 December to 1 October – 30 September

In 2007 the company’s financial profile has remained strong due to
continued high petroleum prices, the company’s ability to attain
financial growth whilst maintaining its financial strengths, and the
Thai government’s support of the company in the petroleum exploration
and production business. As of 31 December 2007, PTTEP’s credit ratings
are as follows;

-   A2 for its Long-term foreign currency rating by Moody’s Investors
    Service

-   BBB+ for its Long-term foreign currency rating, and BBB+ for its
    Long-term local currency rating by Standard and Poor’s Ratings
    Services

-   A- by Japan Credit Rating Agency, Limited

-   AAA by TRIS Rating Company Limited

    1.  Adoption of New Accounting Standard

The Federation of Accounting Professions (FAP) issued Notification to
adopt the Thai Accounting Standard related to International Financial
Reporting Standard. The revised Thai Accounting Standards that have been
published in the Royal Gazette and have become effective for the
financial statement for fiscal year beginning on or after 1 January 2007
are as follows:

  TAS 44 Consolidated Financial Statements and Separate Financial
  Statements

  TAS 45 Investments in Associates

  TAS 46 Interests in joint Ventures

Since the first quarter of 2007, the Company has changed the Accounting
for investments in subsidiaries and associates presented in the
Company’s financial statements to comply with the revisions and
restated, in accordance with this accounting change, for comparative
purposes.

The revised Thai Accounting Standards that have been published in the
Royal Gazette and become effective for the financial statement for
fiscal year beginning on or after 1 January 2008 are as follows:

  TAS 25 Cash Flow Statements

  TAS 29 Leases

  TAS 31 Inventories

  TAS 33 Borrowing Costs

  TAS 35 Presentation of Financial Statement

  TAS 39 Accounting Policies, Changes in Accounting Estimates and Errors

  TAS 41 Interim Financial Reporting

  TAS 43 Business Combinations

  TAS 49 Construction Contracts

  TAS 51 Intangible Assets

Company management has assessed the effect of these revised accounting
standards and believes that they will not have any significant impact on
PTTEP and its subsidiaries financial statements.

2.  Impacts on Operational Results

Key factors which affected the 2007 operation results include oil price
volatility, Baht strengthening, higher fiscal regime, higher cost of
operations, and the limitations of human resources development and
organization capability to support growth.

1.  In 2007, oil prices were highly volatile as determined by the price
    of Brent crude which started at 49 USD per barrel at the beginning
    to 96 USD per barrel at the end of the year. Since the PTTEP product
    price is closely related to world oil prices, the high oil price
    situation resulted in an increase of PTTEP average product prices
    from 36.52 USD per barrel of oil equivalent (BOE) in 2006 to 39.78
    USD per BOE in 2007.

2.  Baht strengthening is another key factor that has impacted on PTTEP
    operational results. However, since the majority of Company revenues
    and expenditures are US Dollar based, the impact of a strong Thai
    Baht on business performance is quite limited.

3.  Fiscal regime has trended upward for several years as the
    governments of high petroleum potential countries have raised their
    fiscal regimes steadily. To deal with the situation, various oil
    companies have improved their operational efficiency to maintain the
    expected return. PTTEP realized the impact of the situation and
    closely monitored the development and took into account both fiscal
    regime and the risk of its future increase when evaluating
    investment opportunities. In addition, PTTEP also continuously
    improved the operational efficiency of various projects with the
    objective to generate the optimum return as planned.

4.  Continuous cost increase is another factor that has had a vital
    impact on PTTEP business performance. As result of the high oil
    price, various oil companies strive for goods & services for E&P
    business which resulted in a tight supply market and ฟ dramatic cost
    increases. However, to effectively contain the cost issue, PTTEP
    closely monitors its cost trends. It also analyzes and implements
    various programs to effectively manage and reduce costs e.g. 1) Long
    Term Procurement Planning to increase bargaining power and secure
    long lead materials & services at lower price within the timeline
    and budget; 2) Overall efficiency improvement efforts through
    synergy and sharing of assets to generate value and optimize
    operating costs; 3) Standard Wellhead Platform Design to study and
    prepare standard wellhead platform designs for various projects
    which helps reduce design costs and also provides benefits in terms
    of procurement and long term maintenance. In addition, PTTEP has
    also closely monitored the activities and work progress of every
    project in order to analyze and provide timely solutions to
    potential problems that may lead to project delays. All efforts have
    been made to ensure that all projects are progressing as planned and
    that they will generate return for our stakeholders.

5.  Human resources and organization capability development that
    corresponds well with growth is another key factor which impacted
    business performance, especially in light of the tight labor market.
    PTTEP values a strong human resources base as strategic factors for
    sustainable growth. PTTEP, therefore, is determined to acquire and
    develop the quality of its people by using various tools, including
    competency management system, a special development system for high
    potential staff, etc. In addition, PTTEP has improved its
    organization capability by continuously evolving the organization
    structure & HR allocation system as well as streamlining key work
    processes to correspond with changes in business requirements.
    Finally, it also promotes Knowledge Management across the
    organization, which also includes effective database management and
    creation of a knowledge base culture to promote learning and
    transferring of knowledge/expertise within the organization. The
    overall objective of this effort is to turn related knowledge into
    wisdom and to use related information to improve overall decision
    making.