DocumentSSHE ReportFile 35956-1 49 F BusinessOperation En

8/11/2019 DocumentSSHE ReportFile 35956-1 49 F BusinessOperation En

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Form 56-1 Year 2006

PTTEPEF.doc Part 2 Page 18

3. Business Operation of PTTEP and its subsidiaries

3.1 Products Features

PTTEP and its subsidiaries performed the petroleum exploration and production business (crude oil, natural

gas, LPG and condensate). On December 31, 2006, PTTEP has 34 petroleum exploration and production projects

and 4 investment projects as mention in item 2.2.1. The definitions of the products are as follows:

3.1.1 Petroleum

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

3.1.2 Gas Transportation Pipeline :

PTTEPO has other major investment in other companies as well such as a 25% of the

investment in Moattama Gas Transportation Company (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.


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3.2 Factors affecting the opportunity or restriction in business

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. 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, the period of production 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 as follows:

3.2.1 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. ThePetroleum 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 program, 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.

3.2.2 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 manage operations and make cash calls on all co-

venturers to finance the work program. 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.

3.2.3 Nature of Operations and Investment Decisions

Before 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


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Form 56-1 Year 2006


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 program 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 ismade 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 buyers refinery while

the sale of the condensate is made at the Floating Storage Unit (FSU) near the well-head.

3.2.4 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:(1) 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;

(2) the concessionaire, the co-concessionaire(s) and the co-venturer(s) must pay royaltywhich 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);

(3) the rate of petroleum income tax may be prescribed not less than 50% but not overthan 60% of the net interest from the petroleum business;


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Form 56-1 Year 2006


(4) interest paid cannot be deducted as expenses for income tax purposes;(5) 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 Industry 4 from B.E. 2514

to B.E. 2532 and the onshore petroleum concession issued before B.E. 2525

Thailand II 5 for all onshore petroleum concessions issued by the Ministry of Industry 4 from

B.E. 2525 to B.E. 2532

Thailand III for the petroleum concessions issued by the Ministry of Industry4 from B.E. 2533

_________________________4 Now is the Ministry of Energy5 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.


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Form 56-1 Year 2006


Details of Thailand I, II and III Terms

Term Thailand I Thailand II Thailand III

Royalty Rates 12.5% of income from

sale or disposal of

petroleum which may

be treated as tax credit

12.5% of income from

sale or disposal of

petroleum which may

be treated as tax credit

progressive rate at sliding scale

5-15%, deemed to be expenses

which could be deducted in tax

calculation

Petroleum Income

Tax

50% of net profit from

petroleum business

operation


petroleum business

operation


petroleum business operation

Special Benefits - annual benefits, andannual production

bonus

special remunerator benefitwhich may be taken as

deduction

Exploration Period 8 years with 4 year

extension

8 years with 4 year

extension

6 years with 3 year extension

Production Period not exceeding 30

years from expiry date

of exploration, with

extension not

exceeding 10 years

not exceeding 30

years from expiry date

of exploration, with

extension not

exceeding 10 years

not exceeding 20 years from

expiry date of exploration, with

extension not exceeding 10

years

Concession areas not exceeding 10,000

sq. km per exploration

block, up to 5

exploration blocks

not exceeding 10,000

sq. km per exploration

block, up to 5

exploration blocks

not exceeding 4,000 sq. km per

exploration block, up to 5

exploration blocks


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Form 56-1 Year 2006


3.2 Marketing

In 2006, PTTEP and its subsidiaries averagely sold 169,348 BOED of crude oil, natural gas, LPG

and condensate, 10.30% higher than in the previous year. Annual sales revenue amounted to 86,339

million Baht, a 30% increase from 2005.

Product Volume Value (Million Baht)

Crude Oil (MMBBL) 13 30,076

Natural Gas (MMSCF) 254,916 39,810

LPG (Metric Tons) 96,518 1,060

Condensate (MMBBL) 6.64 15,393

3.3.1 Marketing Policy and Characteristics

PTTEP has a vision and policy of supplying its products from both domestic and overseas

sources primarily to Thai domestic market. PTT is currently the major buyer for all products which, after

processing, find utilization in power plants, petrochemical industry, transportation, industries and

households (in the form of cooking gas).

(1) Natural Gas

PTTEP sells all its regionally produced natural gas to Thai domestic customers under

long-term (20-30 year) contracts. Gas from offshore Thailand is delivered through three PTT-owned

pipelines in the Gulf, while that from Myanmar goes through MGTC and TPC pipelines, in which

PTTEPO holds 25.5% and 19.3% equity interest, respectively. In addition, a couple of onshore projects,

namely E5 and Phu Horm, produce natural gas for consumption at Nam Phong power plant; S1 Project

supplies its associated gas to Lan Krabue power plant.

To guarantee revenue from gas field developments, PTTEP stipulates take-or-pay

conditions in its GSAs, which provide for minimum sales volumes each year (annual contract quantity:

ACQ) together with formulated prices. Such formulae factor in economic indices and fuel oil prices to

ensure that the gas prices reflect production costs and remain competitive with alternative fuels over the

entire contractual periods.

As regards overseas investments, PTTEP may consider selling products to a market or

a regional market closest to the point of production of commercial gas reserves if transportation to

Thailand makes no economic sense. Therefore, market characteristics vary with the countries where


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PTTEP operates. For example, PTTEP OM sells gas from Oman 44 Project to the Omani government

under the 2005 GSA, whereas the condensate and crude oil under the same project is still sold to PTT to

supply to Thailand.

In 2006, PTTEP reached the following GSAs.

On January 17, PTTEPS signed a GSA with Ratchaburi Energy Co., Ltd., forassociated gas derived from oil production at Pratu Tao-A. The expected gas sales amount is 0.4

MMSCFD for eight years and the test run is expected to begin in the second quarter of 2007. This is a

major achievement for PTTEP in using the gas by-product instead of burning it off.

On September 1, PTTEPI and joint-venture partners under Yadana Project inthe Gulf of Moattama, Myanmar (namely Total E&P Myanmar, Unocal Myanmar Offshore Co., Ltd., and

Myanmar Oil and Gas Enterprise), signed an amendment agreement to the export gas sales agreement with

PTT to raise the DCQ from 525 to 565 MMSCFD. The equity interest of PTTEPI in this project is 25.50%.

Moreover, during the year, PTTEP began production and sale of natural gas from one

project:

Phu Horm (with 20% equity). Production began in November for delivery toPTT under the GSA signed on July 19, 2005. During the initial start-up, the average production amounted

to 60 MMSCFD.

(2) Crude Oil and Condensate

PTTEP sells crude oil and condensate principally to Thai domestic buyers, with selling

prices tied to those traded in the region to reflect their market values. A major portion of the oil and

condensate is under long-term contracts, with some short-term and spot sales to capture available market

channels and expand opportunities of creating value for these products.

In 2006, PTTEP signed agreements to sell oil and condensate from the following new

projects.

On August 4, PTTEP, PTTEPS and other joint-venture partners of Phu HormProject, namely Hess (Thailand) Ltd., Apico LLC, and Exxon Mobil Exploration and Production Khorat

Inc., entered into an agreement with PTT to sell the by-product condensate. The sale began in the fourth

quarter of 2006. During the initial stage, the production rate will average 420 BPD.


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On August 26, PTTEP OM signed an agreement with PTT to sell crude oil fromOman 44 Project for one year. This is the first time PTTEP will be producing and selling crude oil from

overseas to PTT.

3.3.2 Competition

In Thailand, petroleum exploration and production is mild. Markets for natural gas and

condensate are typically secured through long-term sales agreements, while crude oil sales can be

conducted through long-term contracts, short-term contracts, or exported to spot markets. Although the

market is partially protected by long-term contracts, indigenous produced oil still holds advantages over

imports because of lower transportation costs and superior tax privileges under Petroleum Income Tax Act

B.E. 2514. And with domestic oil demand exceeding indigenous supply, competition among domestic

producers is insignificant.

As a result of the rapid rise in the domestic demand for natural gas, PTT plans to import

liquefied natural gas (LNG) from 2012 onward. LNG imports, however, are unlikely to pose serious

competition to existing producers, since gas demand is likely to outgrow the available regional supply.

Besides, because of its lower costs, piped gas is likely to compete well with LNG.

To justify overseas investments, PTTEP conducts market studies for each country of interest

in advance. Oman 44 is going to enter commercial phase in 2007, and will sell natural gas under a take-or-

pay contract to the Omani government and sell crude oil under short-term contracts. Incidentally, because

of the continually high demand from Thai refineries, Thailand is a critical market for the Oman Blend

crude oil.

3.4 Production

3.4.1 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


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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 Christmastree 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 andeffectiveness of the production

In the Gulf of Thailand, the natural gas which is produced will be sent to thenatural 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.

3.4.2 Petroleum Reserves

Reserves are those quantities of petroleum which are anticipated to be commercially

recovered from known accumulations from a given date forward. All reserve estimates involve somedegree of uncertainty. The uncertainty depends chiefly on the amount of reliable geologic and engineering

data available at the time of the estimate and the interpretation of these data. The relative degree of

uncertainty may be conveyed by placing reserves into one of two principal classifications, either proved or

unproved. Unproved reserves are less certain to be recovered than proved reserves and may be further sub-

classified as probable and possible reserves to denote progressively increasing uncertainty in their

recoverability.

(1) Proved reserves are those quantities of petroleum which, by analysis of geological

and engineering data, can be estimated with reasonable certainty to be commercially recoverable, from a


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Form 56-1 Year 2006


given date forward, from known reservoirs and under current economic conditions, operating methods, and

government regulations. Proved reserves can be categorized as developed or undeveloped.

If deterministic methods are used, the term reasonable certainty is intended to express

a high degree of confidence that the quantities will be recovered. If probabilistic methods are used, there

should be at least a 90% probability that the quantities actually recovered will equal or exceed the estimate.

(2) Unproved reserves

Probable reserves are those unproved reserves which analysis of geologicaland engineering data suggests are more likely than not to be recoverable. In this context, when

probabilistic methods are used, there should be at least a 50% probability that the quantities actually

recovered will equal or exceed the sum of estimated proved plus probable reserves.

Possible reserves are those unproved reserves which analysis of geological andengineering data suggests are less likely to be recoverable than probable reserves. In this context, when

probabilistic methods are used, there should be at least a 10% probability that the quantities actually

recovered will equal or exceed the sum of estimated proved plus probable plus possible reserves.

The Proved Reserves are reviewed annually by companys earth scientists and

reservoir engineers to ensure rigorous professional standards. The Proved Reserves are reported on a gross

basis, which includes the companys net working interest and related host countrys interest. As of

December 31, 2006, the total Proved Reserves of all PTTEP and subsidiaries projects are 156Million Stock

Tank Barrels (MMSTB) for crude oil and condensate, and 5,001 Billion Standard Cubic Feet (BSCF) for

gas. The total Proved Reserves (Consolidated Companies) in term of oil equivalent is 923 Million Barrels

(MMBOE). No reserves quantities have been recorded for the company on Blocks B, 48/95, 52/97, 16-1

Projects in offshore Vietnam, Block G4/43 in Gulf of Thailand , Myanmar M7 & M9 in Gulf of Mataban

and Blocks 433a & 416b in Algeria because no commercial arrangement has been established for thediscoveries.

3.4.3 PTTEP Petroleum Production

In 2006, the total production of PTTEP and Subsidiaries projects is 71 MMBOE or

equivalent to the production rate of approximately 194,000 Barrels of Oil Equivalent per Day (BOED),

approximately 10,000 BOED or 5% increase from last year . The production increase was mainly

attributed to the increase of petroleum production from B8/32 & 9A, Pailin, and Bongkot projects, the

initially putting on production from Phu Horm and Oman 44 project in 2006.


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3.5 Environmental Impact

For a petroleum exploration and production operation, an effective environmental management system is

developed to minimize the following potential environmental impacts: -

(1) Land use and marine organism impact from sound vibration, which is the mainenvironmental impact during seismic surveys.

(2) Water and soil contamination from discharges of drilling fluid and produced water, release ofsludge and contaminated solid wastes, and accidental spills of oil and condensate during drilling and

production activities.

(3) Air pollution from hydrocarbon releases and atmospheric emissions from gas flaring, gasventing and fuel gas combustion during drilling and production activities.

Currently, the above environmental impacts are directly under the control of the Department of

Mineral Fuel under Ministry of Energy, which 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, which issues the requirement that an environmental impact assessment must be conducted

prior to any commencement of exploration and production projects

PTTEP has clearly initiated efforts to reduce environmental impacts, and has maintained a constant

and continuous follow-up of this initiative, 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, an

environmental management system is followed in compliance with company policy, legislation and other

requirements in order to prevent pollution to environment, and to ensure improvement in 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.

(2) Study of environmental impact assessment prior to commencement 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 for operations in Thailand and overseas.

(3) Re-injection of produced water (wastewater separated from the production process) into

subsurface reservoirs to ensure no overboard discharging which might affect the environment.


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(4) Monitoring of discharged wastewater quality from the production process and the quality of

seawater, sediment, benthic fauna and fish around platform vicinity to ensure there is no exposure to health

and environmental hazards.

(5) Recovery of flare gas for electricity generator and sales.

(6) Oil Spill Equipment and response are provided to ensure environmentally sound operations

from any oil spill incident, joining the Oil Industrial Environmental Safety Group (IESG) for Tier 2 oil

spill response incident (20-1000 tonnes) and EARL/OSRL (East Asia Response Limited/ Oil Spill

Response Limited) for Tier 3 Oil Spill Response (>1000 tonnes).

(7) Provision of appropriate technology for waste disposal and treatment (e.g. Mercury

contaminated waste, oil contaminated waste) for environmental impact abatement.

(8) Promotion of Safety, Security, Health and Environmental awareness through a number of

means, e.g., training, and monthly SSHE bulletins, etc.

(9) Coordination and provision of support 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.

During the past 3 years, PTTEP strictly complied with both Thai and International legislation and

other requirements concerning Safety, Security, Health and Environment. In addition, PTTEP has been

continuously improving its 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 its operational sites as detailed below:

(1) PTTEP1 Project in the scope of Exploration and production

(2) PTTEP Building in the scope of Building management and maintenance services

(3) Bongkot Project 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 andgas operations

(5) S1 Project in the scope of Exploration and production of petroleum


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(6) Core research centre and logistics support for storage of core lab samples.

Just last year, PTTEP developed its Environmental management System to comply with

requirement of ISO 14001 version 2004, and all PTTEP operating units were certified for that standard.

For its Safety management system, PTTEP is committed to its policy to conduct its activities

without undue impact on the personnel and properties of the company and its contractors. In addition, the

Lost Time Injury Frequency Rate (The number of Lost Time Injury per 1,000,000 hours worked) for the

years 2004, 2005 and 2006 were 1.03, 0.41 and 0.31 respectively. This tendency of LTIF reduction in the

past 3 years has been reflected in the strengthened Safety, Security, Health and Environment (SSHE)

standards and measures implementation in the company management system.

In addition, last year PTTEP conducted its SSHE case program to assess the Safety, Security

Health and Environmental Risk of Bongkot Production Platform and Drilling activities. In the SSHE

Case, risks in each activities were assessed; and will further be reduced by proactive measures, so that

they are as low as reasonably practicable (ALARP).

Regarding spill incidents, spills in 2004, 2005 and 2006 were 1.30, 4.45 and 0.64 tonnes/ million

tonnes of production respectively. From these figures, it can be seen that spills in the past years have

decreased as a result of the companys continuous improvement in safety, security, occupational health and

its environment management system. 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.

Additionally, as part of its commitment to protect the environment, PTTEP has increased its

spending on environmental improvement programs by 14.7, 67.2 and 78.7 million baht in the years 2004,

2005 and 2006 respectively.

Regarding sustainable development, PTTEP is one of the companies under consideration for the

potential project on Green House Gas reduction. Although it is not mandatory for Thailand to reduce green

house gases, according to Kyoto Protocol under United Nations Framework Convention on Climate

Change (UNFCCC), PTTEP is voluntarily encouraging green house gas emission reduction in its

operations through both a Clean Development Mechanism (CDM) and the search for other opportunities

for economical projects.


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PTTEPEF doc Part 2 Page 31

Finally, PTTEPs project, the Gas Recovery Unit, was installed for green house gas emission

reduction from Bongkot platform operation and a feasibility study on CDM projects for operations in the

Bongkot concession area was also conducted to identify even more potential green house gas reduction

projects in the future.

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DocumentSSHE ReportFile 35956-1 49 F BusinessOperation En