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  4. Nature of the Business

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4.1 Establishment / Changes / Significant Development

The Company was incorporated on 20 June 1985 with the Petroleum
Authority of Thailand (now PTT Public Company Limited) as the
shareholders of 99.99% in accordance with the Cabinet’s resolution of
April 16, 1985 for the Government to be able to hold petroleum
concessions. And on February 16, 1988 the Cabinet gave resolution for
PTTEP to conduct its business without having to comply with the orders ,
rules & regulation and the Cabinet’s resolution that enforced general
State Enterprises with exemption only to the solution concerning the
creating of the country’s debt of year 1985 and its amendment. This was
for the Company to conduct its business independently with effectiveness
and efficiency and be able to compete with other international oil
companies.

On October 30,1992, PTTEP became a public company with approval from the
Shareholders’ Meeting to raise fund from the general public. The Company
was given approval by the Office of the Securities and Exchange
Commission to offer its 39.96 million shares to investors both in and
outside the country and by the Stock Exchange of Thailand to be a listed
company in the stock market; and was first trade in the market on June
10,1993. The Company raised capital from Baht 3,100 million to Baht
3,272 million on May 12, 1999 with paid-up capital of Bath 3,260 million
from the new offering of 16 million common shares and reserve of 1.2
million common shares for the exercise of warrants to purchase the
Company’s common shares for management and employees. On September 20,
2000 the Company changed its par value from Baht 10 to Baht 5 with
registered capital still remaining at Baht 3,272 million. In 2002 the
Company increased its registered capital to Baht 3,322 million to
reserve for the exercise of warrants to purchase the Company’s common
shares for the management and employees, a program of 5-year period
amounting 10 million shares with paid-up capital still remaining at Baht
3,260 million with 652 million shares. At the end of 2003, PTTEP’s
paid-up capital was Baht 3,261.99 million with paid-up registered
capital of 652.398 million shares. The increased paid-up capital was
from the exercise of warrants of the directors, management and employees
under the ESOP Program in year 2002. On December 31, 2003 PTT held 63.61
percent of PTTEP’s shares.

The Company and its subsidiaries conducted E&P business through
investment strategic plan by join-investing with international E&P
companies to shares their risk and experiences. At present, the Company
and its subsidiaries joint-invested in many E&P projects, increasing
their investment opportunity both in and outside Thailand such as in
Myanmar, Vietnam, Malaysia, Indonesia and entering the Middle East into
Oman. At the beginning of 2003, the Company was awarded a new petroleum
concession, Block G9/43 and also joint-invested in Block G4/43 and
L22/43. At the end of year 2003, the Company purchased all shares of
Thai Shell Exploration and Production Company Limited which made the
Company the wholly owner and operator of Block S1, Block 6/27 and Block
L22/43. The Company also increased investment in Yetagun Project and was
awarded to be operator of Block M7&M9 in Myanmar. The Company also
entered Africa to Algeria by joint-investing with Vietnam Petroleum
Company.

4.2 Business Overview

4.2.1 Business Objective: PTTEP has the following business objectives:

(1) To carry out petroleum exploration and production for the maximum
benefit of the nation’s economy;

(2) To be the government’s vehicle in joint investment for exploration
and production both domestic and oversea with international oil
companies which help decrease the load of petroleum import; and for high
strategic related business;

(3) To be an organization with independent, flexible and efficient
management to enable it to compete efficiently with private companies;

(4) To develop its personnel to have qualifications, high capability in
petroleum exploration and production technology and necessary experience
for PTTEP’s various projects at all times;

(5) To carry out operations in the area designated by the Government;

(6) To stimulate investment in business related to petroleum exploration
and production in a manner which will yield maximum benefits to the
Kingdom.

1.  PTTEP Shareholding Structure

As at December 31, 2003, PTTEP shareholding structure comprised 8
subsidiary companies¹, 5 associated companies. Details are presented as
follows:

¹Excluding PTB Partner Co., Ltd. which is on liquidation process4.2.3
Project Investment Structure: PTTEP has 8 petroleum exploration and
production projects currently under production out of a total of 21
projects as mentioned in the Summary Information. Please see additional
details of PTTEP and its subsidiaries’ projects in Page 126

3.  

4.  Revenue Structure

The petroleum exploration and production projects which generated
revenues for PTTEP and its subsidiaries comprised 8 projects: Bongkot,
Pailin, S1, E5, Unocal III, PTTEP1, Yadana and Yetagun. In addition,
PTTEP and its subsidiaries recorded revenues proportionately from gas
pipeline transportation which MGTC and TPC rendered to Myanmar Oil and
Gas Enterprise (MOGE)

Revenue structure of PTTEP and its subsidiaries during 2001-2003

  ------------------ --------- ---------- --------- --------- --------- --------- ---------- ---------- ------- ------ ---------- ------------ ------- ------ ---------- ---------- ------- ------
                                                    % of                                     2001                                 2002                                   2003               
                                                    PTTEP                                                                         (Restated)                                                
                                                    Shares                                                                                                                                  

  Product                      Operated             2002                2003                 Revenue            %                 Revenue              %                 Revenue            %
                               by                                                            (million                             (million                               (million           
                                                                                             baht)                                baht)                                  baht)              

  Petroleum                                                                                                                                                                                 
  Exploration and                                                                                                                                                                           
  Production Segment                                                                                                                                                                        

  Crude oil                    PTTEP                -                   -                    1,898.9            6.5               1,957.1              6.2               2,169.3            5.9

                               PTTEPI               99.99               99.99                184.4              0.6               192.3                0.6               251.0              0.7

  Natural gas                  PTTEP                -                   -                    15,442.7           52.7              16,556.4             52.1              18,910.0           51.1

                               PTTEPI               99.99               99.99                5,286.7            18.1              5,893.5              18.5              6,394.0            17.3

  LPG                          PTTEP                -                   -                    282.7              1.0               246.4                0.8               260.0              0.7

  Condensate                   PTTEP                -                   -                    4,258.6            14.5              4,514.3              14.2              5,603.0            15.1

                               PTTEPI               99.99               99.99                164.2              0.6               227.0                0.7               450.2              1.2

  Share of profit              PTTEPO               75.00               75.00                -                  -                 529.9                1.7               480.4              1.3
  from investments                                                                                                                                                                          
  under equity                                                                                                                                                                              
  method                                                                                                                                                                                    

  Total                                                                                      27,518.2           94.0              30,116.9             94.8              34,517.9           93.3

                                                                                                                                                                                            

                                                    % of                                     2001                                 2002                                   2003               
                                                    PTTEP                                                                         (Restated)                                                
                                                    Shares                                                                                                                                  

  Product                      Operated             2002                2003                 Revenue            %                 Revenue              %                 Revenue            %
                               by                                                            (million                             (million                               (million           
                                                                                             baht)                                baht)                                  baht)              

  Overseas Pipeline                                                                                                                                                                         
  Segment                                                                                                                                                                                   

  Gas Pipeline                 MGTC ¹               25.50               25.50                580.7              2.0               506.0                1.6               857.2              2.3
  transportation                                                                                                                                                                            

                               TPC ¹                14.1667             19.3178              82.1               0.3               139.4                0.4               232.0              0.6

  Total                                                                                      662.8              2.3               645.4                2.0               1,089.2            2.9

  Other Segment                                                                                                                                                                             

  Share of profit              PTTEPI               99.99               99.99                82.5               0.3               126.3                0.4               269.7              0.7
  from investments                                                                                                                                                                          
  under equity                                                                                                                                                                              
  method                                                                                                                                                                                    

  Total                                                                                      82.5               0.3               126.3                0.4               269.7              0.7

  Other revenues               PTTEP                -                   -                    323.3              1.1               349.9                1.1               1,157.8            3.1

                               PTTEPI               99.99               99.99                622.8              2.1               124.5                0.4               ( 512.1 )          ( 1.4
                                                                                                                                                                                            )

                               PTTEPO               75.00               75.00                8.4                0.0               410.3                1.3               306.3              0.8

                               PTTEPKV ¹            100.00              100.00               0.2                0.0               ( 9.6 )              ( 0.0             30.3               0.1
                                                                                                                                                       )                                    

                               PTTEPSV ¹            100.00              100.00               0.1                0.0               0.6                  0.0               18.9               0.1

                               PTTEPHV ¹            100.00              100.00               -                  -                 ( 0.1 )              ( 0.0             77.8               0.2
                                                                                                                                                       )                                    

                     PTTEPHL ¹            100.00              100.00              -                     -              ( 1.9 )                 ( 0.0 )        41.5                  0.1     

                     PTTEPME ¹            100.00              100.00              -                     -              -                       -              12.9                  0.0     

                     PTTEPAG ¹            100.00              100.00              -                     -              -                       -              ( 0.1 )               ( 0.0 ) 

                     MGTC ¹               25.50               25.50               64.1                  0.2            7.2                     0.0            3.6                   0.0     

                     TPC ¹                14.1667             19.3178             3.8                   0.0            4.1                     0.0            -                     -       

  Total                                                                           1,022.7               3.5            885.0                   2.8            1,136.9               3.1     

  รวม                                                                             29,286.2              100.0          31,773.6                100.0          37,013.7              100.0   

  ¹ Holds by PTTEPO                                                                                                                                                                         
  ------------------ --------- ---------- --------- --------- --------- --------- ---------- ---------- ------- ------ ---------- ------------ ------- ------ ---------- ---------- ------- ------

For 2003, the total revenues of PTTEP and subsidiaries amounted to Baht
37,014 million, increasing Baht 5,240 million or 16%, when compared with
Baht 31,774 million in 2002. This increase was mainly due to an increase
in sales of Baht 4,451 million or 15%, resulting from the average
petroleum price in 2003 increased to USD 20.62 per BOE when compared
with USD 18.59 per BOE in 2002, and the higher sale volumes in 2003 at
107,299 BOED compared with 101,736 BOED in 2002. The increased sale
volumes derived mainly from the higher sale volumes of natural gas from
the Pailin and Yetagun projects and the higher sale volume of condensate
from the Pailin project, while the decreased sale volume was mainly from
of the sale volumes of natural gas in the Bongkot project, and decrease
in portion of production sharing in Yadana project.

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.

PTTEP and subsidiaries realized their share of net profits from
associated companies in 2003 at Baht 750 million, consisting of
operation results from Medco Energi through New Links of Baht 480
million, and from Thai Oil Power Co., Ltd., of Baht 270 million.

4.4 Business Corporate Targets in 2003-2007

Notable aspects of PTTEP corporate targets in 2003-2007 per corporate
strategy are summarized here:

+----------------------------------+-----------------------------------+
| Quantitative Target              | Execution in 2003                 |
+----------------------------------+-----------------------------------+
| -   PTTEP had sales volume       | -   The actual sales volume       |
|     target in 2003 of 107,796    |     turned out to be 107,299 BOED |
|     BOED (Excluded Medco).       |     in 2003, slightly lower than  |
|     According to the PTTEP       |     target. The reasons for being |
|     public disclosure in March   |     lower than targeted was       |
|     2003, PTTEP forecasted sales |     because of the reduction in   |
|     volume target in 2007 of     |     cost recovery from product    |
|     149,000 BOED.                |     sharing contract in the       |
|                                  |     Yadana project and the lower  |
|                                  |     sales volume of Bongkot       |
|                                  |     project, caused by its        |
|                                  |     production reduction owing to |
|                                  |     quality concerns in the first |
|                                  |     half year. However, a         |
|                                  |     recovery soon followed in the |
|                                  |     second half year after a      |
|                                  |     successful collaborative      |
|                                  |     resolution of this issue with |
|                                  |     PTT.                          |
+----------------------------------+-----------------------------------+
| -   PTTEP aims to be an operator | -   In 2003, for projects in      |
|     with operational excellence  |     which PTTEP is the operator,  |
|     in Operation Projects. In    |     the company aims to become an |
|     addition, PTTEP aims to be   |     operator proud of its         |
|     an operator in overseas      |     Operational Excellence along  |
|     exploration projects by 2003 |     with a keen awareness of      |
|     and in overseas production   |     Health, Safety and            |
|     projects within 2010.        |     Environment (HSE) issues. Of  |
|                                  |     note, PTTEP was awarded       |
|                                  |     International Environment     |
|                                  |     Management System certificate |
|                                  |     or ISO14001 for its           |
|                                  |     operational areas, which are  |
|                                  |     the PTTEP1 project, PTTEP     |
|                                  |     Office Building, the Bongkot  |
|                                  |     field and the Songkha         |
|                                  |     Logistics Base.               |
+----------------------------------+-----------------------------------+
| -   PTTEP aims to be the company | -   PTTEP has applied Good        |
|     recognized for its           |     Corporate Governance and      |
|     international best practices |     developed an Internal Control |
|     both in organizational       |     System, including Risk        |
|     development and active       |     Management, to ensure for     |
|     health, safety and           |     implement of its plan. In     |
|     environment policy           |     2003, PTTEP in its continued  |
|     implementation.              |     effort on corporate           |
|                                  |     governance, initiated         |
|                                  |     two–year promotion campaign   |
|                                  |     formally entitled             |
|                                  |     ‘Strengthening Corporate      |
|                                  |     Governance of PTTEP. The      |
|                                  |     company had also incorporated |
|                                  |     Learning Organization and     |
|                                  |     Knowledge Management          |
|                                  |     approaches to guarantee       |
|                                  |     continued organizational      |
|                                  |     development.                  |
+----------------------------------+-----------------------------------+
| -   PTTEP aims to be the company | -   Net profit of PTTEP was       |
|     acknowledged for its         |     12,028 million baht in 2003.  |
|     World-Class Competitive      |     Its annual performance        |
|     Strengths, outstandingly     |     yielded a Return on Capital   |
|     competent and developed      |     Employed (ROCE) of 21.5%.     |
|     management and staff, growth |                                   |
|     reserves as targeted in      | -   Regarding the long term       |
|     planning, strong financial   |     Debt-to-Equity ration, the    |
|     performance and trustworthy  |     PTTEP ratio was 0.5 time.     |
|     internal and external        |                                   |
|     relationships.               |     -   All PTTEP investment      |
|                                  |         expansions have been in   |
|                                  |         line with corporate       |
|                                  |         strategy. The key         |
|                                  |         investment events in 2003 |
|                                  |         are; acquiring stakes in  |
|                                  |         the Algeria project       |
|                                  |         (Blocks 433a&416b),       |
|                                  |         investing as an operator  |
|                                  |         in the offshore           |
|                                  |         concession block M7&M9 in |
|                                  |         Myanmar, purchasing all   |
|                                  |         issued shares of capital  |
|                                  |         for Thai Shell Company    |
|                                  |         and becoming an operator  |
|                                  |         in Project S1 as well as  |
|                                  |         a whole concessionaire of |
|                                  |         blocks L22/43 and B6/27.  |
+----------------------------------+-----------------------------------+