1. Risk Factors

The major types of risks associated with petroleum exploration and
production are described below.

1.1 TECHNICAL AND CORE CAPABILITY

1.1.1 Investment Risks

PTTEP’s policy is to invest more, both domestically and internationally,
with a focus on promising projects and ones aligning with its strategic
plan of increasing petroleum production and reserves. To achieve solid,
long-term growth, it therefore focuses on investments made in areas of
high petroleum potential. Since new investments carry substantial risks,
the Company has 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
profit sharing, contract adherence, political stability, geographical
conditions, and project types and sizes. These risk factors are taken
into account in profitability analyses.

To add decision-making efficiency and lessen investment risks, during
the year PTTEP set up an investment committee to recommend the
investment decision making to the president. A development committee was
also set up to review ongoing projects and to buy or sell new projects
under development phase, so that the Company might achieve its greatest
value.

1.1.2 Exploration Risks

Exploration for new petroleum sources is vital to this business, by
itself a high-risk, high-return business. Exploration projects deal with
petroleum reserves potentially lying kilometers beneath the surface of
the earth, making it difficult to visualize and understand the petroleum
geology at such depths. Absolute geological 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. To
achieve efficient decision-making, PTTEP set up an exploration committee
of experienced and competent personnel to review and recommend
exploration activities and decision making in exploration projects to
the president.

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 information one commands, the more
    effective one’s investigation and analysis.

To minimize the risks associated with these three factors, PTTEP pays
attention to develop capability of Geoscientists, such as through
knowledge management efforts and further E&P database development, best
practice, lesson learnt, and expert directory to encourage its use.

1.1.3 Project Development Risks

In line with the elevated oil prices of 2006, several new projects came
into existence. 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 execution plan and engineering designs, contract strategy,
    monitoring, and construction supervision management.

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

    1.1.4 Production Risks

Besides natural disasters and terrorist acts, already addressed by the
SSHE policy, production risks result from disruptions caused by ageing
production equipment and from operation errors.

To prevent such risks, the Company pays great attention to 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 production and safety assessment program such as
Opersafe assessment is conducted by external agencies.

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 exploration and production 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 entered
into 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 are the keys to any organization’s
success. The Company has taken the following actions to enhance its
organization capability:

Personnel

(1) Define new corporate values to govern the formulation of and
approach for an organization culture, consisting of:

-   Adaptability and the will to learn, which allows for adaptable to
    changes, will to learn& re-learn, applying talent, and
    self-awareness

-   Boundaryless, which implies collaboration, open- mindedness,
    teamwork, knowledge sharing, sharing& caring

-   Clear thinking leads to clear communication, which implies focused,
    result-oriented, precise, and thorough

-   Determination and dedication, which also implies perseverance,
    loyalty, accountability, and quality

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

(3) Set up talent management plan to develop high potential personals to
be ready for higher position

Business Processes

(1) Raise the efficiency of project management processes, described
under Project Development Risks

(2) Raise the efficiency of procurement processes by educating the
personnel involved on the processes and procedures, and accelerate these
processes

(3) Raise the efficiency of subsurface evaluation processes by
developing the potential of geoscientists as required by competency
assessment findings

(4) Raise the efficiency of investment decision-making and risk
management processes by appointing an investment committee and a project
development committee. These committees contributed to optimize the
value of projects, new and ongoing.

(5) Develop a knowledge management project for geosciences and
engineering, so that the knowledge management technology may find
applications in information and experience sharing, which is one way of
upgrading organizational capability.

1.2 INHERENT RISKS

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 countries bear substantial
political risks, and therefore PTTEP appointed a geopolitical risk team
to monitor all these factors and periodically analyze their
developments. Scenarios are made up to complement decision-making on new
investments, and to 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 Safety, Security, Health, and Environmental Risks

Petroleum exploration and production is inherently associated with
various risks of commercial repercussions, including blowouts and gas
pipeline leaks. Offshore locations of equipment pose inherent risks from
natural forces like severe storms, monsoons, and earthquakes. Other
potential threats arise from terrorist acts with potentially significant
damage to PTTEP’s personnel, properties, business, the surrounding
environment, and its overall business.

In view of these, PTTEP has drawn up a clear policy on safety, security,
health, and environment 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
production platforms as well as production control and hazard control.
Work processes are managed and continually improved. PTTEP organizes
regular personnel training on safety, security, health, and environment
to enhance their familiarity with accident prevention measures, safe
working practices, and emergency preparedness.

To mitigate potential impacts and losses resulting from accidents, PTTEP
regularly assesses its safety management systems against the
International Safety Rating System (ISRS) through independent
verification. On a scale of 0 to 10, the Company achieved Level 7 ISRS
for Bongkot operations, Level 6 for and Songkhla Logistics Base, and
Level 6 for PTTEP1 operations. As regards environmental operations, the
Company won ISO 14001 certification for PTTEP1, S1, Bongkot, Songkhla
Logistics Base, and the PTTEP Office Building, with certification
conducted by AJA Registrars Ltd., an agency under United Kingdom
Accreditation Service. It continues to pass all required site
surveillance audits performed by AJA Registrars.

1.2.3 Litigation Risks

Since non-compliance is illegal and directly causes all forms of damage
– monetary and otherwise – PTTEP seriously takes compliance with all
laws and regulations related 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.

Besides legal regulation risks, 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.

Prudent contract management would lessen risks and damage potentially
resulting from delays, which could affect company plans and performance
at large, and 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
Law Department.

1.3 FINANCIAL RISKS

1.3.1 Price Volatility

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

In 2006, the oil price took a giant leap, resulting in higher product
price sold by PTTEP than 2005, when they averaged $29.37 per barrel. For
2006, the corresponding average was $36.52 per barrel.

When oil prices drop, so do the prices of PTTEP’s oil and condensate.
However, because of built-in gas pricing mechanisms found in gas sales
agreements (GSAs), which cushion gas prices from oil price volatility,
the typical prices of natural gas, its main product, do not immediately
drop. Most of the Company’s contractual gas prices are adjusted every
six or 12 months. A reference oil price is usually found in each gas
price formula. Should this reference oil price rise or fall, the gas
price will move correspondingly to a certain degree. Thanks to this
mechanism, buyers can be assured of natural gas competitiveness with
other fuels and of its price stability.

1.3.2 Exchange Rate Fluctuations

PTTEP has proved petroleum reserves which can be produced and sold as
the main source of revenue for the Company. The pricing of such
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. Therefore, the foreign
exchange rate fluctuations will affect the company’s revenue and
expenditure structures.

Moreover, in accordance with the accounting standard, the Company has to
record its USD assets and USD liabilities in Thai Baht. The foreign
exchange rate fluctuation will effect the Company’s financial
statements. As a result of the appreciation of Thai Baht against USD
throughout the year 2006, the Company accounted a gain on foreign
exchange in the amount of Baht 1313.93 MM since the Company had more USD
liabilities than USD assets

1.3.3 Interest Rate Fluctuations

At present, all of PTTEP’s debts have fixed interest rates, therefore,
the volatility in interest rates will not effect the Company’s interest
obligations. However, a change in interest rate will lead to a higher or
lower cost of borrowings in the future, depending on the market
condition.

For the deposits of surplus cash, interest rate fluctuation will affect
their interest income. The Company policy is to invest in short term
deposits and instruments, with consideration of returns and risks.
However, it considers liquidity as a priority.