20-F 1 d20f.htm FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005 For the fiscal year ended December 31, 2005
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 20-F

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: December 31, 2005

Commission file number: 1-10220

Repsol YPF, S.A.

(Exact name of registrant as specified in its charter)

Kingdom of Spain

(Jurisdiction of incorporation or organization)

Paseo de la Castellana, 278—280, 28046 Madrid, Spain

(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of each class

  

Name of each exchange
on which registered

Ordinary shares of Repsol YPF, S.A., par value €1.00 per share

   New York Stock Exchange*

American Depositary Shares, each representing the right to receive one ordinary share of Repsol YPF, S.A., par value €1.00 per share

   New York Stock Exchange

Series A 7.45% non-cumulative guaranteed preference shares of Repsol International Capital Limited

   New York Stock Exchange

 

* Shares are not listed for trading, but only in connection with the registration of American Depositary Shares pursuant to the requirements of the New York Stock Exchange.

The number of certain outstanding shares of each class of stock of Repsol International Capital Limited benefiting from a guarantee of Repsol YPF, S.A. at December 31, 2005 was:

 

Series A 7.45% non-cumulative guaranteed preference shares

        29,000,000

Series B floating rate quarterly non-cumulative guaranteed preference shares

   1,000,000

Series C floating rate quarterly non-cumulative guaranteed preference shares

   2,000,000

The number of outstanding shares of each class of stock of Repsol YPF, S.A. as of December 31, 2005 was:

 

Ordinary shares, par value €1.00 per share

   1,220,863,463

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act

Yes  x    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨

Indicate by check mark which financial statement item the registrant has elected to follow.

Item 17  ¨    Item 18  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ¨    No  x

 



Table of Contents

CROSS REFERENCE SHEET

The following table provides cross reference between the contents of this annual report and the requirements of Form 20-F.

 

Form 20-F Item

  

Repsol YPF 2005 Annual Report on Form 20-F

PART I

  

PART I

Item 1.

  

*                   

Item 2.

  

*                   

Item 3.

  

Item 1.          Key Information about Repsol YPF

Item 4.

  

Item 2.          Information on Repsol YPF

Item 4A.

  

Item 13F.     Unresolved Staff Comments

Item 5.

  

Item 3.          Operating and Financial Review and Prospects

Item 6.

  

Item 4.          Directors, Senior Management and Employees

Item 7.

  

Item 5.          Major Shareholders and Related Party Transactions

Item 8.

  

Item 6.          Financial Information

Item 9.

  

Item 7.          Offering and Listing

Item 10.

  

Item 8.          Additional Information

Item 11.

  

Item 9.          Quantitative and Qualitative Disclosure About Market Risk

Item 12.

  

*                   

PART II

  

PART II

Item 13.

  

Item 10.        Defaults, Dividend Arrearages and Delinquencies

Item 14.

  

Item 11.        Material Modifications to the Rights of Securities Holders and Use of Proceeds

Item 15.

  

Item 12.        Controls and Procedures

Item 16.

  

*                   

Item 16A.

  

Item 13A.    Audit Committee Financial Expert

Item 16B.

  

Item 13B.     Code of Ethics

Item 16C.

  

Item 13C.     Principal Accountant Fees and Services

Item 16D.

  

Item 13D.    Exemptions from the Listing Standards for Audit Committees

Item 16E.

  

Item 13E.     Purchases for Equity Securities by the Issuer and Affiliated Purchasers

Item 17.

  

*                   

PART III

  

PART III

Item 18.

  

Item 14.        Financial Statements

Item 19.

  

Item 15.        Exhibits


* Not applicable.


Table of Contents

Table of Contents

 

          Page

Oil and Gas Terms

   iii

Conversion Table

   iv

Presentation of Certain Information

   iv

Reserves Restatement

   v

Forward-looking Statements

   vi

References

   vi

PART I

   1

1.

  

Key Information about Repsol YPF

   1

1.1

  

Selected consolidated financial data

   1

1.2

  

Exchange rates

   3

1.3

  

Risk Factors

   3

2.

  

Information on Repsol YPF

   9

2.1

  

Repsol YPF

   9

2.2

  

Operations

   17

2.3

  

Regulation of the Petroleum Industry

   71

2.4

  

Description of Property

   91

2.5

  

Seasonality

   91

2.6

  

Risk Control Systems

   92

3.

  

Operating and Financial Review and Prospects

   94

3.1

  

Factors Affecting Repsol YPF’s Consolidated Results of Operations

   94

3.2

  

IFRS Financial Statements

   102

3.3

  

U.S. GAAP Reconciliation

   103

3.4

  

Overview of Consolidated Results of Operations

   104

3.5

  

Results of Operations by Business Segment

   107

3.6

  

Liquidity and Capital Resources

   111

3.7

  

Research and Development

   120

3.8

  

Recent Developments

   121

4.

  

Directors, Senior Management and Employees

   124

4.1

  

Directors and Officers of Repsol YPF

   124

4.2

  

Remuneration of Directors and Officers

   132

4.3

  

Share Ownership of Directors and Officers

   136

4.4

  

Employees

   137

5.

  

Major Shareholders and Related Party Transactions

   140

5.1

  

Major Shareholders of Repsol YPF and Restrictions on Certain Transactions

   140

5.2

  

Related Party Transactions

   141

5.3

  

Interest of Management in Certain Transactions

   143

6.

  

Financial Information

   143

6.1

  

Financial Information

   143

6.2

  

Legal Proceedings

   143

6.3

  

Dividends Policy

   154

7.

  

Offering and Listing

   154

7.1

  

Historical Trading Information

   154

7.2

  

Nature of the Trading Market

   157

7.3

  

Securities Market Regulation

   159

7.4

  

Trading by Subsidiaries/Affiliates

   160

7.5

  

Internal Code of Conduct for the Repsol YPF Group in respect of the Stock Markets

   160

8.

  

Additional Information

   161

8.1

  

Memorandum and Articles of Association

   161

8.2

  

Dividends

   168

 

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          Page

8.3

  

Taxation

   168

8.4

  

Available Information

   172

8.5

  

Material Contracts

   172

9.

  

Quantitative and Qualitative Disclosure About Market Risk

   173

9.1

  

Oil Price Exposure

   173

9.2

  

Foreign Currency Exposure

   176

9.3

  

Interest Rate Exposure

   180

9.4

  

Operations Linked to Evolution of Repsol YPF Share Price

   186

PART II

   188

10.

  

Defaults, Dividend Arrearages and Delinquencies

   188

11.

  

Material Modifications to the Rights of Security Holders and Use of Proceeds

   188

12.

  

Controls and Procedures

   188

13A.

  

Audit Committee Financial Expert

   189

13B.

  

Code of Ethics

   189

13C.

  

Principal Accountant Fees and Services

   189

13D.

  

Exemptions from the Listing Standards for Audit Committees

   190

13E.

  

Purchases for Equity Securities by the Issuer and Affiliated Purchasers

   190

13F.

  

Unresolved Staff Comments

   190

PART III

   191

14.

  

Financial Statements

   191

15.

  

Exhibits

   191

16.

  

Signatures

   193

 

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Oil and Gas Terms

The following terms have the meanings shown below unless the context indicates otherwise:

 

“acreage”

   The total area, expressed in acres, over which Repsol YPF has interests in exploration or production. Net acreage is Repsol YPF’s interest, expressed in acres, in the relevant exploration or production area.

“bbl”

   Barrels.

“bcf”

   Billion cubic feet.

“bcm”

   Billion cubic meters.

“boe”

   Barrels of oil equivalent.

“boe/d”

   Barrels of oil equivalent per day.

“calendar day”

   When used with respect to production or capacity, means total annual production or capacity (after taking into account scheduled plant shutdowns) divided by 365.

“condensate”

   Light hydrocarbon substances produced with natural gas which condense into liquid at normal temperatures and pressures associated with surface production equipment.

“crude oil”

   Crude oil with respect to Repsol YPF’s production and reserves includes condensate and natural gas liquids.

“distillation”

   A process by which liquids are separated or refined by vaporization followed by condensation.

“gas”

   Natural gas.

“GWh”

   Gigawatt hours.

“HP”

   Horse Power.

“hydrocarbons”

   Crude oil and natural gas.

“kbbl/d”

   Thousand barrels per day.

“kboe/d”

   Thousand barrels of oil equivalent per day.

“km”

   Kilometers.

“km2

   Square kilometers.

“liquids”

   Crude oil, condensate and natural gas liquids.

“LNG”

   Liquefied natural gas.

“LPG”

   Liquefied petroleum gas.

“mbbl”

   Million barrels.

“mboe”

   Million barrels of oil equivalent.

“mboe/d”

   Million barrels of oil equivalent per day.

“mBtu”

   Million British thermal units.

“mmcf”

   Million cubic feet.

“mmcf/d”

   Million cubic feet per day.

“mmcm/d”

   Million cubic meters per day.

“MW”

   Megawatts.

 

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“proved developed reserves”

   Proved developed oil and gas reserves are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Additional oil and gas expected to be obtained through the application of fluid injection or other improved recovery techniques for supplementing the natural forces and mechanisms of primary recovery are included as “proved developed reserves” only after testing by a pilot project or after the operation of an installed program has confirmed through production response that increased recovery will be achieved.

“proved reserves”

   Proved oil and gas reserves are the estimated quantities of crude oil, natural gas and natural gas liquids which geological and engineering data demonstrates with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, i.e. prices and costs as of the date of the estimates is made. Prices include consideration of changes in existing prices provided only by contractual arrangements, but not on escalations based upon future conditions.

“proved undeveloped reserves”

   Proved undeveloped oil and gas reserves are reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion. Reserves on undrilled acreage are limited to those drilling units offsetting productive units that are reasonably certain of production when drilled. Proved reserves for other undrilled units can be claimed only where it can be demonstrated with certainty that there is continuity of production from the existing productive formation. Under no circumstances are estimates for proved undeveloped reserves attributable to any acreage for which an application of fluid injection or other improved recovery techniques is contemplated, unless such techniques have been proved effective by actual tests in the area and in the same reservoir.

Conversion Table

1 tonne = 1,000 kilograms = 2,204 pounds

1 barrel = 42 U.S. gallons

1 tonne of oil = approximately 7.3 barrels (assuming a specific gravity of 34 degrees API (American Petroleum Institute))

1 barrel of oil equivalent = 5,615 cubic feet of gas = 1 barrel of oil, condensate or natural gas liquids

1 kilometer = 0.63 miles

1 million Btu = 252 termies

1 cubic meter of gas = 35.3147 cubic feet of gas

1 cubic meter of gas = 10 termies

1,000 acres = approximately 4 square kilometers

Presentation of Certain Information

Since January 1, 1999, Repsol YPF publishes its financial statements in euro. Until the year ended December 31, 2004, Repsol YPF prepared its financial statements in accordance with generally accepted accounting principals in Spain (Spanish GAAP). In accordance with European Union (EU) regulations, from January 1, 2005, Repsol YPF has prepared its financial statements in conformity with International Financial Reporting Standards (IFRS) as adopted by the EU. As applied to Repsol YPF, there are no material differences with IFRS as issued by the International Accounting Standards Board. The opening IFRS consolidated balance

 

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sheet was prepared as of January 1, 2004. See Note 1 to our Consolidated Financial Statements for a description of the principal differences between Spanish GAAP and IFRS as they related to Repsol YPF and for a reconciliation of our shareholders’ equity as of January 1 and December 31, 2004 and the 2004 income statement from Spanish GAAP to IFRS. IFRS differs in important respects from U.S. generally accepted accounting principles, referred to as U.S. GAAP. See Note 42 to the Consolidated Financial Statements included elsewhere in this annual report for a description of the principal differences between IFRS and U.S. GAAP as they relate to Repsol YPF and for a reconciliation of net income and total shareholders’ equity for the periods and as of the dates indicated. See also Section 3. “Operating and Financial Review and Prospects—U.S. GAAP Reconciliation.”

This annual report is prepared under the one-time accommodation provided by the SEC to allow, for a limited period, foreign private issuers that prepare financial statements in accordance with IFRS to present only one year of comparative information in their first IFRS financial statements.

Unless otherwise indicated, the information contained in this annual report reflects:

 

    for the subsidiaries whose results and balance sheet were consolidated using the global integration method at the date or for the periods indicated, 100% of the assets, liabilities and results of operations of such subsidiaries without excluding minority interests,

 

    for the subsidiaries whose results and balance sheet were consolidated using the proportional integration method, a pro rata amount of the assets, liabilities and results of operations for such subsidiaries at the date or for the periods indicated. For information regarding consolidation, see Note 2 to the Consolidated Financial Statements, and

 

    for the subsidiaries whose results were consolidated using the equity method, the amount of the financial investment in such subsidiaries corresponds to the pro rata share of the value of the assets of such subsidiaries, plus the amount, if any, of any associated goodwill and whose results of operations are included within the item “Share of results of companies accounted for using the equity method” on our consolidated income statement.

Unless otherwise indicated, where this annual report provides translations into euro of amounts denominated in or resulting from transactions effected in currencies other than the euro, the conversion has been effected at the relevant exchange rate on the effective date of the transaction for accounting purposes. All other translations into euro of amounts in currencies other than the euro in this annual report have been calculated, unless otherwise indicated, at the relevant exchange rate on December 31, 2005.

Reserves Restatement

On January 26, 2006, Repsol YPF announced that, in connection with the determination of its worldwide proved oil and gas reserves as of December 31, 2005, it would reduce its prior proved reserves estimates by 1,254 million barrels of oil equivalent. This amount represented 25% of Repsol YPF’s total proved reserves originally reported as of December 31, 2004. Repsol YPF’s Audit and Control Committee undertook an independent review of the facts and circumstances of the reduction in proved reserves with the assistance of an independent counsel, King & Spalding LLP. The Audit and Control Committee presented the final conclusions of the independent review to the Board of Directors at its meeting of June 15, 2006. This report includes restated unaudited oil and gas reserves disclosures to give effect to this reduction as of the date on which such reserves did not represent “proved reserves” under the applicable rules of the Securities and Exchange Commission. Please refer to Section 2. “Information on Repsol YPF—Operations—Exploration and Production—Oil and Gas Reserves” for an analysis of the reserves revision by country and Section 3. “Operating and Financial Review and Prospects—Recent Developments—Reserves Revisions and Independent Review” and Notes 41 and “Supplementary Information on Oil and Gas Exploration and Production Activities (Unaudited Information)” to the Consolidated Financial Statements for additional information and discussion relating to the reserves revision.

 

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Forward-looking Statements

This annual report, including any documents incorporated by reference, contains statements that Repsol YPF believes constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may include statements regarding the intent, belief or current expectations of Repsol YPF and its management, including statements with respect to trends affecting Repsol YPF’s financial condition, financial ratios, results of operations, business, strategy, geographic concentration, production volume and reserves and Repsol YPF’s plans with respect to capital expenditures, business strategy, geographic concentration, cost savings, investments and dividend payout policies. These statements are not guarantees of future performance and are subject to material risks, uncertainties, changes and other factors which may be beyond Repsol YPF’s control or may be difficult to predict. Accordingly, Repsol YPF’s future financial condition, financial ratios, results of operations, business, strategy, geographic concentration, production volumes, reserves, capital expenditures, cost savings, investments and dividend payout policies could differ materially from those expressed or implied in any such forward-looking statements. Such factors include, but are not limited to, factors described in Repsol YPF’s filings with the Securities and Exchange Commission and, in particular, those described in Section 1. “Key Information about Repsol YPF—Risk Factors” and Section 3. “Operating and Financial Review and Prospects” in this annual report. Repsol YPF does not undertake to publicly update or revise these forward-looking statements even if experience or future changes make it clear that the projected results or condition expressed or implied therein will not be realized.

References

In this annual report, references to “Repsol YPF”, “Repsol YPF Group”, “Group”, “we”, “us” and “our” refer to Repsol YPF, S.A. and its consolidated subsidiaries, unless otherwise specified.

In this annual report, references to “Consolidated Financial Statements” are to Repsol YPF’s audited consolidated balance sheets as of December 31, 2005 and 2004, Repsol YPF’s audited consolidated statements of income for the years ended December 31, 2005 and 2004 and Repsol YPF’s audited consolidated cash flow statements for the years ended December 31, 2005 and 2004.

In this annual report, references to “euro” or “€” are to the European Union euro, which is Spain’s legal currency, references to “dollars” or “$” or “US$” are to United States dollars, and references to “pesos” or “Ps.” are to Argentine pesos. A “billion” is a thousand million.

 

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PART I

 

1. Key Information about Repsol YPF

 

  1.1 Selected consolidated financial data

The following tables present selected consolidated financial data of Repsol YPF. You should read this table in conjunction with Section 3. “Operating and Financial Review and Prospects” and the Consolidated Financial Statements included elsewhere in this annual report.

The consolidated income statement data for each of the years in the two-year period ended December 31, 2005 and the consolidated balance sheet data as of December 31, 2005 and 2004 set forth below have been derived from, and are qualified in their entirety by reference to, the Consolidated Financial Statements and notes thereto included in this annual report.

The following table presents selected consolidated financial data of Repsol YPF in accordance with IFRS for the periods indicated:

 

     Year ended December 31,  
         2005                2004      
     (millions of euro, except
per share and ADS
amounts)
 

Consolidated income statement data

       

Amounts in accordance with IFRS(1):

       

Operating revenues

   51,045        40,292  

Operating income

   6,161        4,686  

Income before income taxes and minority interest

   5,556        4,193  

Net income

   3,224        2,566  

Net income attributable to shareholders of the parent

   3,120        2,414  

Net income attributable to minority interests

   104        152  

Net income per ADS or share(2)(3)

   2.56        1.98  

Weighted average shares outstanding (millions)(3)

   1,221        1,221  

Consolidated balance sheet data

       

Amounts in accordance with IFRS(1):

       

Property, plant and equipment, net

   23,304        20,303  

Total current assets

   14,305        11,780  

Total assets

   45,782        39,693  

Long-term debt

   6,236        7,333  

Preference shares

   3,485        3,386  

Short-term debt

   2,701        3,142  

Shareholders’ Equity

   16,790        13,230  

Equity attributable to shareholders of the parent

   16,262        12,806  

Equity attributable to minority interests

   528        424  

Capital stock

   1,221        1,221  

Other consolidated data

       

Amounts in accordance with IFRS(1):

       

Cash flow from operating activities

   6,056        4,314  

Cash flow from investing activities

   (3,132 )      (3,486 )

Cash flow from financing activities

   (3,665 )      (2,198 )

Dividends per ADS or share(2)(3):

   0.60        0.50  

 

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In reading Repsol YPF’s financial information provided above, you should be aware of all of the following information:

 

(1) As applied to Repsol YPF, there are no material differences between IFRS as adopted by the EU and IFRS as issued by the International Accounting Standards Board. Therefore, no additional items relating to IFRS as issued by the International Accounting Standards Board are disclosed.
(2) Based on the average number of shares outstanding during such year, which, from 2001 to 2005, was 1,220,863,463 shares.
(3) Each Repsol YPF ADS represents one share.

The following table presents selected consolidated financial data of Repsol YPF in accordance with U.S. GAAP for the periods indicated:

 

     Year ended December 31,
     2005    2004    2003    2002    2001
     (millions of euro, except per share and ADS
amounts)

Amounts in accordance with US GAAP(1):

              

Consolidated income statement data

              

Revenues(2)

   45,981    37,462    33,600    33,054    41,075

Net income

   2,861    1,943    1,921    1,286    980

Net income per ADS or shares(3)(4)

   2.33    1.60    1.57    1.05    0.80

Consolidated balance sheet data

              

Total assets

   39,884    36,440    36,920    37,230    51,613

Long-term debt (including preference shares)(5)

   8,146    8,677    5,962    8,137    13,140

Shareholders’ equity

   17,612    14,190    13,180    12,947    13,717

 


In reading Repsol YPF’s financial information provided above, you should be aware of all of the following information:

 

(1) The principal differences between IFRS and U.S. GAAP are explained below under Section 3. “Operating and Financial Review and Prospects—U.S. GAAP Reconciliation” and in Note 42 to the Consolidated Financial Statements.
(2) These amounts were adjusted compared to those presented in previous years. The details of such adjustment are as follows:

 

     Year ended December 31,
     2004    2003    2002
     (millions of euro)

Amounts in accordance with US GAAP:

        

As previously presented

   31,929    27,974    27,522

Adjustment

   5,533    5,626    5,532

As presented

   37,462    33,600    33,054

Under IFRS, Repsol YPF reflects excise and similar taxes on oil and gas production and/or sales as both expenses and income. This gave rise to an increase in expenses of €5,636 million in 2005 which was recognized under the heading “Other Expenses”, and to a similar increase in income, which was recognized under the heading “Sales” in the income statement of the Consolidated Financial Statements (see Notes 3.23 and 29 to the Consolidated Financial Statements included elsewhere in this annual report).

Under U.S. GAAP, in previous years, Repsol YPF reported these revenues on a net basis. Since U.S. GAAP allows for various ways of reporting these revenues, in accordance with the accounting policies applied under IFRS, Repsol YPF has now concluded that it will no longer reconcile this difference between IFRS and U.S. GAAP.

 

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(3) Information for all years is calculated based on the average number of shares outstanding during such year, which, from 2001 to 2005, was 1,220,863,463 shares.
(4) Each Repsol YPF ADS represents one share.
(5) The difference between long-term debt (including preference shares) under IFRS and U.S. GAAP corresponds mainly to the consolidation by the equity method under U.S. GAAP of certain of Repsol YPF’s subsidiaries which are consolidated by the proportional integration method under IFRS. See Section 3. “Operating and Financial Review and Prospects—U.S. GAAP Reconciliation—Classification Differences and Other.”

 

  1.2 Exchange rates

The following tables set forth, for the periods and dates indicated, information concerning the noon buying rate in New York City as certified for customs purposes by the Federal Reserve Bank of New York buying rate for cable transfers in U.S. dollars, per €1.00.

 

Year ended December 31,

   Period End    Average    High    Low
     (U.S. dollar per euro)

2001

   0.8901    0.8952    0.9535    0.8370

2002

   1.0485    0.9454    1.0485    0.8594

2003

   1.2597    1.1411    1.2597    1.0361

2004

   1.3538    1.2478    1.3625    1.1801

2005

   1.1842    1.2400    1.3476    1.1667

 

Month

   Period End    High    Low
     (U.S. dollar per euro)

January 2006

   1.2158    1.2287    1.1980

February 2006

   1.1925    1.2092    1.1860

March 2006

   1.2139    1.2197    1.1886

April 2006

   1.2624    1.2624    1.2091

May 2006

   1.2833    1.2888    1.2607

June 2006

   1.2779    1.2953    1.2522

July 2006 (through July 13, 2006)

   1.2673    1.2822    1.2673

The “average” column in the first table above represents the average of the noon buying rates on the last day of each month during the relevant period.

The Noon Buying Rate for the U.S. dollar on July 13, 2006 was $1.2673 = €1.00.

For a discussion of Repsol YPF’s foreign currency exposure, see Section 9. “Quantitative and Qualitative Disclosure About Market Risk—Foreign Currency Exposure.”

Currency fluctuations will affect the dollar equivalent of the euro price of Repsol YPF’s shares on the Spanish stock exchanges and, as a result, are likely to affect the market price of the Repsol YPF American Depositary Shares (“ADSs”) on the New York Stock Exchange. Currency fluctuations will also affect the dollar amounts received by holders of Repsol YPF ADSs on conversion by the depositary of cash dividends paid in euro on the underlying ordinary shares.

 

  1.3 Risk Factors

 

  1.3.1 International reference crude oil prices may fluctuate due to factors beyond Repsol YPF’s control

World oil prices have fluctuated widely over the last 10 years and are subject to international supply and demand factors over which Repsol YPF has no control. Political developments throughout the world (especially

 

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in the Middle East), the evolution of stocks of oil and products, the circumstantial effects of climate increases and meteorological phenomena, such as storms and hurricanes, which have affected especially the Gulf of Mexico, the increase in demand in countries with strong economic growth, such as China and India, as well as significant conflicts, like the conflict in Iraq, political instability and the threat of terrorism from which some producing areas suffer periodically, together with the risk that the supply of crude-oil may become a political weapon, as could happen in the conflict that affects the international community with Iran or the conflict of Venezuela with the United States, can particularly affect the world oil market and oil prices. In 2005, the average international price for West Texas Intermediate (“WTI”) crude oil price was US$56.59 per barrel, compared to an average of US$27.86 per barrel for the period 1995-2005, with high and low annual averages of US$56.59 per barrel in 2005 and US$14.39 per barrel in 1998, respectively. Reductions in oil prices negatively affect Repsol YPF’s profitability, the valuation of its assets and its plans for capital investment including projected capital expenditures related to exploration and development activities. A significant reduction of capital investments may negatively affect Repsol YPF’s ability to replace oil reserves.

 

  1.3.2 Repsol YPF’s natural gas operations are subject to particular operational and market risks

Natural gas prices in the various regions in which Repsol YPF operates tend to vary from one another as a result of significantly different supply, demand and regulatory circumstances, and such prices may be lower than prevailing prices in other regions of the world. In addition, excess supply conditions that exist in some regions cannot be utilized in other regions due to a lack of infrastructure and difficulties in transporting natural gas. Because of the significance of the overall investment in infrastructures, natural gas prices in regions where Repsol YPF operates are expected to remain lower than prevailing prices for natural gas produced in regions where there is strong natural gas demand and adequate transportation networks, such as in the United States.

In addition, Repsol YPF has entered into long-term contracts to purchase and supply gas in different parts of the world. In order to supply its clients in Spain and other markets, Gas Natural SDG, in which Repsol YPF owns 30.85%, has entered into long-term contracts to purchase natural gas from Algeria and Norway, as well as long-term contracts to purchase LNG from Algeria, Nigeria, Libya, Trinidad and Tobago and Qatar. These contracts have different price formulas, which could result in higher purchase prices than the price at which such gas could be sold in increasingly liberalized markets. Also, gas availability could be subject to risks of contract fulfillment from counterparties. Thus, it might be necessary to look for other sources of natural gas in the case of non-delivery from any of these sources, which could require payment of higher prices than those called for under such contracts.

Repsol YPF also has long-term contracts to sell gas mainly to clients in Argentina, Bolivia, Brazil, Chile, Venezuela and Spain. These contracts present additional types of risks to the company as they are linked to current proved reserves in Argentina, Bolivia, Venezuela and Trinidad and Tobago. If sufficient reserves in those countries were not available, Repsol YPF might not be able to fulfill these contracts, several of which include penalty clauses for the case of non-fulfillment.

Any of the above items could materially adversely affect our business, results of operations and financial condition.

 

  1.3.3 Repsol YPF has extensive operations in Argentina

As of December 31, 2005, approximately 30.47% of Repsol YPF’s assets were located in Argentina, corresponding for the most part to exploration and production activities. Also, in 2005, approximately 36.89% of Repsol YPF’s operating income was generated from activities in Argentina.

Since the end of 2001, companies that operate in Argentina have continued to encounter difficulties as a result of the serious economic and political crisis affecting Argentina. Monetary and currency exchange control measures, including restrictions on bank deposit withdrawals and tight restrictions on transferring funds abroad,

 

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suspension of payments by Argentina on its external debt and abrogation of the peso convertibility law (and the consequent depreciation of the peso against the dollar) had a significant negative impact on the Argentine economic system, resulting in a reduction of economic activity, increasing inflation and exchange rate volatility. These conditions adversely affected the financial condition of our Argentine subsidiaries and their results of operations and may continue to impair their ability to make distributions to us.

With the improvement in the political and economic condition of the country in 2003 and 2004, the regulatory environment applicable to the energy sector, which was deeply affected by the emergency measures adopted during the crisis, began to stabilize. However, since March 2004 and, as a consequence of a shortage in the domestic supply of natural gas and continued high international oil prices, the government has adopted additional measures that modify the regulatory environment. On the one hand, the government has approved an increase in well head gas prices for industries and electricity generators; on the other hand, it has imposed limits on the export of gas to Chile and has taken additional measures, including imposing limits on the supply of gas to industrial consumers and electricity generation plants, since the government gives priority to residential consumers. The government has increased the export tax up to a maximum of 45% for crude oil and fixed it at 20% for LPG. For gasoline, it has reintroduced the export tax at 5%. Additionally, since May 28, 2004 exports of natural gas are subject to customs duties of 20%.

In the domestic oil product market, translation of relatively high domestic inflation rates (12.3% in 2005) and international oil prices into higher domestic prices has been delayed. These measures could have a negative impact on our business, financial condition and results of operation in Argentina.

As of the date of this report, Argentina had completed the restructuring of a substantial portion of its bond indebtedness in 2005 and cancelled all of its debt with the International Monetary Fund (IMF). The country is also seeking to resolve the non-restructured part of its external public debt and the claims brought before international courts by foreign companies affected during the crisis.

In addition, Repsol YPF’s Argentine subsidiary YPF, S.A. (“YPF”) is subject to the risk that the Argentine authorities impose restrictions limiting or prohibiting the export of natural gas and crude oil from Argentina. Any such export restrictions imposed on YPF, S.A. could materially and adversely affect Repsol YPF’s business and results of operations. See Section 2. “Information on Repsol YPF—Regulation of the Petroleum Industry—Market Regulation.”

Repsol YPF’s business and results of operations have been, and may continue to be, materially and adversely affected by economic, political and regulatory risks and developments in Argentina. In particular, during the past years, the energy sector and YPF have been affected by lower sales volumes, difficulties in passing through domestic inflation rates and the impact of prices of crude oil and derived products quoted in dollars to domestic prices fixed in pesos, difficulties in increasing domestic natural gas sale prices and the creation of a tax specifically targeted at the export of hydrocarbons.

The main economic risks we face because of our operations in Argentina are the following:

 

    difficulties in passing through domestic inflation rates and the movements in international prices of crude oil and exchange rates to domestic prices;

 

    difficulties in increasing local prices of natural gas for our residential customers (households);

 

    higher taxes on exports of hydrocarbons;

 

    quantitative restrictions on hydrocarbons exports;

 

    political pressure to carry out hydrocarbon import activities even if unprofitable or loss-making;

 

    higher taxes on domestic sales of fuel; and

 

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    the possibility of a reversal of the current appreciation of the Argentina peso. Additional depreciation of the peso in relation to foreign currencies may adversely affect the financial condition or results of operations of Argentine companies and the ability of Argentine companies to meet their foreign currency obligations.

 

  1.3.4 Political instability and the negative regulatory environment and outlook for the oil and gas industry in Bolivia may have a material adverse effect on our business, financial condition and results of operations.

Repsol YPF commenced operations in Bolivia in 1994, where we are currently carrying out oil and gas exploration and production activities and LPG distribution activities. During 2005, our operations in Bolivia accounted for 0.99% of our consolidated operating revenues and -0.21% of our consolidated operating income. As of December 31, 2005, the net investment at risk of our operations in Bolivia amounted to €548 million. At such date, Repsol YPF’s net proved oil and gas reserves in Bolivia were 604 million barrels of oil equivalent including the minority interest of Empresa Petrolera Andina, S.A. (“Andina, S.A.”) and 336 million barrels of oil equivalent excluding the minority interest of Andina, S.A. The latter represents 11% of Repsol YPF’s total net proved oil and gas reserves at December 31, 2005.

Since the beginning of 2005, the regulatory environment and outlook for companies that operate in the oil and gas industry in Bolivia has deteriorated. In May 2005, the National Congress of Bolivia approved a new Hydrocarbon Law that stipulated a new legal framework for, and affected various aspects of, the legal regime under which the Repsol YPF Group and all oil and gas companies had been operating, which, among others, included the imposition of an additional 32% tax on oil and gas production (IDH). The Hydrocarbon Law transfers the ownership of all hydrocarbons in the well head to the Bolivian State. In its ruling of June 2, 2006, the Bolivian Constitutional Court confirmed the constitutionality of the Hydrocarbon Law.

In December 2005, Evo Morales, the leader of the Movement to Socialism party, following an election campaign in which he discussed frequently the need for the Bolivian State to have greater involvement in the oil and gas industry, was elected president.

Supreme Decree 28.701, published on May 1, 2006, has nationalized all of Bolivia’s natural hydrocarbon resources and the Bolivian State, through Yacimientos Petrolíferos Bolivianos (“YPFB”), the Bolivian oil company, took over their commercialization for the internal market as well as their industrialization and exportation. Accordingly, the Bolivian State will take control and direction of production, transportation, refining, storage, distribution, commercialization and industrialization of all hydrocarbons in Bolivia. In addition, as many shares in Andina, S.A. as necessary for YPFB to control at least 50% plus one vote in Andina, S.A., an affiliate of Repsol YPF, were nationalized. YPFB has recently nominated its representatives and administrators for Andina S.A. representing 48% of Andina, S.A.’s share capital. This 48% interest in Andina S.A. was owned by the Bolivian citizens and was part of the Collective Capital Fund (Fondo de Capitalización Colectiva) of privatized companies (empresas capitalizadas). Supreme Decree 28.701 has transferred the ownership of this 48% interest to YPFB.

Supreme Decree 28.701 establishes that, within a period of 180 days from its publication, private companies in Bolivia must adjust their activities in Bolivia through the negotiation and execution of new agreements reflecting the new legal framework. Any company that fails to comply with this time limit will be prohibited from continuing its activities in Bolivia. Repsol YPF has indicated its willingness to negotiate with the Bolivian government, though Repsol YPF also intends to pursue all available legal rights.

To implement the Supreme Decree, the Bolivian government has established several coordination committees composed of representatives of the government and oil and gas companies. The Bolivian government has also announced that ongoing negotiations will not conclude until completion of the audit that was commissioned by the government regarding the amounts invested in the country by oil companies.

As of the date of this annual report, we cannot assure you that these developments, including the increases in taxation or royalties and the nationalization of hydrocarbon resources assets, will not have a material adverse

 

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effect on our business, financial condition and results of operations. In addition, we cannot assure you that possible future developments in Bolivia, whether or not an agreement with the Bolivian State is reached, including the full expropriation of assets or revocation of all concessions and licenses, will not lead us to cease our operations in Bolivia and/or have a material adverse effect on our business, financial condition and results of operations.

See also Section 2. “Information on Repsol YPF—Operations—Exploration and Production—Oil and Gas Reserves” for a discussion of revisions to our previously-reported reserves as of December 31, 2005, in Bolivia.

 

  1.3.5 The oil and gas industry is subject to particular operational risks, and we depend on the cost-effective acquisition or discovery of, and, thereafter, development of new oil and gas reserves

Oil and gas exploration and production activities are subject to particular risks, some of which are beyond the control of Repsol YPF. These activities are subject to production, equipment and transportation risks, natural hazards and other uncertainties including those relating to the physical characteristics of an oil or natural gas field. The operations of Repsol YPF may be curtailed, delayed or canceled as a result of weather conditions, mechanical difficulties, shortages or delays in the delivery of equipment and compliance with governmental requirements. If these risks materialize, Repsol YPF may suffer substantial losses and disruptions to its operations. These activities are also subject to the payment of royalties and taxation, which tend to be relatively higher than those payable in respect of other commercial activities.

In addition, Repsol YPF is dependent on the replacement of depleted oil and gas reserves with new proved reserves, and such replacement must be achieved in a cost-effective manner that permits subsequent production to be economically viable. Repsol YPF’s ability to acquire or discover new reserves is subject to a number of risks. For example, drilling may involve unprofitable efforts, not only with respect to dry wells, but also with respect to wells that are productive but do not produce sufficient net revenues to return a profit after drilling, operating and other costs are taken into account. In addition, crude oil and natural gas production blocks are typically auctioned by governmental authorities and Repsol YPF faces intense competition in bidding for such production blocks, in particular those blocks with the most attractive crude oil and natural gas potential reserves. Such competition may result in Repsol YPF’s failing to obtain desirable production blocks or result in Repsol YPF’s acquiring such blocks at a higher price, which would not permit subsequent production to be economically viable.

If the Repsol YPF Group fails to acquire or discover, and, thereafter, develop new oil and gas reserves on a cost-effective basis, its business, results of operations and financial condition would be materially and adversely affected.

 

  1.3.6 Repsol YPF’s operations are subject to extensive regulation

The oil industry is subject to extensive regulation and intervention by governments throughout the world in such matters as the award of exploration and production interests, the imposition of specific drilling and exploration obligations, restrictions on production, price controls, required divestments of assets and foreign currency controls over the development and nationalization, expropriation or cancellation of contract rights. Such legislation and regulations apply to virtually all aspects of Repsol YPF’s operations inside and outside Spain, and may change. In Spain, for example, the government regulates maximum price levels for bottled LPG exceeding 8 kgs as well as for the supply of piped LPG and natural gas.

In addition, the terms and conditions of the agreements under which Repsol YPF’s oil and gas interests are held generally reflect negotiations with governmental authorities and vary significantly by country and even by field within a country. These agreements generally take the form of licenses or production sharing agreements. Under license agreements, the license holder provides financing and bears the risk of the exploration and production activities in exchange for resulting production, if any. Part of the production may have to be sold to

 

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the state or the state-owned oil company. License holders are generally required to pay royalties and income tax. Production sharing agreements generally require the contractor to finance exploration and production activities in exchange for the recovery of its costs from part of production (cost oil), and the remainder of production (profit oil) is shared with the state-owned oil company.

Repsol YPF has operations in many countries throughout the world, including Iran. U.S. legislation, such as the Iran Sanctions Act of 1996, as amended and extended by the ILSA Extension Act of 2001 (the “Sanctions Act”), may impact Repsol YPF’s operations in Iran. For example, the Sanctions Act requires the President of the United States to impose two or more of certain enumerated sanctions under certain circumstances on companies which engage in trade with or investment activities in Iran. These sanctions include, among others:

 

    prohibitions on loans from U.S. financial institutions, contracts with the U.S. government, and exports of certain U.S. technology, and

 

    additional sanctions, as appropriate, to restrict imports from sanctioned persons.

Repsol YPF cannot predict changes in U.S. legislation or interpretations of, or the implementation policy of the U.S. government with respect to, U.S. legislation, including the Sanctions Act.

 

  1.3.7 Repsol YPF is subject to extensive environmental regulations and risks

Repsol YPF is subject to extensive environmental laws and regulations in almost all the countries in which it operates, which regulate, among other matters affecting Repsol YPF’s operations, environmental quality standards for products, air emissions and climate change, water discharges, remediation of soil pollution and the generation, handling, storage, transportation, treatment and disposal of waste materials. These laws and regulations have had and will continue to have a substantial impact on Repsol YPF’s operations. Repsol YPF’s operations are subject to certain environmental risks that are inherent in the oil and gas industry and which may arise unexpectedly and result in material adverse effects on Repsol YPF’s business, financial condition and results of operations.

 

  1.3.8 Most of Repsol YPF’s reserves are located in developing countries

Substantial portions of Repsol YPF’s hydrocarbons reserves are located in countries outside the EU, certain of which may be politically or economically less stable than EU countries. At December 31, 2005, 95.3% of Repsol YPF’s net proved hydrocarbons reserves were located in Latin America and 4.3% in North Africa and the Middle East. See Section 2. “Information on Repsol YPF—Operations—Exploration and Production—Oil and Gas Reserves.” Reserves in developing countries as well as related production operations may be subject to risks, including increases in taxes and royalties, the establishment of limits on production and export volumes, the compulsory renegotiation of contracts, the nationalization or denationalization of assets, changes in local government regimes and policies, changes in business customs and practices, payment delays, currency exchange restrictions and losses and impairment of operations by actions of insurgent groups. See Section 2. “Information on Repsol YPF—Operations—Exploration and Production.” In addition, political changes may lead to changes in the business environment in which Repsol YPF operates. Economic downturns, political instability or civil disturbances may disrupt distribution logistics or limit sales in the markets affected.

 

  1.3.9 Exchange rates may fluctuate due to factors beyond Repsol YPF’s control

Repsol YPF faces exchange rate risk because the revenues and cash receipts it receives from sales of crude oil, natural gas and refined products are generally denominated in U.S. dollars or influenced by the U.S. dollar exchange rate, while a significant portion of Repsol YPF’s expenses are denominated in the local currency of the countries where it operates, principally the euro and the Argentine peso. While an increase in the value of the U.S. dollar against these currencies tends to increase Repsol YPF’s net income, such an increase would also increase the value of Repsol YPF’s debt as the majority of its debt is denominated in U.S. dollars (either directly

 

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or synthetically through currency forward contracts). By contrast, a decrease in the value of the U.S. dollar against these currencies tends to decrease Repsol YPF’s net income and reduce the value of its debt. In addition, Repsol YPF publishes its financial statements in euro by translating assets and liabilities expressed in currencies other than euro at period-end exchange rates and revenues and expenses expressed in currencies other than the euro at average exchange rates for the period. Fluctuations in the exchange rates used to translate these currencies into euro could have a material adverse effect on Repsol YPF’s financial statements expressed in euro.

 

  1.3.10 Conditions in the petrochemicals industry are cyclical and may change due to factors beyond Repsol YPF’s control

The petrochemicals industry is subject to wide fluctuations in supply and demand reflecting the cyclical nature of the chemicals market at regional and global levels. These fluctuations affect prices and profitability for petrochemicals companies, including Repsol YPF. Repsol YPF’s petrochemicals business is also subject to extensive governmental regulation and intervention in such matters as safety and environmental controls.

 

2. Information on Repsol YPF

 

  2.1 Repsol YPF

 

  2.1.1 Overview

Repsol YPF is a limited liability company (sociedad anónima) duly organized on November 12, 1986 and existing under the laws of the Kingdom of Spain. The address of Repsol YPF is Paseo de la Castellana 278-280, 28046 Madrid, Spain and its telephone number is 011-34-91-348-8000.

Repsol YPF is an integrated oil and gas company engaged in all aspects of the petroleum business, including exploration, development and production of crude oil and natural gas, transportation of petroleum products, LPG and natural gas, petroleum refining, petrochemical production and marketing of petroleum products, petroleum derivatives, petrochemicals, LPG and natural gas.

Repsol YPF began operations in October 1987 as part of a reorganization of the oil and gas businesses then owned by Instituto Nacional de Hidrocarburos, a Spanish government agency which acted as a holding company of government-owned oil and gas businesses. In April 1997, the Spanish government sold in a global public offering its entire remaining participation in Repsol YPF. During 1999, and as part of its international growth strategy, Repsol YPF acquired, through a series of acquisitions, YPF, a leading Argentine petroleum company and the former state oil and gas monopolist in Argentina. Since 1999, Repsol YPF has acquired additional shares of YPF and, as of December 31, 2005, Repsol YPF owned 99.04% of YPF.

On June 28, 2000, the General Meeting approved the change of the company’s name from Repsol, S.A. to Repsol YPF, S.A.

Through the acquisition of YPF, Repsol YPF sought to achieve a balance between upstream and downstream operations, position itself as a market leader in Latin America, achieve operating and capital expenditure synergies and consolidate its business scale and financial strength. As part of its integration strategy, Repsol YPF has disposed of specific assets which do not correspond to its core businesses outlined above or to its core geographic areas, which include Spain, Latin America and North Africa.

For a description of our principal capital expenditures and divestitures, see Section 3. “Operating and Financial Review and Prospects—Liquidity and Capital Resources—Capital Investments and Divestitures.”

Below is a simplified organizational chart of Repsol YPF’s significant subsidiaries and joint controlled companies as of December 31, 2005, including the country of incorporation and main activities and Repsol YPF’s ownership interest. For a complete list of Repsol YPF’s subsidiaries, see the Consolidated Financial Statements.

 

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LOGO

 

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  2.1.2 Organization of Repsol YPF

Repsol YPF engages in all aspects of the petroleum business, including exploration, development and production of crude oil and natural gas, transportation of petroleum products, LPG and natural gas, petroleum refining, petrochemical production and marketing of petroleum products, petroleum derivatives, petrochemicals, LPG and natural gas.

Repsol YPF has operations in 32 countries, the most significant of which are Spain and Argentina. Repsol YPF has a unified global corporate structure with headquarters in Madrid, Spain and Buenos Aires, Argentina. Repsol YPF manages its business as a fully-integrated organization at both the operational and organizational levels. Key functions such as strategic planning, control, finance and human resources are centrally coordinated.

In October 2004, the Board of Directors elected Antonio Brufau as Chief Executive Officer.

Until January 2005, Repsol YPF organized its business along the following areas of activities: Upstream (Exploration and Production and LNG); Downstream (Refining and Marketing, LPG and Trading); Chemicals; and Gas and Electricity. In January 2005, Repsol YPF approved an organizational structure which, under the leadership of its Chief Executive Officer, reflects the following four key goals:

 

    Orientate and move the organization closer to the markets in which Repsol YPF operates;

 

    Decentralize and accelerate the decision-making process;

 

    Make managers directly responsible for earnings; and

 

    Increase the efficiency of the business areas.

This organizational structure emphasizes Repsol YPF’s major managerial priorities—the business areas of Exploration, Production and LNG (Upstream) and Refining, Marketing, Chemicals and LPG (Downstream)—as well as its leading position in Latin America, where approximately 50% of Repsol YPF’s assets are located.

Given Argentina’s particular importance to Repsol YPF’s business, financial condition and results of operations, Repsol YPF will seek to strengthen its management and institutional presence in the country.

Consequently, this organizational structure, which simplifies Repsol YPF’s previous corporate structure, includes three strategic business areas, which report directly to the Chief Executive Officer:

 

    Business Division of Argentina, Brazil and Bolivia, which is responsible for the integrated value chain (exploration, production, refining, logistics, marketing and chemicals) in such countries. This Division consists of five business areas and the support functions necessary for integrated management of such business areas.

 

    Business Division of Upstream, which Repsol YPF believes will be its principal source of growth. This Division has direct responsibility for exploration and production (except in Argentina, Brazil and Bolivia) and midstream and marketing of LNG on a worldwide basis.

 

    Business Division of Downstream, which manages the business areas of refining, marketing and chemicals (except in Argentina, Brazil and Bolivia) and LPG and trading on a worldwide basis.

This organizational structure transfers to the business areas the functions and resources relating to planning and budgets and also includes five divisions which report directly to the Chief Executive Officer:

 

    Corporate Division of Legal and General Counsel, whose role, in addition to taking on the secretarial role with respect to the Board of Directors, also incorporates the Corporate Division of Legal Affairs and the Division of Corporate Governance Affairs. As such, activities relating to property, general services, industrial ownership, regulation and competition remain under this Division’s control.

 

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    Corporate Division of Finance and Corporate Services, which incorporates the Division of Finance responsible for financial management and development of financial information and the Corporate Division of Resources responsible for information systems, engineering, technology, contracts, insurance, environmental issues and security systems. This Division is also responsible for Repsol YPF’s tax issues.

 

    Corporate Division of Control and Corporate Development, which provides support to the Chairman and the Executive Committee and plays a key role in ensuring that the performance of the business areas is in line with Repsol YPF’s goals for efficiency and corporate responsibility. This Division is also responsible for issues relating to control, corporate strategy and development and investor relations.

 

    Corporate Division of Human Resources, which concentrates on defining Repsol YPF’s policies relating to organization, development, employee relations, planning and compensation, and provides support to the management of human resources within the business areas.

 

    Corporate Division of Communication and Head of the Chairman’s Office, which is responsible for Repsol YPF’s corporate communications, publicity, sponsorships, branding and brand name and institutional affairs.

The Divisions of Corporate Audit and Reserves Control, which operate under the Corporate Division of Finance and Corporate Services, report to the Audit Committee of the Board of Directors.

 

  2.1.3 Strategy

Repsol YPF’s Strategic Plan for the period 2005-2009, presented to analysts, institutional investors and employees on May 31, 2005, outlines Repsol YPF’s major lines of action for this period and is based upon the following five fundamental bases, which together represent a commitment towards greater profitability for the shareholder:

1. Cost Reduction

2. Transformation of the Asset Portfolio

3. Growth in Upstream and LNG

4. Optimizing the Strategic Business Areas of Argentina, Bolivia and Brazil (ABB) and Downstream

5. Financial Discipline.

Cost Reduction. Operational excellence at all levels is key to maintaining the profitability of mature business areas. Repsol YPF therefore will endeavor to optimize costs in all business areas, to improve energy efficiency, to pass corporate functions to the business areas, thereby simplifying the management process, and to improve the purchasing function and optimize logistics.

Transformation of the Asset Portfolio. A detailed review of the portfolio will be carried out to identify assets of low profitability or whose value could be higher for third parties. Dynamic management of the asset portfolio will permit Repsol YPF to concentrate investments in business sectors and geographical areas of high value and to withdraw investment from areas or sectors that are not considered strategic.

Growth in Upstream and LNG. Upstream is expected to be the driver of Repsol YPF’s growth in the period 2005-2009. Repsol YPF’s goals in this area for the period are the following:

 

    Development of profitable business opportunities and options in gas and crude oil to compensate for the maturity of the operations in Argentina.

 

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    Strengthening the assets related to Repsol YPF’s production of natural gas, in particular LNG.

 

    Development of new platforms for growth with greater profitability and a longer maturation period, which will include increased exploration in new mining territories and the search for new opportunities through agreements for the development of non-conventional petroleum and new areas.

Optimizing the Strategic Business Areas of Argentina, Bolivia and Brazil (ABB) and Downstream. Repsol YPF’s goals in this area for the period are the following:

 

    Managing assets in ABB to take advantage of synergies and efficiencies derived from the integration of the business areas and countries.

 

    Exercising discipline to control increasing costs.

 

    Searching for new areas of exploration, such as opportunities related to offshore in Argentina, Upstream in Brazil and gas reserves in Bolivia.

 

    Optimization of capital expenditures.

 

    Managing Downstream assets to maximize cash flow and maintain it at a stable and low risk state.

Financial Discipline. When setting its capital structure policy, Repsol YPF’s goals in this area for the period are the optimization of cost of capital, to have permanent access to markets and minimize Repsol YPF’s vulnerability to any type of economic shock. These goals translate into a policy that aims to achieve a financial strength level consistent with market spreads for its debt in line with the average spreads of companies rated single A or higher.

Repsol YPF’s Strategic Plan for 2005-2009 represents a renewed commitment to its shareholders, customers, employees, partners, suppliers and the public and marks the beginning of a step-by-step transformation of Repsol YPF’s management culture, which will be based on decentralization, orientation towards the markets, corporate social responsibility and the development of “best practices”.

The Strategic Business Areas of Repsol YPF will develop their strategies according to the following general lines:

Upstream: Engine of profitable growth

 

    Solid positioning in the two strategic areas in which Repsol YPF has competitive advantages: North Africa (Libya and Algeria) and the Caribbean (Trinidad and Tobago and Venezuela).

 

    Unique position in LNG in the Atlantic Rim. Attractive portfolio of LNG (Trinidad and Tobago, Algeria and Iran) and agreement with Gas Natural SDG. Leadership through integration. The agreement with Gas Natural SDG, in upstream and midstream, will be the tool used to maximize value through the integrated chain. See “—Operations—Exploration and Production—Other Activities—LNG.”

Within this program for growth in Upstream, Repsol YPF has chosen assets related to the production of natural gas, especially LNG, and particularly for the integrated projects of Gassi Touil (Algeria), for its high potential, and for Persian LNG (Iran) as a long-term option.

 

    Development of business supported by relationships with national oil companies.

Argentina, Bolivia and Brazil (ABB): An integrated, profitable business

 

    Argentina: Argentine businesses will generate a stable cash flow, particularly through the management of mature assets in upstream, where opportunities for exploration of new offshore areas will be exploited, while downstream Repsol YPF will improve the integration and efficiency of all business areas, whose structural position in ABB is very strong.

 

    Brazil: development of potential opportunities for upstream.

 

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Downstream: Leadership position in growing markets

 

    Contribution to the solid and stable growth of cash flow of Repsol YPF, based upon its leadership position in the industry at a worldwide level, and on a positive margin situation.

 

    In Refining, Repsol YPF will take advantage of its excellent position in growing markets, where its better capability for conversion will permit it to achieve margins, taking advantage of the increase in gas/oil imports.

 

    Improvement of the cycle in petrochemicals will allow Repsol YPF to enjoy competitive advantages in a profitable and integrated chemical business.

 

    The optimal competitive position of the LPG business increases its chances for integration.

The main prudent assumptions (“reference conditions”) for the business environment that management used for estimating the strategic targets were: (i) reference prices of Brent crude oil of 25 US$/bbl, (ii) natural gas reference prices of 4 US$/mBtu (Henry hub), (iii) exchange rates of 1.2 US$/€ and (iv) a tax rate of 35%.

 

  2.1.4 Economic and Operating Information

Below are summaries of operating revenues of Repsol YPF by business and geographic segment:

 

     2005     2004     05 vs. 04  
     (millions of euro)        

Operating revenue by business segment

      

Exploration and Production

   9,203     8,302     10.9 %

Refining and Marketing

   41,298     32,815     25.9  

Chemicals

   4,186     3,025     38.4  

Gas and Electricity

   2,765     1,991     38.9  

Adjustments and Other

   (6,407 )   (5,841 )   9.7  
              
   51,045     40,292     26.7  
              

 

     2005    2004    05 vs. 04  
     (millions of euro)       

Operating revenue by geographic segment

        

Spain

   32,794    25,678    27.7 %

ABB

   9,443    8,079    16.9  

Rest of the World

   8,808    6,535    34.8  
            
   51,045    40,292    26.7  
            

 

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Below is a summary of selected operating data of Repsol YPF:

 

     2005    2004    2003

Crude oil net proved reserves(1)(2)

   1,166,660    1,581,697    1,768,036

Spain

   3,223    3,749    4,974

ABB(2)

   898,197    1,231,816    1,365,065

Rest of the World

   265,240    346,132    397,997

Gas net proved reserves(2)(3)

   12,136,643    14,342,169    15,446,696

Spain

   974    —      —  

ABB(2)

   7,698,326    9,500,318    9,970,344

Rest of the World

   4,437,342    4,841,851    5,476,352

Hydrocarbon net production(4)

   415,886    426,671    413,348

Spain

   1,259    1,373    1,481

ABB

   303,886    315,310    304,139

Rest of the World

   110,742    109,788    107,728

Refining capacity(5)(9)

   1,233    1,234    1,234

Spain

   740    740    740

ABB

   391    392    392

Rest of the World

   102    102    102

Crude oil processed(6)(9)

   55.3    54.9    53.4

Spain

   33.8    34.3    32.4

ABB

   17.4    17.1    17.1

Rest of the World

   4.2    3.5    3.9

Number of service stations(7)

   6,853    6,913    6,614

Spain

   3,618    3,616    3,611

ABB

   2,245    2,370    2,425

Rest of the World

   990    927    578

Sales of petroleum products(8)(9)

   57,940    54,968    53,577

Spain

   33,631    33,028    31,909

ABB

   15,815    15,073    15,110

Rest of the World

   8,494    6,867    6,558

Sales of petrochemical products(8)

        

By region:

   4,644    4,104    3,968

Spain

   1,481    1,342    1,293

ABB

   1,102    909    868

Rest of the World

   2,061    1,853    1,807

By product:

   4,644    4,104    3,968

Basic

   979    420    426

Derivative

   3,665    3,684    3,542

LPG sales(8)

   3,342    3,217    3,193

Spain

   1,921    1,955    1,992

Argentina

   314    310    308

Rest of Latin America

   918    863    809

Rest of the World

   189    89    84

Natural gas sales(10)

   36.11    32.85    30.34

Spain

   23.36    20.99    20.34

America

   8.59    7.92    7.15

Rest of the World

   4.16    3.94    2.84

(1) Thousands of barrels of crude oil.
(2) As restated (at December 31, 2004 and 2003) to give effect to the reserves reduction with respect to fields in Argentina and Bolivia.

 

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(3) Millions of cubic feet of gas.
(4) Thousands of barrels of oil equivalent.
(5) Thousands of barrels per day.
(6) Millions of tonnes of oil equivalent.
(7) Information for ABB includes 50% of Refinor’s service stations.
(8) Thousands of tonnes.
(9) Information includes 50% of Refinor refinery (Argentina), 30% of REFAP refinery (Brazil) and 30.71% of Manguinhos refinery (Brazil).
(10) Billion cubic meters. Includes 100% of sales volumes reported by Gas Natural although at December 31, 2005 Repsol YPF owned 30.85% of Gas Natural and accounts for it using the proportional integration method under IFRS because, since January 1, 2002, Gas Natural reports 100% of the natural gas sales volumes of each of its consolidated subsidiaries, regardless of Gas Natural’s stake in such subsidiaries. Since 2004, natural gas sales in Spain have included LNG supplied to wholesale customers in Spain, whereas in prior years these sales were reported as “Rest of the World.” Natural gas sales for 2003 have been restated in accordance with this criterion.

 

  2.1.5 Business Environment

In 2005, global economic growth was slightly lower than in 2004. However, growth remains robust (approximately 4.8%) supported by positive growth in the United States (3.5%) and emerging markets (7.2%), with particularly high rates of GDP in Asian countries. Despite the positive environment, global oil demand (1.1 million of barrels per day in 2005) slowed down due to the persistence of high crude oil prices.

Latin America contributed to this economic growth. Argentina again outperformed other Latin American countries, registering the second consecutive year of extremely high growth (9.1%).

The Spanish economy remained buoyant compared to other European countries, growing 3.4%.

In 2005, crude oil prices remained high. The average WTI price per barrel rose US$15 to US$56.6, while the average Brent price per barrel rose US$17 to reach an average of US$55.1. Such as in 2004, this trend towards rising prices has been followed by high volatility and uncertainty.

Overall, supply side factors are the reason for this development, leading to a significant reduction of demand. Among them, the maintenance of OPEC’s surplus capacity at historically low levels and problems in refining capacity, have been important factors. In addition, although high crude oil prices have created a favorable environment for oil companies focused on Upstream to create value, oil supply increases in the non-OPEC region were lower than expected. Finally, the oil market had to cope with the physical and speculative effects of hurricanes. The loss of a considerable amount of crude oil and natural gas production from the Gulf of Mexico region (initial losses of 95% and 88% of pre-Hurricane-Katrina production levels, respectively) and significant disruptions to approximately half of the U.S. refining industry which is located in the region due to Hurricanes Katrina and Rita, have resulted in significant damages to the global oil sector (according to the U.S. Minerals Management Service, approximately 179,970 barrels per day of oil production and 935.67 million cubic feet of gas per day in the federal offshore Gulf of Mexico remained offline as of June 19, 2006.

Refining margins enjoyed another positive year. This was the result of high crude oil prices, stronger demand for lighter products in the United States and Asia, more stringent specifications worldwide, and the increases in the supply of heavier crude oil from OPEC countries.

In 2005, the exchange rate environment was relatively positive given the higher stability in the dollar/euro exchange rate.

Average international margins in the petrochemical industry in 2005 were the highest for the last five years, with theoretical world margins for basic petrochemicals in the US$700 per ton range. The margins were also high for most of the final petrochemical derived products.

 

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The natural gas sector is generally considered to have the greatest growth opportunities globally. Accordingly, LNG supply is satisfying the growing demand for natural gas in markets that are long distances away from the actual source of the demand, which poses great possibilities of growth in this sector.

Asia has historically driven the development of LNG markets. In 2000, Japan, Korea and Taiwan represented more than 70% of global LNG consumption. Whilst this figure has decreased in recent years because of new markets in the United States and the European Union, the trend could shift back towards Asia due to the fact that China and India are now LNG importers.

In addition to these emerging markets, demand for LNG in the United States and Europe is experiencing strong growth due to new combined cycle power plants and the decline in domestic production. Existing terminals in the United States and Europe are currently under expansion, and there are numerous projects for new LNG regasification facilities.

In order to meet the growing demand for LNG, there are several projects that will commence operations in the following years or that have recently commenced. New projects continue to be developed in countries such as Russia and Norway, while others in Egypt, Australia and Trinidad and Tobago recently commenced operation. These projects, together with others in Africa and the Middle East, are expected to increase the global liquefaction capacity to satisfy demand.

Prices of natural gas on an international level were higher in 2005 than in 2004, as a result of the increased prices of alternative fuels and the tensions derived from supply restrictions in some regions, such as in the United States, where the hurricane season caused production losses in the Gulf of Mexico, or the conflict between Russia and Ukraine that affected Western Europe, as well as the decline of production in some highly developed areas of the Organization of Economic Co-operation and Development (OECD).

 

  2.1.6 Development of the Business

Repsol YPF’s net income attributable to shareholders of the parent for 2005 increased by 29.2% to €3,120 million. Cash flow from operating activities was €6,056 million compared to €4,314 million in 2004. Net income per share increased from €1.98 in 2004 to €2.56 in 2005.

Operating income in 2005 was €6,161 million compared to €4,686 million in 2004.

Repsol YPF’s operating performance was the result of improvements in all its business areas, which during 2005 posted a considerable rise in operating income. Refining and marketing performed well with a 69.3% increase in operating income and record high margins. Meanwhile, in exploration and production, operating income rose by 6% to €3,246 million. Chemicals registered a 17.6% growth in operating income, bolstered in part by higher international margins in Repsol YPF’s product mix and gas power activities.

Repsol YPF’s net debt was €4,514 million at December 31, 2005, compared to €5,398 million at December 31, 2004. See Section 3. “Operating and Financial Review and Prospects—Liquidity and Capital Resources—Financial Condition” for a reconciliation of net debt to total debt and an explanation as to why Repsol YPF believes “net debt” is a useful figure for investors.

 

  2.2 Operations

 

  2.2.1 Exploration and Production

Exploration and Production (“E&P”) accounted for approximately 53% and 65% of Repsol YPF’s operating income in 2005 and 2004, respectively.

 

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E&P includes the exploration and production of crude oil and natural gas in different parts of the world. Repsol YPF’s oil and gas reserves are located in Latin America (Argentina, Bolivia, Trinidad and Tobago, Venezuela, Brazil, Ecuador, Colombia and Peru), North Africa (Libya and Algeria), the Middle East, Spain and the United States.

Repsol YPF conducts its E&P activities through YPF, Repsol Exploración, Repsol YPF Bolivia and Repsol YPF Brazil.

Repsol YPF’s other E&P activities include the liquefaction of natural gas in Trinidad and Tobago, the sale and transportation of LNG and the supply and retail sale of natural gas and natural gas liquids in Argentina.

The lifting costs were €1.97 and €1.57 per barrel of oil equivalent in 2005 and 2004, respectively.

The lifting cost ratio was calculated and based on the figures presented in the tables and in the results of operations of oil and gas production activities in the “Supplementary Information on Oil and Gas Exploration and Production Activities (unaudited information)” in the Notes to the Consolidated Financial Statements included elsewhere in this annual report.

The lifting cost ratio is calculated as the ratio of production cost (excluding royalties, local taxes, withholdings on exports of crude oil and gas from Argentina, transport and others costs) divided by annual production. For example, in 2005 this ratio was €1.97 per barrel of oil equivalent and it was calculated as the ratio between production cost of €2,356 million less royalties, local taxes and withholdings on exports of crude oil and gas from Argentina of €1,309 million and less transport and other costs of €227 million divided by annual production of 415.8 million barrels of oil equivalent.

At December 31, 2005, Repsol YPF had oil and gas exploration and production interests in 24 countries, through concessions and contractual agreements, either directly or through its subsidiaries. Repsol YPF acted as operator in 20 of those countries.

 

  2.2.1.1 Oil and Gas Reserves

Unless otherwise indicated below, Repsol YPF estimated its proved oil and gas reserves as of December 31, 2005, 2004 and 2003 in accordance with guidelines established by the Securities and Exchange Commission and accounting principles set by the Financial Accounting Standards Board. See “Supplementary Information on Oil and Gas Exploration and Production Activities (Unaudited Information)” in the Notes to the Consolidated Financial Statements. These standards require that reserve estimates be prepared under existing economic and operating conditions with no provision for price and cost escalations except by contractual arrangements.

The reserves in all the production areas were externally certified by independent engineers Gaffney, Cline & Associates (“GCA”) and DeGolyer and MacNaughton (“D&M”) over a three-year cycle (2002-2004). On January 1, 2005, a second external certification cycle began. D&M evaluated the main areas operated by Repsol YPF in the Cuyana and Neuquina basins in Argentina, all the areas in Bolivia, the Camisea field in Peru and the Mene Grande and Barrancas fields in Venezuela and GCA evaluated the main areas operated by Repsol YPF in the Golfo de San Jorge basin in Argentina, the reserves of the Loma La Lata-Sierras Blancas gas-condensate reservoir in Argentina and the San Alberto and Sábalo gas-condensate fields in Bolivia. External certifications covered 53% of Repsol YPF’s proved reserves at December 31, 2005.

 

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Repsol YPF’s estimated net proved reserves at December 31, 2005, 2004 and 2003 are summarized in the following table. These reserves are set out in the restated unaudited “Supplementary Information on Oil and Gas Exploration and Production Activities” section of the Consolidated Financial Statements, and are subject to the explanations and qualifications listed therein.

 

As restated   Total   Spain  

North

Africa and

Middle East

  Argentina  

Rest of Latin

America

  Far East  

Rest of the

World

    (thousands of barrels)
Proved developed and undeveloped net crude oil reserves (including condensate and natural gas liquids)              

Reserves at Dec. 31, 2003(1)

  1,768,036   4,974   177,371   1,207,799   372,488   5,371   34

Reserves at Dec. 31, 2004(1)

  1,581,697   3,749   151,446   1,065,530   354,643   —     6,328

Reserves at Dec. 31, 2005(2)

  1,166,660   3,223   117,166   774,282   265,666   —     6,323

(1) As restated (at December 31) to give effect to the reserves reduction with respect to fields in Argentina and Bolivia.
(2) 57.5% of reserves as of December 31, 2005 were reviewed by GCA and D&M.

 

As restated   Total   Spain  

North

Africa and

Middle East

  Argentina   Rest of Latin
America
  Far East   Rest of the
World
    (millions of cubic feet)
Proved developed and undeveloped net natural gas reserves              

Reserves at Dec. 31, 2003(1)

  15,446,696   —     310,584   6,695,495   8,391,355   44,875   4,387

Reserves at Dec. 31, 2004(1)

  14,342,169   —     240,036   5,867,076   8,226,826   —     8,232

Reserves at Dec. 31, 2005(2)

  12,136,643   974   153,669   4,771,697   7,202,500   —     7,802

(1) As restated (at December 31) to give effect to the reserves reduction with respect to fields in Argentina and Bolivia.
(2) 53.4% of reserves as of December 31, 2005 were reviewed by GCA and D&M.

 

As restated   Total   Spain  

North

Africa and

Middle East

  Argentina  

Rest of Latin

America

  Far East   Rest of the
World
    (thousands of barrels of oil equivalent)
Total proved developed and undeveloped net reserves              

Reserves at Dec, 31, 2003(1)

  4,519,006   4,974   232,684   2,400,229   1,866,941   13,363   815

Reserves at Dec. 31, 2004(1)

  4,135,956   3,749   194,195   2,110,424   1,819,795   —     7,794

Reserves at Dec. 31, 2005(2)(3)

  3,328,128   3,397   144,533   1,624,095   1,548,391   —     7,712

(1) As restated (at December 31) to give effect to the reserves reduction with respect to fields in Argentina and Bolivia.
(2) 51.2% of reserves as of December 31, 2005 were reviewed by GCA and D&M.
(3) Includes 268,626 thousand barrels of crude oil equivalent relating to the minority shareholders of Andina (Bolivia).

Net crude oil and gas proved reserves at December 31, 2005 were 3,328 million barrels of oil equivalent (35.1% crude oil, including condensate and natural gas liquids and 64.9% natural gas), a 32.4% decrease compared to net crude oil and gas proved reserves of 4,926 million barrels of oil equivalent originally reported at December 31, 2004.

 

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On January 26, 2006, Repsol YPF announced that, in connection with the determination of its worldwide proved oil and gas reserves as of December 31, 2005, it would reduce its prior proved reserve estimates by 1,254 million barrels of oil equivalent. This amount represented 25% of Repsol YPF’s total proved reserves originally reported as of December 31, 2004 (4,926 million barrels of oil equivalent). Repsol YPF’s Audit and Control Committee undertook an independent review of the facts and circumstances of the reduction of proved reserves described above and, on June 15, 2006, presented its final conclusions to the Board of Directors. According to the independent review, the process for determining reserves with respect to Repsol YPF’s fields in Bolivia and Argentina was flawed from 1999 to 2004 and Repsol YPF personnel at times failed to apply properly U.S. Securities Exchange Commission (“SEC”) criteria for reporting proved reserves.

The independent review reported that this was principally due to:

 

    Lack of proper understanding of and training on the requirements of the SEC for booking proved reserves.

 

    Undue optimism regarding the technical performance of the fields and (for Bolivia) commercialization of the gas and focus on Repsol YPF’s replacement ratio.

 

    Absence of a meaningful deliberative process for determining proved reserves and resolving disputes.

 

    Unwillingness to accept personal responsibility for reporting internally adverse facts regarding reserves and a corresponding tendency to view such issues as falling within another person’s or department’s jurisdiction. Over time, problems emerged and grew in the absence of delineation of responsibilities for booking proved reserves and in the absence of clear directives pre-2005.

This notwithstanding, no evidence was found that any personnel involved in the reporting of proved reserves were motivated by a desire to further their personal gain.

In addition to emphasizing the importance of the numerous and effective organizational changes that Repsol YPF has undertaken in 2005, which have remedied in large measure the weaknesses identified above, as well as the significant steps already undertaken regarding public awareness about Repsol YPF’s reserves, the independent review has also led to certain recommendations with the goal of continuing the process already underway. The Board of Directors has fully accepted the conclusions of the Audit and Control Committee and of its independent advisors and management is in the process of implementing these recommendations. See Section 3. “Operating and Financial Review and Prospects—Recent Developments—Reserves Revisions and Independent Review” for a detailed discussion of the independent review and its conclusions and Section 3. “Operating and Financial Review and Prospects—Factors Affecting Repsol YPF’s Consolidated Results of Operations—Critical Accounting Policies—Critical Accounting Policies relating to the Primary Financial Statements” for a discussion of certain provisions we made in our Consolidated Financial Statements as of and for the year ended December 31, 2005 relating to the reserves revision.

Based on its application of SEC criteria for reporting proved reserves, Repsol YPF has concluded that a reserves restatement should be made for Argentina with respect to years 2003 and 2004. Specifically, Repsol YPF has concluded that reported volumes at the gas-condensate reservoir of Loma La Lata—Sierras Blancas, which had originally been booked on the basis of computer reservoir simulation modeling, were not sufficiently supported by actual reservoir performance. This conclusion is attributable to recent processing of technical information available in 2003 and 2004. D&M and GCA had conducted two external evaluations of the Loma La Lata—Sierras Blancas reservoir at December 31, 2005.

With respect to the revision of proved oil and gas reserves in Bolivia, the proved reserves reported in “Supplementary Information on Oil and Gas Exploration and Production Activities (Unaudited information)” in the Consolidated Financial Statements relating to years prior to 2005 have been restated since the treatment during years 1999 to 2004 was inadequate due to a different interpretation of the commercial aspects of the exportation of gas to Brazil. Particularly, proved reserves for these periods did not take into account commercial

 

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agreements for the gas exported to Brazil other than the Gas Sales Agreement (“GSA”) between YPFB and Petrobras, and the contract to supply gas to the thermoelectric power plant at Cuiaba (Brazil). The reserves restatement in Bolivia affects mainly the giant gas-condensate fields of Sábalo and San Alberto, where D&M and GCA had conducted two external evaluations at December 31, 2005.

As consequence of proved reserves restatements in Argentina and Bolivia, the previously reported reserves for the following years have been affected:

Years prior to 2003

For Bolivia, a summary of the estimated effects on years prior to 2003 is as follows:

At December 31, 1999 (and January 1, 2000), the aggregated effect on proved reserves volumes of the reserves restatement was 188 million barrels of oil equivalent, comprising 17 million barrels of crude oil, condensate and natural gas liquids and 956 billion standard cubic feet of gas. This amounts to 4% of the total proved reserves originally stated at that date (4,698 million barrels of oil equivalent). Of the total aggregated effect 32% had been in the proved developed reserves category and 68% had been categorized as proved undeveloped reserves. Gas condensate fields in Bolivia accounted for 100% of the restated volume at that date.

At December 31, 2000 (and January 1, 2001) the aggregated effect on proved reserves volumes of the reserves restatement was 111 million barrels of oil equivalent, comprising 15 million barrels of crude oil, condensate and natural gas liquids and 542 billion standard cubic feet of gas. This amounts to 2% of the total proved reserves originally stated at that date (4,942 million barrels of oil equivalent). Of the total aggregated effect 43% had been in the proved developed reserves category and 57% had been categorized as proved undeveloped reserves. Gas condensate fields in Bolivia accounted for 100% of the restated volume at that date.

At December 31, 2001 (and January 1, 2002), the aggregated effect on proved reserves volumes of the reserves restatement was 373 million barrels of oil equivalent, comprising 36 million barrels of crude oil, condensate and natural gas liquids and 1,895 billion standard cubic feet of gas. This amounts to 7% of the total proved reserves originally stated at that date (5,606 million barrels of oil equivalent). Of the total aggregated effect, 37% had been in the proved developed reserves category and 63% had been categorized as proved undeveloped reserves. Gas condensate fields in Bolivia accounted for 100% of the restated volume at that date.

At December 31, 2002 (and January 1, 2003) the aggregated effect on proved reserves volumes of the reserves restatement was 593 million barrels of oil equivalent, comprising 65 million barrels of crude oil, condensate and natural gas liquids and 2,961 billion standard cubic feet of gas. This amounts to 11% of the total proved reserves originally stated at that date (5,261 million barrels of oil equivalent). Of the total aggregated effect 15% had been in the proved developed reserves category and 85% had been categorized as proved undeveloped reserves. Gas condensate fields in Bolivia accounted for 100% of the restated volume at that date.

Years 2003 and 2004

For Bolivia, the proved reserves restatement at December 31, 2004 and 2003 was due to not taking into account commercial agreements for the gas exported to Brazil other than the GSA and the contract to supply gas to the thermoelectric power plant at Cuiaba. For Argentina the reported volumes at the gas-condensate reservoir of Loma La Lata—Sierras Blancas, which had originally been booked on the basis of computer reservoir simulation modeling, were not sufficiently supported by actual reservoir performance. This conclusion is attributable to recent processing of technical information available in 2003 and 2004.

A summary of the estimated effects on years 2003 and 2004 is as follows:

At December 31, 2003 (and January 1, 2004), the aggregated effect on proved reserves volumes of the reserves restatement was 914 million barrels of oil equivalent, comprising 114 million barrels of crude oil, condensate and natural gas liquids and 4,495 billion standard cubic feet of gas. This amounts to 17% of the total proved reserves originally stated at that date (5,433 million barrels of oil equivalent). Of the total aggregated

 

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effect 36% had been in the proved developed reserves category and 64% had been categorized as proved undeveloped reserves. Gas condensate fields in Bolivia accounted for 63% of the restated volume at that date and the gas-condensate reservoir of Loma La Lata-Sierras Blancas accounted for the remaining 37%. The reserves restatement gave rise to an estimated reduction of $807 million in the standardized measure of discounted future net cash flow for Group. This effect represents approximately 5.7% of the total standardized measure that was originally stated at that date.

At December 31, 2004 (and January 1, 2005), the aggregated effect on proved reserves volumes of the reserves restatement was 790 million barrels of oil equivalent, comprising 101 million barrels of crude oil, condensate and natural gas liquids and 3,865 billion standard cubic feet of gas. This amounts to 16% of the total proved reserves originally stated at that date (4,926 million barrels of oil equivalent). Of the total aggregated effect 78% had been in the proved developed reserves category and 22% had been categorized as proved undeveloped reserves. Gas condensate fields in Bolivia accounted for 68% of the restated volume at that date and the gas-condensate reservoir of Loma La Lata-Sierras Blancas accounted for the remaining 32%. The reserves restatement gave rise to an estimated reduction of $510 million in the standardized measure of discounted future net cash flow for the Group. This effect represents approximately 3.4% of the total standardized measure that was originally stated at that date.

Year 2005

For year 2005 the main changes to proved reserves, after giving effect to the proved reserves restatement previously indicated for prior years, have been due to:

 

  1. Revisions of previous estimates

After Repsol YPF’s proved reserves restatement the total revisions of previous estimates as of December 31, 2004 are 464 million barrels of oil equivalent, comprising 269 million barrels of crude oil and natural gas liquids and 1,095 billion standard cubic feet of gas. This amounts to 11% of the total unaudited proved reserves as restated at that date. The principal revisions to proved reserves in 2005, country by country, are as follows:

Argentina

At December 31, 2004, Repsol YPF’s restated proved reserves in Argentina were 2,110 million barrels of oil equivalent (5,867 billion standard cubic feet of gas and 1,066 million barrels of crude oil, condensate and natural gas liquids).

The reserves of all the productive areas were certified externally by GCA over a period of three years (2002-2004). In 2005, a second period of external certifications began in which D&M evaluated the principal areas operated by Repsol YPF in the Cuyana and Neuquina basins, and GCA evaluated the principal areas operated by Repsol YPF in the Golfo de San Jorge basin; additionally, GCA certified the reserves of the giant Loma La Lata-Sierras Blancas gas-condensate reservoir. External certifications covered 68.6% of Repsol YPF’s proved reserves in Argentina at December 31, 2005.

The downward revision of the previous estimates by 256 million barrels of oil equivalent (179 million barrels of crude oil, condensate and natural gas liquids and 433 billion standard cubic feet of gas) represented 12% of Repsol YPF’s proved reserves restated in Argentina at December 31, 2004.

These negative revisions were principally due to two factors:

 

  a) Contractual revisions: reserves declared as proved in previous years based on the 10 year extension of the Concessions, established by the Law of Hydrocarbons, were reclassified as non-proved since there is no reasonable certainty at December 31, 2005 that concessions will indeed be renewed.

This entails a negative adjustment of net proved reserves of 67 million barrels of oil equivalent (63 million barrel of crude oil and 23 billion standard cubic feet of gas) of which 47% correspond to the Chihuido de la Sierra Negra area and 42% correspond to the reserve areas of the Cuyana basin.

 

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  b) Several technical revisions, such as revisions of GIIP in gas fields because of adjustments of the pressure evolution, greater decline of the primary oil production and acceleration of the water cut in oil fields, which caused a negative adjustment of 189 million barrels of oil equivalent (116 million barrels of crude oil, condensate and natural gas liquids and 410 billion standard cubic feet of gas).

The principal adjustments due to the revision of previous estimates were made to:

 

  a) The Chihuido de la Sierra Negra (CHSN)-Troncoso Inferior/Agrio+Avilé reservoir for which the new evaluation implies a negative revision of 40.2 million barrels of oil equivalent (37.8 million barrels of crude oil and 13.2 billion standard cubic feet of gas) for technical reasons relating to the production performance of the reservoir that has been adversely affected by multiple factors, including the effect of interrupted production in late 2004 and problems with the injection wells and the handling of the produced fluids, which has caused a downward deviation in short and medium-term production estimates, to which 31.6 million barrels of oil equivalent need to be added (30.4 million barrels of crude oil and 6.5 billion standard cubic feet of gas) corresponding to the 10 years contractual extension declared as proved in previous years. The total revision, taking into account both reasons, amounts to 49% of the reservoir proved reserves at December 31, 2004. The proved reserves had been certified by DeGolyer & MacNaughton at December 31, 2005.

 

  b) The Ramos/Chango Norte-Porcelana gas-condensate field, where the updated analysis of the pressure evolution by the material balance method resulted in a negative revision of the net proved reserves of 41.4 million barrels of oil equivalent (196 billion standard cubic feet of gas and 6.5 million barrels of condensate and natural gas liquids), which represent 39% of the field proved reserves at December 31, 2004. This field had been certified by Gaffney, Cline & Associates at December 31, 2004.

 

  c) The Portón/Chihuido of the Salina/Chihuido of the Salina Sur reserve area, where the net proved reserves were reduced by 21.7 million barrels of oil equivalent (78.9 billion standard cubic feet of gas and 7.7 million barrels of condensate and natural gas liquids) principally due to the volumetric adjustments of the GIIP of the gas-caps and its corresponding liquid hydrocarbons. The mentioned revision includes the adjustment of 2.3 million barrels of oil equivalent (12.5 billion standard cubic feet of gas) corresponding to the gas volumes to be produced in the El Portón area during the 10 years contractual extension declared as proved in previous years. The external reserve certification, conducted by DeGolyer & MacNaughton at December 31, 2005, confirmed that the internal estimate was reasonable.

 

  d) The Aguada Toledo-Sierra Barrosa reservoir, for which the review of the production-reinjection history, together with the evolution of the pressures of the gas-cap and its analysis by the material balance method resulted in a negative revision of 21 million barrels of oil equivalent (119 billion standard cubic feet of gas), of which 28% have been reclassified as non proved reserves. The proved reserves had been certified by DeGolyer & MacNaughton at December 31, 2005.

 

  e) The Lomas del Cuy/Los Perales reserve areas, formed by oil reservoirs, located in the western flank of the Golfo de San Jorge basin, where there has been a global negative revision of 17.3 million barrels of crude oil, 17% of the crude oil proved reserves at December 31, 2004, due to the external reserve certification conducted by Gaffney, Cline & Associates at December 31, 2005. The fundamental reason for the negative revision is the increased exponential decline used by Gaffney, Cline & Associates to estimate the proved reserves, for the primary oil recovery, of wells drilled before 2001 in Los Perales and Lomas del Cuy.

Bolivia

At December 31, 2004, Repsol YPF’s restated proved reserves in Bolivia were 772 million barrels of oil equivalent (3,619 billion standard cubic feet of gas and 128 million barrels of crude oil, condensate and natural gas liquids).

 

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At December 31, 2005, D&M certified all of Repsol YPF’s proved reserves in Bolivia. In addition, GCA certified the reserves of Repsol YPF’s main gas-condensate fields in Bolivia: San Alberto and Sábalo.

The downward revision of the previous estimates by 122 million barrels of oil equivalent (510 billion standard cubic feet of gas and 31 million barrels of crude oil, condensate and natural gas liquids) represented 16% of Repsol YPF’s proved reserves restated in Bolivia at December 31, 2004.

The downward revision is attributable to two main factors:

 

  a) Changes in the contractual framework applicable to operations in Bolivia:

The new Hydrocarbon Law, enacted in May 2005, dramatically alters the applicable tax regime and the commercial and operating environment for the oil and gas industry in Bolivia.

These changes have had a significant impact on the anticipated economics of new development, affected the commercial viability of many marginal fields, reduced the expected profitability of existing production and introduced commercial uncertainties that could affect the ability to fulfill existing supply contracts in the future.

New changes in the legal and/or contractual framework, or the possibility that the Bolivian Government will elect to receive royalties in kind in the future, instead of in cash, as it does today, may modify the figures mentioned above.

 

  b) Changes in the performance of some fields:

New volumetric calculations and the match by material balance of the brief history of production-pressures available in the gas-condensate field of San Alberto, has led to a reduction in the estimated Gas Initially In Place (GIIP) contacted by the existing wells and of the proved reserves.

The negative revisions, which result from the operating activity in 2005, and which mainly affect the condensate-gas field of Río Grande, add up to the overall revisions.

The principal adjustments due to the revisions of previous estimates were made to:

 

  a) The Yapacaní field where, mainly as a result of the new Hydrocarbon Law, the new investments, for the previously planned expansion of the gas treatment plant and the infrastructure to increase the transportation capacity of the Boomerang area pipeline, have been put in hold. This decisions have resulted in a negative revision of 55 million barrels of oil equivalent (262 billion standard cubic feet of gas and 8.2 million barrels of condensate and natural gas liquids), which represented 63% of the field restated proved reserves at December 31, 2004.

 

  b) The Río Grande field, where there was a negative revision by 53 million barrels of oil equivalent (227 billion standard cubic feet of gas and 12.5 million barrels of condensate and natural gas liquids), which represented 55% of the field restated proved reserves at December 31, 2004. The causes of that revision, which made the projects marginal, were the negative results of the wells workovers made during 2005 in the gas-condensate reservoirs of Cajones, San Telmo Wm and San Telmo X, its subsequent technical re-evaluation and the negative impact of the tax system imposed by the new Hydrocarbon Law on the profitability of new investments necessary for their development.

 

  c) The San Alberto field for which the new technical estimate, that implied a reduction of the proved GIIP estimate due to the volumetric re-evaluation that takes into account the latest geological and petrophysical review and that is in line with the dynamic estimate by material balance, has led to a negative revision of net proved reserves of 35 million barrels of oil equivalent (147 billion standard cubic feet of gas and 8.9 million barrels of condensate and gasoline) which represented 15% of the filed restated proved reserves at December 31, 2004.

Venezuela

In Venezuela, as of December 31, 2005, the proved reserves were revised downwards by 58.4 million barrels of oil equivalent. Of this revision, 50 million barrels of oil equivalent, was due to the provisional estimate

 

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of the expected impact on the proved reserves of the signed transitional agreements to replace the current operating service agreements of Mene Grande, West Guarico, Quiamare-la Ceiba and Quiriquire, with new joint ventures (“empresas mixtas”) with PDVSA. The rest of the negative revisions were due to technical adjustments.

Rest of the World

The revisions of the estimates for the rest of the world were 27.8 million barrels of oil equivalent (79 billion cubic feet of gas and 13.6 million barrels of crude oil, condensate, and natural gas liquids), amongst which stand out:

 

    Algeria, where proved reserves were revised downwards by 17.2 million barrels of oil equivalent (68% gas), of which 7.3 million barrels of oil equivalent (29 billion standard cubic feet of gas and 2.2 million barrels of condensate and natural gas liquids) were revised for contractual reasons as a result of the application of the Production Sharing Contract (PSC) in Tin Fouyé Tabankork (TFT) gas-condensate field, using oil and gas prices at the end of the year and the remainder was revised, fundamentally, for the update of the geological and simulation model of the TFT.

 

    Libya, where proved reserves were revised downwards by 10 million barrels of crude oil , of which 0.8 million barrels of crude oil was revised for contractual reasons as a result of the application of the PSC in the NC-186 Concession using the oil prices at the end of the year, and the remainder was revised for technical reasons mainly due to the update of the geological and simulation model of the A field, located in the NC-115 Concession, that incorporate the results of the development wells recently drilled.

 

2. Improved recovery

Additions of net proved reserves for improvements in the recovery were due to the Argentinean oil fields that have added 7.1 million barrels of oil equivalent (7.0 million barrels of crude oil and 0.5 billion standard cubic feet of associated gas) through water injection projects.

 

3. Extensions and discoveries

The addition of net proved reserves through extensions and discoveries was 39.7 million barrels of oil equivalent (16.7 million barrels of crude oil and condensate and 129 billion standard cubic feet of gas) of which 20.0 million were incorporated in Argentina, 12.8 million in Trinidad-Tobago, 5.9 million in Venezuela and 1.0 million in Columbia.

 

4. Sales and acquisitions

The net balance of acquisitions and sales of net proved reserves in 2005 was 25.2 million barrels of oil equivalent. The principal transactions were:

 

    In Trinidad-Tobago, with an effective date of November 1, 2005, Repsol YPF sold 30% of its ownership of the offshore oil fields in Teak, Saaman and Poui together with its Onyx gas field, which represented a reduction of net proved reserves of 19.3 million barrels of oil equivalent (14.4 million barrels of crude oil and 27.3 billion standard cubic feet of gas). Together with this transaction, also with an effective date of November 1, 2005, Repsol YPF exercised its pre-emptive right and acquired 70% of the oil fields of Teak, Samaan and Poui, incorporating 21.7 million barrels of crude oil.

 

    In Peru, with an effective date of December 13, 2005, Repsol YPF acquired 10% of Blocks 56 and 88 of the Camisea area with an incorporation of net proved developed reserves of 20.3 million barrels of oil equivalent (34 billion standard cubic feet of gas and 14.3 million barrels of condensate and natural gas liquids).

 

    In Venezuela, with an effective date of December 31, 2005, Repsol YPF acquired 25% of the Quiamare-LaCeiba area, 2.5 million barrels of oil equivalent of proved reserves, 96% of which were crude oil. Through this acquisition, Repsol YPF increased the participation in the block to 100%.

 

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Additional detail on developed and undeveloped oil-equivalent proved reserves is shown in the table below:

 

     Year End 2005   

Year End 2004

(As restated)

  

Year End 2003

(As restated)

     Developed    Undeveloped    Developed    Undeveloped    Developed    Undeveloped
     (million of barrels of oil equivalent)

Spain

   3.397    —      3.749    —      4.974    —  

North Africa and Middle East

   114.311    30.222    144.088    50.107    170.562    62.121

Argentina

   1,189.519    434.576    1,601.674    508.749    2,063.630    336.599

Rest of Latin America (1)

   842.465    705.927    1,091.688    728.107    657.570    1,209.371

Rest of the World

   0.674    7.038    0.755    7.038    1.304    12.874
                             

Total

   2,150.366    1,177.763    2,841.954    1,294.002    2,898.040    1,620.965
                             

(1) Most of the proved undeveloped reserves included in this geographic area at year end 2005 are associated with the long term sales gas contracts of Bolivia and Trinidad and Tobago.

 

  2.2.1.2 Production, acreage and drilling activities

The following table shows Repsol YPF’s net daily average production of crude oil and natural gas for 2005, 2004 and 2003:

 

    PRODUCTION BY GEOGRAPHIC AREA
    2005   2004   2003
    Liquids   Natural
Gas
    Total   Liquids   Natural
Gas
  Total   Liquids   Natural
Gas
  Total
    (kbbl/d)   (mmcf/d)     (kboe/d)   (kbbl/d)   (mmcf/d)   (kboe/d)   (kbbl/d)   (mmcf/d)   (kboe/d)

Spain

  2   6     3   4   —     4   4   —     4

North Africa and Middle East

  56   57     66   56   71   68   60   101   79

Algeria

  6   57     16   7   71   20   9   101   28

Libya

  25   —       25   21   —     21   20   —     20

Dubai

  25   —       25   27   —     27   31   —     31

Argentina

  368   1,897     706   399   1,996   755   432   1,842   760

Rest of Latin America

  105   1,454     364   109   1,292   339   98   1,074   289

Bolivia

  31   539     127   29   440   107   21   291   73

Colombia

  5   —       5   5   —     5   5   —     5

Ecuador

  15   —       15   15   —     15   10   —     10

Venezuela

  41   337     101   43   303   97   41   299   94

Trinidad and Tobago

  12   578     115   17   549   114   21   484   107

Peru

  *   * *   *   —     —     —     —     —     —  

Rest of the World

  *   2     *   *   2   *   *   4   1

United States

  *   2     *   *   2   *   *   2   *

Indonesia

  —     —       —     —     —     —     —     2   *
                                     

Total net production

  531   3,416     1,139   567   3,360   1,166   594   3,021   1,132
                                     

* Amounts less than one thousand barrels of oil or oil equivalent per day.
** Amounts less than one million standard cubic feet per day.

In 2005, the average production of hydrocarbons was 1,139,400 barrels of oil equivalent per day. This represents a decrease of 2.3% compared to production in 2004. The decrease was mainly caused by a reduction in net crude oil production, which was 6.4% lower than in the previous year, offset in part by an increase in net

 

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natural gas production. The production of gas in 2005 was 3,415 mmcf/d, which equals 608,300 barrels of oil equivalent per day. This increase took place mainly in Bolivia, Trinidad and Tobago and Venezuela. The greatest increase was in Bolivia, mainly due to the exports of natural gas to Argentina and Brazil.

The production of liquids in 2005, which amounted to 531,100 barrels per day, decreased by 6.4% compared to 2004. The decrease was mainly due to decreases of production in Argentina, Trinidad and Tobago, Dubai and Algeria. The negative effects of strikes in Argentina, as well as the effect of high crude oil prices on the production sharing contracts in Algeria, caused a decrease of 5,700 barrels of oil per day. Without such effects, the decrease in production of liquids would have been 5.3%.

Crude oil and natural gas production accounted for approximately 46.6% and 53.4%, respectively, of Repsol YPF’s total production in barrels of oil equivalent during 2005. Repsol YPF’s current estimated oil and gas net proved reserves to production ratio is 8.0. The ratio is based on total net proved reserves as of December 31, 2005 and annual net production for 2005.

The following tables show information regarding Repsol YPF’s activities as of the dates and for the periods set forth below.

Developed and undeveloped acreage

 

     Total    Spain    North
Africa and
Middle East
   Argentina    Rest of
Latin
America
   Far
East
   Rest of
the World
     (thousands of acres)

Year ended Dec. 31, 2005

                    

Developed(1)

                    

Gross(2)

   1,022    7    236    533    196    —      50

Net(3)

   547    5    32    416    93    —      —  

Undeveloped(4)

                    

Gross(2)

   14,485    24    2,774    7,152    4,531    —      5

Net(3)

   7,734    17    368    5,234    2,115    —      1

(1) Developed acreage is spaced or assignable to productive wells.
(2) The term “gross” relates to the total activity in which the Group and associated companies have an interest.
(3) The term “net” relates to the sum of the fractional interests owned by the Group companies plus the Group share of associated companies’ fractional interests.
(4) Undeveloped acreage is considered to be those acres on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and gas, regardless of whether or not such acreage contains proved reserves.

 

     Total    Spain    North
Africa and
Middle East
   Argentina    Rest of
Latin
America
   Far
East
   Rest of
the World
     (thousands of acres)

Year ended Dec. 31, 2004

                    

Developed(1)

                    

Gross(2)

   1,081    7    249    557    219    —      50

Net(3)

   584    5    35    440    104    —      —  

Undeveloped(4)

                    

Gross(2)

   14,052    24    2,766    7,128    4,129    —      5

Net(3)

   7,637    17    366    5,210    2,044    —      —  

(1) Developed acreage is spaced or assignable to productive wells.
(2) The term “gross” relates to the total activity in which the Group and associated companies have an interest.
(3) The term “net” relates to the sum of the fractional interests owned by the Group companies plus the Group share of associated companies’ fractional interests.

 

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(4) Undeveloped acreage is considered to be those acres on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and gas, regardless of whether or not such acreage contains proved reserves.

Number of productive wells

 

     Total    Spain    North
Africa and
Middle East
   Argentina    Rest of
Latin
America
   Far
East
   Rest of
the World(3)

Year ended Dec. 31, 2005

                    

Oil

                    

Gross(1)

   11,993    9    366    10,635    983    —      —  

Net(2)

   9,803    6    94    9,161    543    —      —  

Gas

                    

Gross(1)

   693    6    67    460    160    —      —  

Net(2)

   519    5    20    377    117    —      —  

(1) The term “gross” relates to the total activity in which the Group and associated companies have an interest.
(2) The term “net” relates to the sum of the fractional interests owned by the Group companies plus the Group share of associated companies fractional interests.
(3) Does not include the productive wells of Crescendo overriding royalty.

The number of wells operated (including injection wells) at year end 2005 were 12,553 gross wells and 11,893 net wells.

 

     Total    Spain    North
Africa and
Middle East
   Argentina    Rest of
Latin
America
   Far
East
   Rest of
the World(3)

Year ended Dec. 31, 2004

                    

Oil

                    

Gross(1)

   11,729    10    351    10,318    1,050    —      —  

Net(2)

   9,734    7    89    9,005    633    —      —  

Gas

                    

Gross(1)

   662    8    64    534    56    —      —  

Net(2)

   417    7    19    365    26    —      —  

(1) The term “gross” relates to the total activity in which the Group and associated companies have an interest.
(2) The term “net” relates to the sum of the fractional interests owned by the Group companies plus the Group share of associated companies fractional interests.
(3) Does not include the productive wells of Crescendo overriding royalty.

The number of wells operated (including injection wells) at year end 2004 were 12,359 gross wells and 11,719 net wells.

Number of Net Productive and Dry Wells Drilled

A. Net Productive Exploratory Wells Drilled(1)

 

     2005    2004    2003

Spain

   —      —      —  

North Africa and Middle East

   2    1    —  

Argentina

   5    7    6

Rest of Latin America

   1    2    1

Rest of the World

   —      —      —  
              

Total

   8    10    7
              

(1) The term “net” relates to the sum of the fractional interests owned by the Group companies plus the Group share of associated companies fractional interests.

 

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B. Net Dry Exploratory Wells Drilled(1)

 

     2005    2004    2003

Spain

   —      —      2

North Africa and Middle East

   3    1    —  

Argentina

   5    17    19

Rest of Latin America

   2    4    1

Rest of the World

   1    1    1
              

Total

   11    23    23
              

(1) The term “net” relates to the sum of the fractional interests owned by the Group companies plus the Group share of associated companies fractional interests.

Present Activities

Wells Drilling

 

     Year End 2005    Year End 2004
     Gross(1)    Net(2)    Gross(1)    Net(2)

Spain

   —      —      —      —  

North Africa and Middle East

   3    1    2    1

Argentina

   7    6    5    4

Rest of Latin America

   3    1    2    1

Rest of the World

   —      —      —      —  
                   

Total

   13    8    9    6
                   

(1) The term “gross” relates to the total activity in which the Group and associated companies have an interest.
(2) The term “net” relates to the sum of the fractional interests owned by the Group companies plus the Group share of associated companies fractional interests.

 

  2.2.1.3 Exploration, Development, Acquisitions and Production

Repsol YPF’s strategy is based on exploration and efficient development of the fields it operates with a focus on regions whose conditions are favorable to improving Repsol YPF’s competitive position. Such regions are primarily located in Latin America, the Caribbean and North Africa, but Repsol YPF also plans to expand to West Africa, the Middle East and other regions.

The tables below show production costs incurred by Repsol YPF and other details of Repsol YPF’s production operations in 2005, 2004 and 2003:

 

     2005    2004
     (millions of euro)

Exploration, development and acquisitions (incurred costs)

     

Exploration

   413    317

Development

   1,447    1,013

Acquisitions and other

   299    21
         

Total

   2,159    1,351
         

 

     2005    2004    2003

Exploration, development and acquisitions

        

Exploratory concession net area (in km2)

   295,266    279,721    246,962

Gross exploratory drilling tests finished

   38    50    39

Positive

   16    15    9

Discoveries and extensions(1)

   40    119    191

Acquisitions (sales), net(1)

   25    3    482

(1) Millions of barrels of oil equivalent.

 

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At December 31, 2005, Repsol YPF had mineral rights with respect to a total of 355 blocks with a net surface area of 339,970 km2 (104 of these blocks were located in Argentina and have a net surface area of 50,123 km2), which consist of 155 production blocks with a net surface area of 44,704 km2 (88 of which were located in Argentina, and have a net surface area of 25,019 km2) and 200 exploratory blocks with a net surface area of 295,266 km2 (16 of which were located in Argentina and have a net surface area of 25,103 km2).

During 2005, Repsol YPF finished a total of 38 exploratory wells, 16 of which were successful. In Argentina, 15 exploratory wells were finished, seven of which were successful, and in the rest of the world 23 were finished, nine of which were successful. Two exploratory wells were under evaluation at December 31, 2005.

As of December 31, 2005, Repsol YPF had 13 exploratory wells in progress, seven of which were located in Argentina and six in the rest of the world.

The following are the most significant activities conducted by Repsol YPF in the countries in which Repsol YPF had exploration and production interests in 2005.

Algeria

At December 31, 2005, Repsol YPF had mineral rights in 17 blocks. Eleven of these blocks are production blocks with a net surface area of 3,108 km2, and the other six are exploratory blocks with a net surface area of 19,771 km2.

Net production in Algeria in 2005 was 5.9 million barrels of oil equivalent (an average of 16.1 thousand barrels of oil equivalent per day), mainly from the TFT block (operated by Repsol YPF in conjunction with Sonatrach and Total) and, to a lesser extent, from the Issaouane block, operated by Repsol YPF. Net oil production was 2.2 million barrels, including condensate and liquids, and 20.7 billion cubic feet of natural gas. During 2005, the impact of high oil prices on production sharing contracts adversely affected the company’s net production. Net proved oil and gas reserves in Algeria at December 31, 2005 were 40.7 million barrels of oil equivalent.

During 2005, one well in block 351c-352c (Reganne Basin) was finished with a positive result (RG-5). The well was completed in September and produced a dry gas flow in three levels, one of which had 1.3 million cubic meters per day (45.9 million standard cubic feet per day), which we consider to be an exceptional result for the area.

During 2005, Repsol YPF recorded 566 km of 2D seismic and 1,122 km2 of 3D seismic in Algeria, principally in the M’ Sari Akabli block.

At the end of 2004, Repsol YPF and Gas Natural SDG signed the first integrated LNG project agreement awarded to a consortium of foreign companies in Algeria. The consortium, in which Repsol YPF holds a 60% and Gas Natural SDG a 40% stake, is carrying out an integrated exploration, production, liquefaction and LNG marketing project in the Gassi Touil Rhourde Nous-Hamra area located in the eastern part of Algeria. The project is designed to last 30 years. It will produce gas from reserves that have been discovered, explore additional hydrocarbon reserves and carry out their subsequent development and production. The related blocks are two exploratory blocks, Gassi Touil and In Amedjene 213, that have a total surface area of 8,748 km2 (net total surface area of 5,248 km2), and nine production blocks that have a total surface area of 4,211 km2 (net total surface area of 2,527 km2). These blocks were incorporated in Repsol YPF’s mining domain in 2005.

The project also involves the construction of a natural gas liquefaction plant in Arzew to market the gas from the awarded production area. The liquefaction plant will have a capacity of 5.2 billion cubic meters per year of LNG and it can be expanded in the future by the addition of a second train to optimize the project. The liquefaction plant may go into commercial operation in 2009.

 

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The effective date of the start of the project was May 2, 2005. The work performed in 2005 was in line with the planned deadlines, with emphasis on the following activities:

 

    Creation of the data bases for subsoil.

 

    Initiation of all of the subsoil studies to establish models of the deposits.

 

    On December 1, the acquisition of 3D seismic in the areas of Nezla and Rhourde Nouss began simultaneously. The proposed objective is to complete the scheduled seismic campaign, the largest in Algeria to date, in 2006.

 

    Drilling contracts were awarded to begin this activity in a massive form as of spring of 2006.

 

    In August, an agreement was reached with SONATRACH regarding the development plan of the fields. The plan favored important synergies with the installation of SONATRACH facilities in the area, and makes possible the anticipated start of gas production, especially in the area of Rhourde Nouss where 5 million of cubic meters per day of gas could be produced starting in the summer of 2008.

 

    The front end engineering and design (FEED) jobs of the gas treatment facilities of the upstream part of the project was completed in the first quarter of 2006. The engineering, procurement and construction (EPC) open book contract is predicted to be awarded for implementation of these installations before summer of 2006.

 

    In July 2005, the conceptual engineering of the LNG plant was finished, allowing for the start of the FEED jobs in August 2005, which were completed in the first quarter of 2006. The awarding of the execution contract of the LNG plant is expected in 2006, with the objective of obtaining the first load of LNG no later than November of 2009.

 

    In March 2006, Repsol YPF signed an agreement with Gas Natural and Sonatrach to constitute a joint venture that will build and operate the liquefaction plant.

On July 29, 2004, the Algerian Ministry of Energy and Mines assigned to the consortium created by Repsol YPF and Gas Natural SDG a hydrocarbon exploration block in the Gassi Chergui Ouest area. The block has a surface area of 4,831 km2 (net surface area of 2,899 km2,) and it is located in eastern Algeria, in the western part of the Berkine Basin adjacent to the Gassi Touil-Rhourde Nouss area. This block was included in Repsol YPF’s mining domain in 2005.

The interpretation of the 3D Seismic of the Issaouanne block has been completed. As a result, the location for drilling two development wells, TFR-13 and TFR-14, has been set.

In 2005, preliminary studies were made and the seismic 2D campaign was planned, which will take place in 2006 in the Gassi Chergui Ouest block. In 2006, Repsol YPF plans to start the first exploration well that will be finished in 2007. In 2007, a second well will be drilled and in 2008 Repsol YPF plans to drill the third.

Angola

At December 31, 2005, Repsol YPF had mineral rights in one exploratory block with a net surface area of 359 km2. No exploratory wells were drilled in 2005.

Argentina

At December 31, 2005, Repsol YPF had mineral rights in 104 blocks, including 16 exploratory blocks with a net surface area of 25,103 km2, and 88 production blocks located in the Neuquén, San Jorge, Austral, Cuyana and Northwest basin, with a net surface area of 25,019 km2.

Net hydrocarbon production in Argentina in 2005 was 257.6 million barrels of oil equivalent (an average of 705.8 thousand barrels of oil equivalent per day). Net crude oil production was 134.3 million barrels, including condensate and liquids, and 692.3 billion cubic feet of natural gas. The break down by area was, on average: Neuquén, 471,224 barrels of oil equivalent per day; San Jorge and Austral, 151,789 barrels of oil equivalent per day; Cuyana, 31,265 barrels of oil equivalent per day; and Northwest, 51,518 barrels of oil equivalent per day.

 

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Compared to 2004, net hydrocarbon production decreased by 7.9% in Neuquén, 4.8% in Cuyana, 4.4% in the Northwest basin and 2.9% in San Jorge and Austral.

In the Gulf of San Jorge Basin, a series of labor conflicts resulted in a negative impact on production of 1.7 million of barrels of oil equivalent and caused a delay in the drilling of 58 new wells.

In 2005, the production in the Manantiales Behr field, of which Repsol YPF owns 100%, was extremely successful. Production from this field, located in the San Jorge Gulf basin, has doubled in recent years and reached an annual production of 5.99 million barrels of oil equivalent (16,411 barrels of oil equivalent per day).

With respect to the offer of gas, Repsol YPF changed its plans in order to improve its current position. One of these changes was the new Low Temperature Separation plant (LTS) in the El Porton field to process two million cubic meters of gas and inject them in the gas transport system that connects El Porton with Loma La Lata. The investment amounts to US$65 million and Repsol YPF hopes to have the plant commissioned by next February. The other changes are low pressure projects in the Loma La Lata field, with an investment of US$50 million over the next three years, and Ramos field, with 18,000 HP in 2005 (the complete project encompasses 60,000 HP).

During 2005, the Macueta project in the Acambuco field was announced. This project consists of a gas trunk line between the Macueta field and the Piquirenda plant. Additionally, the expansion of the Piquirenda plant to process the gas coming from Macueta will be initiated. Both of these projects are expected to be operational in April 2006. The offer of gas will be increased by 1.5 million cubic meters per day.

The works continued at Rincón de los Sauces in the Neuquén basin to mitigate the natural decline that has begun since mid-1999. Work undertaken in 2005 included the repair of 82 wells, the replacement of 7,000 meters of pipelines and the drilling of nine replacement wells, with a cost of US$133 million. The development of new fields is being carried out or is planned, such as Desfiladero Bayo Este (75 wells over the period of 2005-2007), Jagüel Casa de Piedra (30 wells), Pata Mora (15 wells) and Risco Alto (10 wells over a period of three years). Another consideration is the implementation of an enhanced oil recovery (“EOR”) pilot project with gels and water alternating gas (“WAG”) in Chihuido de la Sierra Negra.

The Argentine government maintained during 2005, the tax rates for crude oil exports at 25% with a surcharge varying from 3% to 20% for West Texas Intermediate (“WTI”) crude oil prices between US$32 and US$45 per barrel, respectively, for LPG exports at 20%, for natural gas exports at 20% and for gasoline exports at 5%.

During 2005, a total of 15 exploratory wells were finished, seven of which were successful and one of which is under evaluation. Most prominent among the discoveries made in Argentina are those in Jagüel Casa de Piedra, Aguada Pichana Norte and Risco Alto, located in the Neuquén basin.

In 2005, 34 km of 2D seismic and 3,771 km2 of 3D seismic were recorded.

Bolivia

At December 31, 2005, Repsol YPF had mineral rights in 32 blocks, consisting of 7 exploratory blocks with a net surface area of 9,153 km2, and 25 production and exploration blocks with a net surface area of 2,194 km2.

Net petroleum production in Bolivia was 46.3 million barrels of oil equivalent (an average of 126.8 thousand barrels of oil equivalent per day), mainly from Andina and the Mamoré block which belongs to Repsol YPF. Net crude oil production was 11.2 million barrels, including condensate and liquids, and 196.8 billion cubic feet of natural gas. Net proved oil and gas reserves in Bolivia at December 31, 2005 were 604 million barrels of oil equivalent. Net proved reserves allocated to Andina were 537 million barrels of oil equivalent.

 

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During 2005, Repsol YPF finished one exploratory well in the Mamoré block which was unsuccessful and commenced the drilling of the exploratory well Cuevo West X2 in the Caipipendi block.

In May 2005, the National Congress of Bolivia approved a new Hydrocarbon Law that stipulated a new legal framework for, and affected various aspects of, the legal regime under which the Repsol YPF Group and all oil and gas companies had been operating, which, among others, included the imposition of an additional 32% tax on oil and gas production (IDH). The Hydrocarbon Law transfers the ownership of all hydrocarbons in the well head to the Bolivian State. In its ruling of June 2, 2006, the Bolivian Constitutional Court confirmed the constitutionality of the Hydrocarbon Law.

Supreme Decree 28.701, published on May 1, 2006, has nationalized all of Bolivia’s natural hydrocarbon resources and the Bolivian State, through Yacimientos Petrolíferos Bolivianos (“YPFB”), the Bolivian oil company, took over their commercialization for the internal market as well as their industrialization and exportation. Accordingly, the Bolivian State will take control and direction of production, transportation, refining, storage, distribution, commercialization and industrialization of all hydrocarbons in Bolivia. In addition, as many shares in Andina, S.A. as necessary for YPFB to control at least 50% plus one vote in Andina, S.A., an affiliate of Repsol YPF, were nationalized. YPFB has recently nominated its representatives and administrators for Andina S.A. representing 48% of Andina, S.A.’s share capital. This 48% interest in Andina S.A. was owned by the Bolivian citizens and was part of the Collective Capital Fund (Fondo de Capitalización Colectiva) of privatized companies (empresas capitalizadas). Supreme Decree 28.701 has transferred the ownership of this 48% interest to YPFB.

Supreme Decree 28.701 establishes that, within a period of 180 days from its publication, private companies in Bolivia must adjust their activities in Bolivia through the negotiation and execution of new agreements reflecting the new legal framework. Any company that fails to comply with this time limit will be prohibited from continuing its activities in Bolivia. Repsol YPF has indicated its willingness to negotiate with the Bolivian government, though Repsol YPF also intends to pursue all available legal rights.

See also Section 1. “Key Information about Repsol YPF—Risk Factors—Political instability and the negative regulatory environment and outlook for the oil and gas industry in Bolivia may have a material adverse effect on our business, financial condition and results of operations.”

Brazil

At December 31, 2005, Repsol YPF had mineral rights in 25 blocks located offshore, including 24 exploratory blocks with a net surface area of 6,246 km2, and one production block with a net surface area of 22 km2. Net proved reserves in Brazil at December 31, 2005 were 40.9 million barrels of oil equivalent. Proved reserves were certified by DeGolyer & MacNaughton at December 31, 2004.

Repsol YPF holds 10% of the Albacora Leste field, which is currently under development in accordance with an approved plan. A total of 21 wells were drilled until December 2005, all of them were completed and tested (12 production and nine injection wells). In addition, the vertical part was drilled to the point of entry into the field for another four wells (two production and two injection wells). Production at Albacora Leste begun in April 2006 and it is expected to reach a maximum production of 150,000 barrels of oil equivalent per day by beginning of 2007.

Repsol YPF obtained 16 new off-shore exploratory blocks in the seventh round of competitive bidding in Brazil held in October 2005. Thirteen of these blocks are located in the Santos Basin (SM-615, SM-616, SM-617, SM-670, SM-672, SM-673, SM-674, SM-675, SM-728, SM-789, SM-506, SM-619, SM-623), two are in the Espírito Santo Basin (ESM-665, ESM-737), and the sixteenth is in the Campos Basin (CM-539).

Block SM-615 has a total area of 174 km2 and the winning consortium is comprised of British Gas, who is the operator (50%), and Repsol YPF (50%). Block SM-672 has a total area of 140 km2 and the partners are British Gas, who is the operator (50%), and Repsol YPF (50%). Blocks SM-616, SM-617, SM-670, SM-673, SM-674, SM-675, SM-728, SM-789 and SM-506, have a total area of 174 km2 each and Repsol YPF is the

 

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operator (100%). Block SM-619 has a total area of 698 km2 and the partners are Petrobrás, who is the operator (60%), and Repsol YPF (40%). Block SM-623 has a total area of 698 km2 and the partners are Petrobrás, who is the operator (60%), British Gas (20%), and Repsol YPF (20%). Block ESM-665 has a total area of 707 km2 and the partners are Amerada, who is the operator (60%), and Repsol YPF (40%). Block ESM-737 has a total area of 720 km2 and Repsol YPF is the operator (100%). Block CM-539 has a total area of 708 km2 and the partners are Repsol YPF, who is the operator (50%), and Statoil (50%).

During 2005, 18,002 km of 2D seismic and 4,756 km2 of 3D seismic were purchased. Two exploratory wells drilled in blocks BM-S-7 and BM-C-5 were unsuccessful.

Colombia

At December 31, 2005, Repsol YPF had mineral rights in 11 blocks, consisting of 10 exploratory blocks with a net surface area of 6,214 km2, and one production block (Cravo Norte) with a net surface area of 17 km2.

Net petroleum production in Colombia in 2005 was 1.9 million barrels of crude oil (an average of 5.1 thousand barrels of crude oil per day), at Cravo Norte block. Net proved reserves in Colombia at December 31, 2005 were 6.7 million barrels of crude oil.

During 2005, Repsol YPF finished three exploratory wells in the Llanos Orientales basin, one of them, the exploratory Rondon B well, operated by Oxy and in which Repsol YPF has a 6.25% stake, with a positive result.

The Colombian Administration (ANH) authorized the amendments to the Cravo Norte extension contract, which provides for a participation of the government which varies depending on crude oil prices and brings forward to 2005 the Ecopetrol Carry planned for 2006. In addition, the drilling schedule was accelerated (from the 15 wells initially planned for 2005, 44 wells were scheduled). The Cravo Norte contract is managed by a joint venture in which Ecopetrol holds 50%, Occidental Andina holds 25% and Occidental de Colombia (Oxycol) holds the remaining 25% and acts as operator. Repsol YPF’s stake is 6.25% (25% of Oxycol’s 25%). According to the reached agreement, the contract will extend until it ceases being economically profitable for the operator.

Repsol YPF obtained four new exploratory blocks during the year: Arpa (12.5% Repsol YPF with a net area of 499 km2), Platanillo (35% Repsol YPF with a net area of 50 km2), Río Túa (TEA) (6.25% Repsol YPF with a net surface area of 190 km2), and Zeta (12.5% Repsol YPF with a net area of 377 km2). The Alea exploratory block was returned to the Colombian Authorities.

In 2005, 301 km2 of 3D seismic were recorded in the Capachos-San Miguel block.

Ecopetrol authorized the proposal of a six month extension of the Capachos and San Miguel contracts in order to carry out the second stage works and to decide whether or not to continue on to the third stage. The agreement implies the commitment to carry out a 150 km2 seismic campaign in the north sector of the San Miguel block. The authorization was granted by the Colombian Administration (ANH) on November 21, 2005.

Cuba

At December 31, 2005, Repsol YPF had mineral rights in one exploratory block covering seven adjacent exploratory areas (including block 35 awarded to Repsol YPF at the beginning of 2005) with a net surface area of 11,279 km2. Considering that each of them is managed under the same contract, they are listed in the official mining domain of the company as one exploratory block.

In 2005, Repsol YPF agreed with the companies Norsk Hydro (a Norwegian company) and ONGC (an Indian company) on the dilution of Repsol YPF’s participation in the exploratory block and signed a joint operation agreement (JOA). The dilution was approved by the Cuban authorities in the second quarter of 2006. The participations in the block, which will continue to be operated by Repsol, are Repsol YPF 40%, Norsk Hydro 30% and ONGC 30%.

 

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In November, a campaign for the acquisition of 3D seismic was launched. The campaign is scheduled to be completed during 2006.

During 2005, no exploratory wells were drilled.

Dubai

At December 31, 2005, Repsol YPF had mineral rights in one production block with a net surface area of 454 km2. Net crude oil production was 9.1 million barrels (an average of 25.0 thousand barrels of crude oil per day). Net proved reserves in Dubai at December 31, 2005 were 36.0 million barrels of crude oil.

No exploratory wells were drilled in 2005.

Ecuador

At December 31, 2005, Repsol YPF had mineral rights in three production blocks with a net surface area of 1,225 km2. Net petroleum production in Ecuador was 5.6 million barrels of crude oil (an average of 15.4 thousand barrels of crude oil per day), mainly from block 16. Net proved reserves in Ecuador at December 31, 2005, were 27.6 million barrels of crude oil.

Repsol YPF entered into a fifteen-year “ship or pay” agreement under which it may transport 100,000 barrels of crude oil per day through the heavy crude oil pipeline from September 2003 to September 2018.

During 2005, activities have been focused on the development of reserves in block 16 in order to reach the necessary production potential to cover the Repsol YPF quota in the heavy crude oil pipeline.

Repsol YPF is currently negotiating the expiration dates of mineral rights it holds in production blocks in Ecuador to align them with the expiration dates under the transport agreements. In 2005, Repsol YPF started negotiations with the Ecuadorian government regarding the possible extension of the contract for block 16. This will allow Repsol YPF to adjust its crude oil production to the contracted crude oil transportation capacity. The heavy crude oil pipeline continued operating normally in 2005 and approximately 157,000 barrels of crude oil per day were transported through it. Its maximum transport capacity is 450,000 barrels per day.

During 2005, no exploratory well was finished. In December 2005, the drilling of the Zaparo well in block 16 was started. The well was completed in the first quarter of 2006. The final results indicate that the amount of oil found is not commercial.

In block 14, drilling works to increase production in the block have been delayed compared to the original plans because the operator Encana sold its stake in the block in 2005. In 2005, 284 km2 of seismic 3D and 77 km of seismic 2D were registered in block 14.

In the second quarter of 2006, Repsol YPF and Petroecuador agreed an extension until January 30, 2012 of the contract for the Tivacuno area, which is within the block 16 area.

Equatorial Guinea

At December 31, 2005, Repsol YPF had mineral rights in two exploratory blocks with a net surface area of 2,927 km2. One exploratory well, Oso Pardo 1 (K 2), was finished in block K with a negative result.

In 2005, 940 km of 2D seismic were acquired.

 

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Guyana

At December 31, 2005, Repsol YPF had mineral rights in one exploratory block with a net surface area of 5,175 km2. No exploratory wells were drilled in 2005. During the year, Repsol YPF’s stake in its one exploratory block decreased from 75% to 45% due to the transfer of a 30% stake to Occidental Petroleum.

As of the date of this annual report, some potential targets, for which the viability of drilling still needs to be investigated, have been identified, but the campaign for the acquisition of 3D seismic was deferred until the border dispute between Guyana and Suriname regarding the question to which country the block belongs to is clarified.

Iran

At December 31, 2005, Repsol YPF had mineral rights in three exploratory blocks with a net surface of 15,430 km2, one located in the foreland folded area of the Zagros basin and the other two in the Persian Gulf.

In 2004, Repsol YPF and Shell signed a cooperation agreement with the Iranian state oil company National Iranian Oil Company (NIOC) for the so-called “Persian LNG Project.” This agreement marks a significant advance for the integrated LNG project’s development and opens up new business opportunities in the area. The project would be located in Tombak and the consortium is considering two liquefaction trains of 8.1 million tonnes per year each. The supply would be provided by phase 13 and 13A of the South Pars gas field. The final investment decision (FID) has not yet been made.

In 2004, Repsol YPF reached an agreement with NIOC to explore the Mehr and Forooz marine blocks (100% Repsol YPF), which are located in the southern part of the Persian Gulf. The agreement, which has an initial term of two and a half years, commits Repsol YPF to invest US$27 million and includes the performance of exploratory work involving geological and geophysical studies and the drilling of two wells in the blocks whose total size is approximately 14,600 km2.

In January 2005, there was a discovery in the on-shore Mehr block with the well Band E Karkheh-2. Currently, the operations in the block are suspended by request of the national oil company (NIOC). In the meantime, Repsol YPF is negotiating the commercial agreement for the discovery.

Kazakhstan

In 2005, Repsol YPF agreed to acquire a 25% participation from KazMunayGaz in the Zhambay block, located in the Caspian Sea. The agreement is pending official approval and publication. The block is not included in Repsol YPF’s mining domain at December 31, 2005.

Liberia

In January 2005, Repsol YPF obtained exploration and development rights in Liberia for block 16, located in the territorial sea of Liberia in the course of the first international tender process conducted by the Liberian government. In the summer of 2004, Repsol YPF had already obtained the rights in block 17, which is adjacent to block 16 and borders blocks 6 and 7, previously contracted by Repsol YPF in Sierra Leona’s territorial sea.

The concessions are still pending official publication and the blocks are not in Repsol YPF’s mining domain at December 31, 2005.

Libya

At December 31, 2005, Repsol YPF had mineral rights in 16 blocks, consisting of 15 exploratory blocks (includes NC186 block which must be considered as an exploratory block until 2008, although it has fields on production) with a net surface area of 65,517 km2, and one production blocks with a net surface area of 874 km2.

 

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Net crude oil production in Libya in 2005 was 9.2 million barrels (an average of 25.1 thousand barrels of crude oil per day), from blocks NC-115 (El-Sharara field) and NC-186. Net proved reserves in Libya at December 31, 2005 were 67.8 million barrels of crude oil.

In 2005, 10 exploratory wells were completed in Libya. Four of these wells were positive, three in block NC186 and one in block NC115, five were negative, two in block NC190 and three in block NC200, and one was being assessed at the end of the year in block NC190. In 2005, Repsol YPF continued its intense seismic activity and registered 8,414 km of 2D seismic data and 3,783 km2 of 3D seismic data.

In the second half of 2005, three new discoveries were made in Libya in the block NC186 with the wells I1, J1 and K1, in the Sahara desert 800 km south of Tripoli. The I1 well (finished at the beginning of October) had a test production of 2,097 barrels per day of high quality oil.

The J1 well (finished in October) had a test production of 4,617 barrels per day, and the K1 well (finished in November) had 2,300 barrels per day. Repsol YPF has conducted 11 exploratory wells in block NC186 since the year 2000, eight of which have been oil discoveries.

The stakeholders of the NC186 block are the National Oil Company (NOC) and Repsol YPF (32% stake), which is the operator and representative of a consortium of European companies composed of OMV (Austria), Total (France) and Norsk Hydro (Norway).

In block NC115 an oil discovery was made with the well P1 NC115, which had a maximum trial production of 2,030 barrels per day.

In December 2005, a joint project between Repsol Exploración Murzuq S.A. (REMSA) and ROO was initiated for the delineation of the shared structure between the blocks NC186 and NC115. The first delineation well I2 NC186 is in the test phase and significantly increases the estimated initial reserves of the structure I-NC186.

The total aggregate production in block NC115, measured from the start of its production, reached 500 million barrels in 2005. The average daily gross production in 2005 for blocks NC115 and NC186 increased to 250,000 barrels per day.

Mauritania

In the summer of 2005, Repsol YPF obtained from the Mauritanian authorities 100% of the exploratory blocks TA-9 and TA-10 in the Taoudenni basin. The surface of these blocks is 30,911 km2 (TA-9) and 34,001 km2 (TA-10).

Mexico

At December 31, 2005, Repsol YPF had mining rights on a block under development (Reynosa-Monterrey) with a surface area of 3,538 km2.

In 2004, Repsol YPF took over the operation of the Multiple Services Contract for development and production in the Reynosa-Monterrey block in the Burgos basin in the northern part of Mexico. This area has 16 gas fields already in production, and the goal is to substantially increase production in them by making additional development investments. This contract was awarded in 2003 in the first international competitive bidding process held by the Mexican national oil company (PEMEX).

The contract makes Repsol YPF the first international company to participate in hydrocarbon development and production activities in Mexico.

 

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Morocco

At December 31, 2005, Repsol YPF had mineral rights in eight exploratory blocks with a net surface area of 7,300 km2.

In 2004, Repsol YPF acquired a 20% stake from Shell in the five Rimella A through E off-shore exploratory blocks. The blocks have a gross area of 9,026 km2 and are located in Moroccan Atlantic waters with depths that vary from 500 meters in the segment nearest the coast to 2,200 meters in the easternmost sector. Shell is the operator and holds 45% of the blocks. The other partners are ONAREP (Morocco’s national oil company, with 25%) and Wintershall (with 10%). The Amber 1 exploratory well drilled in 2004 was unsuccessful. In January 2006, the partners officially decided to leave the blocks.

Repsol YPF holds a 100% interest in the exploratory blocks Target-Larache 1-2-3 with a surface area of 5,495 km2.

In 2005, no exploratory well was drilled.

Peru

At December 31, 2005, Repsol YPF had mineral rights in five blocks, consisting of two production blocks with a net surface area of 202 km2 and three exploratory blocks with a net surface area of 14,089 km2.

Net petroleum production in Peru in 2005 was 0.08 million barrels of oil equivalent (an average of 0.2 thousand barrels of oil equivalent per day) from block 88. Net oil production was 0.06 million barrels, including condensate and natural gas liquids, and 0.13 billion cubic feet of natural gas. Net proved oil and gas reserves in Peru at December 31, 2005 were 20.2 million barrels of oil equivalent.

In June 2005, one successful exploratory well was completed in block 39, Buenavista 39 1-X. Repsol YPF has a 55% stake in this block and it is the operator. The block is located in the Marañón basin and has a total extension of 8,868 km2.

In light of the positive results from the BuenaVista well and the remaining exploratory potential, Repsol YPF expects to continue with the assessment of block 39, to commit new exploratory wells and to acquire additional seismic. In order to carry out these works, Repsol YPF has asked Perupetro to move onto the fourth exploratory phase and to extend the license contract until September 2009. The contractual terms for the extension are pending the definitive approval of the Government of Peru. Perupetro’s Board of Directors approved the extension in the first quarter of 2006.

With the signing of the final agreement between Repsol YPF and the U.S. oil company Hunt Oil regarding Repsol YPF’s joining the Peru LNG project in the summer of 2005, the company obtained a 10% stake in the development blocks 88 and 56 (Camisea field). The acquisition of the stake in the development blocks 88 and 56 was approved by the Peruvian government on December 13, 2005, and on December 16, 2005, the relevant contracts were signed by Repsol YPF and the consortium partners (see “—LNG”).

In November 2005, Repsol YPF agreed the acquisition of a 30% stake in block 103 from OXY which was officially ratified by the Peruvian authorities in the first quarter of 2006. The block is in its first exploratory stage and is located in the Faja Plegada of the Marañón basin.

In September 2005, negotiations with Perúpetro were concluded in respect of a new license contract (block 109) with a 100% participation of Repsol YPF. The contract was approved by the Supreme Decree 051–2005–EM, published in December 2, 2005, and officially signed on December 16, 2005.

 

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Saudi Arabia

At December 31, 2005, Repsol YPF had mineral rights in one exploratory block with a net surface area of 15,420 km2.

In January 2004, Repsol YPF obtained the concession for non-associated gas exploration and production in block C in consortium with ENI and Saudi Aramco. This block is located near the world’s most prolific hydrocarbon-producing region to the south of the giant Ghawar oil and gas fields in Saudi Arabia and the North Dome/South Pars gas field in Qatar.

The winning consortium has created the ENIREPSA Gas Ltd. company, which is the block’s operator and is comprised of Repsol YPF (30%), ENI (50%) and Saudi Aramco (20%). A broad-based and ambitious exploration program was developed for the following five years and includes the acquisition of 5,000 km of 2D seismic and the drilling of four exploratory wells in a virtually unexplored area covering more than 50,000 km2.

In 2005, 5,223 km of 2D seismic were registered. No exploratory well was drilled in 2005.

Sierra Leone

At December 31, 2005, Repsol YPF had mineral rights in two exploratory blocks with a net surface area of 5,249 km2.

In the Marine Exploratory Round, which was held during the third quarter of 2003, Repsol YPF was awarded 100% of two off-shore exploratory blocks: block SL-6 and block SL-7. Repsol YPF diluted a 50% stake in both blocks during 2004.

No exploratory wells were drilled in 2005.

Spain

At December 31, 2005, Repsol YPF had mineral rights in 36 blocks, consisting of 24 exploratory blocks, with a net surface area of 11,193 km2, and 12 production blocks, with a net surface area of 1,041 km2.

Net petroleum production in Spain in 2005 was 1.3 million barrels of oil equivalent (an average of 3.4 thousand barrels of oil equivalent per day) from Repsol YPF facilities in Casablanca (Mediterranean Sea), Poseidón (Bahía de Cádiz) and Gaviota (Cantabrian Sea). Net proved reserves in Spain at December 31, 2005 were 3.4 million barrels of oil equivalent.

In 2005, Repsol YPF continued negotiating with the Spanish authorities concerning the operating and execution terms for the project to double current underground natural gas storage at Gaviota (off-shore in the Cantabrian Sea). Repsol YPF holds 82% of this field and the U.S. Company Murphy holds the remaining 18%. The engineering work (facilities, wells and field) commenced in February 2004, and the additional capacity is expected to become available two or three years after the project’s approval.

As a result of a ruling of the Spanish High Court (Tribunal Supremo) which declared the permits for Canarias 1 – 9 void for formal reasons, the works in this area, which were supposed to enter the next stage (3rd to 6th year) and should include the drilling of two exploratory wells, have been temporarily suspended. The National Industry Department has corrected the formal defects in a project of new Royal Decree (Real Decreto), which has been pending the approval of the cabinet since February 2005. Following the approval, the drilling of the exploratory wells could commence within approximately one year, which is the period necessary to obtain the relevant environmental permits.

 

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In June, the documentation for the abandonment of the blocks Calypso-Circe in the Gulf of Cadiz was filed. The resignation was approved by the “Subdirección General de Hidrocarburos” in February 2006.

Repsol YPF and Gas Natural have agreed to dilute by 40% Repsol YPF’s stake in the blocks Murcia A and B, Sierra Sagra and Siroco A, B and C. As a consequence, the new partnership structure will be: Repsol YPF 60% and Gas Natural 40%. After signing the purchase agreements on October 1, 2005, Repsol YPF filed an application for the approval of the transfer agreements with the National Industry Department and with the Regional Industry Department of Murcia.

One exploratory well was finalized in 2005 with a negative result (Murcia B-1).

In 2005, 1,843 km2 of 3D seismic in the Ballena, Lubina and Siroco blocks were registered.

Suriname

At December 31, 2005, Repsol YPF had mineral rights in one exploratory block with a net surface area of 7,440 km2.

In April 2004, Repsol YPF and the Suriname national oil company, Staatsolie, signed a production sharing contract for hydrocarbon exploration and production in block 30 of the Guyana-Suriname basin, where oil is currently produced in the Tabaredjo and Calcutta fields near Paramaribo. The block is located 100 km from Suriname’s coast.

In 2005, the dilution of Repsol YPF’s stake in the exploratory block was agreed by Noble Energy and Oxy companies and the JOA was signed. The dilution was approved by the Suriname government in the second quarter of 2006. The participations in the block are Repsol 40% (operator) and Noble and Oxy 30% each.

In November 2005, the 3D seismic campaign was initiated with the registration of 1,933 km2 3D seismic in block 30. The plan for this campaign is to be finalized in 2006.

Trinidad and Tobago

At December 31, 2005, Repsol YPF had mineral rights in three production blocks located offshore, with a combined net surface area of 1,110 km2.

Net production in Trinidad and Tobago was 42.0 million barrels of oil equivalent (an average of 115.1 thousand barrels of oil equivalent per day). Net crude oil production was 4.4 million barrels, and 210.9 billion cubic feet of natural gas. Net proved reserves in Trinidad and Tobago at December 31, 2005 were 674 million barrels of oil equivalent.

In May 2004, production commenced at the Atlas Methanol plant, and its maximum capacity of 4.5 million cubic meters per day was reached in August 2004. Repsol YPF’s participation in the supply of natural gas to the plant is 30%.

In Trinidad and Tobago, there was a discovery in 2005 with the exploratory well Coconut 1 the bpTT blocks, in which Repsol YPF has a 30% stake.

In December 2005, the fourth liquation train commenced operations in the Atlantic LNG platform. The new train has a production capacity of 5.2 million of tonnes per year and is one of the largest in the world.

In July 2005, Repsol YPF acquired three oil fields and one gas field in Trinidad and Tobago. The three oil fields, Teak, Samaan and Poui (TSP), currently produce 20,000 boe/d. The development of the gas field Onyx is scheduled, and Repsol YPF expects it to be producing in the second semester of 2008.

 

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The facilities for production include 3 platforms, 10 drilling satellites and one compression satellite. After the closing of this operation both Petrotrin (public owned oil company of Trinidad and Tobago) and NGC, acquired a 15 % stake in the fields. Repsol YPF is operating the fields and holds a 70% stake. On October 31, 2005, Repsol YPF started its operations as operator in TSP.

The research carried out for the acquisition of the TSP assets indicates a clear potential to extend their life-time and to establish a more aggressive production horizon drilling new wells. Additionally, there is an opportunity to develop the gas field Onyx, which has proved reserves in a high demanded and very competitive market. It is important to mention the exploration potential of the fields, considering that it is a large area located in a prolific basin with great discoveries. As of the date of this annual report, there are two identified projects: Royal Oak Deep and Galeota South.

392 km2 of 3D seismic were acquired in 2005.

United States

At December 31, 2005, Repsol YPF had mineral rights in 72 exploratory blocks with a net surface area of 999 km2.

Net petroleum production in the United States in 2005 was 0.1 million barrels of oil equivalent. Net proved oil and gas reserves at December 31, 2005 were 7.7 million barrels of oil equivalent.

In 2005, no exploratory well was drilled, and 5,616 km2 of 3D seismic were acquired.

On June 30, 2005, Maxus Energy Corp (“Maxus”), a subsidiary of YPF Holdings, announced the decision to start the development of the Neptune field, located in deep waters of the Gulf of Mexico (U.S.). Maxus’s stake in the project is 15%. The start of the oil and gas production, which will be transported to the coast via existing transportation routes, is planned for the third quarter of 2007 and is expected to reach a maximum of 50,000 bbl/d of oil and 50 million standard cubic feet per day of gas (100% of the field).

The Neptune consortium is composed of Maxus (15%), BHP Billiton (35% and operator), Marathon Oil Corp. (30%) and Woodside Energy (U.S.) Inc., a subsidiary of Woodside Petroleum Ltd. (20%).

In the Lease Sale of March 2005 in the Gulf of Mexico, U.S.A., Repsol YPF bid for 12 blocks, of which the company obtained nine, three of them in competition with other companies.

In 2005, Repsol YPF reached an agreement with Mitsubishi regarding the acquisition of its 17.5% stake in the exploratory block MC589 (Prospect Kestrel-Valencia). Repsol YPF’s working interest in this block after this acquisition is 33%.

Venezuela

At December 31, 2005, Repsol YPF had mineral rights in seven blocks, consisting of one exploratory block with a net surface area of 1,488 km2, and six production blocks with a net surface area of 5,902 km2.

Net petroleum production in Venezuela in 2005 was 36.9 million barrels of oil equivalent (an average of 101.1 thousand barrels of oil equivalent per day), mainly from Quiriquire, Mene Grande and Quiamare-La Ceiba, all of which are operated by Repsol YPF. Net crude oil production was 15.0 million barrels, including condensate, and 123.0 billion cubic feet of natural gas. Net proved reserves in Venezuela at December 31, 2005 were 174.6 million barrels of oil equivalent.

 

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The most relevant activities for Repsol YPF in Venezuela in 2005 were the following:

Migration of operation agreements to joint ventures

 

    After the negotiations carried out during 2005, a Memorandum of Understanding was signed in Venezuela that became effective on April 1, 2006, which reflects the conditions in which the migration of operation agreements to joint ventures will occur. This agreement establishes a 40% stake for Repsol YPF in the Quiriquire and Mene Grande oil joint venture for 20 years, a 60% stake of the Quiriquire Profundo gas license for 20 years and the relinquishment of the areas of Quiamare la Ceiba and Guarico.

 

    On May 4, 2006, Venezuela’s National Assembly approved the establishment of a joint venture named Petroquiriquire, S.A. in which Repsol YPF has a 40% stake.

Barrancas and TermoBarrancas Block

 

    In the second half of 2004, a discovery was made with the first exploratory well drilled by Repsol YPF in the Barrancas block (Sipororo 2X). This block, which is located in the country’s southwestern region in the states of Barinas, Portuguesa and Trujillo, was awarded to Repsol YPF in 2001 under a license for exploration and production of non-associated gaseous hydrocarbons. The early gas production in the block began in September 2005. The gas produced will be sent to a thermoelectric generating plant of up to 450 MW to be set up in the municipality of Obispos in Barinas (TermoBarrancas). This project will help overcome electric power generation problems in that region of Venezuela.

 

    In January 2005, due to the success of the drilling of exploratory well SIP-2X, carried out in 2004, Repsol YPF acquired a 51% stake in TermoBarrancas.

 

    In March 2005, the TermoBarrancas company signed a contract for the sale of electricity to PDVSA.

 

    In April 2005, the works for the early generation stage were initiated in order to generate 80 MW in situ.

 

    The Barrancas Integrated Project initiated the early production in September 2005 with a gas production of 20 million of standard cubic feet per day and an electricity production of 80 MW.

 

    In December 2005, the drilling of the exploratory well Sipororo-3x was finalized with positive results.

Brasilia Agreement

 

    On October 1, 2005, Repsol YPF’s president signed a regional framework agreement with PDVSA regarding the joint participation in high value basin projects in Venezuela. In accordance with this agreement, Repsol YPF and PDVSA would establish a production joint venture and would operate in the block Junin 7 and/or other blocks in the Orinoco oil strip, located in the southeast of Venezuela and considered one of the world’s main reservoirs of heavy crude oil and extra-heavy crude oil.

 

  2.2.1.4 Other Activities

 

  2.2.1.4.1 Natural Gas Market in Argentina

Repsol YPF sells approximately 43% of its natural gas production to distribution companies, 42% to industrial clients and electric generators and exports the remaining 15%. The exports are principally to Chile and Brazil. The largest part of Repsol YPF’s proved natural gas reserves is located in the Neuquén basin, which is closer than other production basins to the Buenos Aires and Santiago markets.

In 2005, Repsol YPF’s natural gas sales were 60.5 million cubic meters per day, a 0.5% decrease from 60.7 million cubic meters per day in 2004. Natural gas sales in 2005 and 2004 include export sales volumes to Brazil and Chile, which amounted to 8.7 and 9.0 million cubic meters per day in 2005 and 2004, respectively.

 

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Between 1980 (13,466 million cubic meters) and 2005 (50,300 million cubic meters), natural gas production in Argentina grew significantly with an increase of 273%, which represents an annual average rate of 5.2%. This growth was due to the increase in the number of customers in Argentina connected to the distribution systems from 2.5 million to 6.6 million, a higher rate of consumption per client, exports of gas and the installation of gas fired power generation plants (combined cycles).

Since the devaluation of the country’s currency in 2002, gas demand in Argentina has been stimulated by artificially low gas prices. In addition, the unusually high prices of substitute products in comparison with their historical levels and a continuously dry hydrological scenario have reinforced the effect.

Approximately 76.5% of YPF’s proved natural gas net reserves in Argentina are located in the Neuquén basin, which is strategically located near the principal market of Buenos Aires and is supported by sufficient pipeline capacity during most of the year. Because of its proximity to the market, natural gas from this region has a competitive advantage compared to natural gas from other regions. In the past, the capacity of the natural gas pipelines in Argentina has proved to be inadequate at times to meet peak-day winter demand, and there is no significant storage capacity in Argentina. During the last 11 years, local pipeline companies have added approximately 57 million cubic meters per day of new capacity. These additions have improved their ability to satisfy peak-day winter demand and directly benefited Repsol YPF. In 2005, there have been two expansions: TGN’s capacity increased by 1.8 million cubic meters per day and TGS’s capacity increased by 2.9 million cubic meters per day in 2005.

On July 2, 2004, the gas import from Bolivia to Argentina started with restricted volumes according to Refinor transport capacity, reaching a contract volume of 4 million cubic meters per day. Later, during November 2004 the import agreement was renegotiated with an average of 3.2 million cubic meters per day (RY). The present import permit is 7.7 million cubic meters per day. Repsol YPF has 4.4 million cubic meters per day within the last renegotiated contract that expires in December 2006. With the imported gas, the supply in the northwest of Argentina basin was stabilized and Neuquén ceased to serve as a back-up basin for the demand of the northwest of Argentina.

Repsol YPF is actively involved in projects which seek to enhance Repsol YPF’s presence in the natural gas markets in Argentina and the rest of Latin America, including the following:

 

    The Diadema underground gas storage project in the San Jorge Gulf basin, which has an average deliverability of one million cubic meters of gas per day (153 days of winter) and was carried out to supply gas to customers in the basin.

 

    A new underground gas storage project in Mendoza, named Lunlunta Carrizal, which has an estimated deliverability of one million cubic meters per day and is expected to be operational at the end of 2006.

 

    The sale of natural gas to the Methanex Plant (methanol producer) located in Cabo Negro-Punta Arenas in Chile with an annual supply of 2.5 million cubic meters of gas per day in 2005.

 

    The supply of approximately 1.05 million cubic meters of gas per day in 2005 to electric companies in the Santiago (Chile) area through the Gas Andes gas pipeline.

 

    A 10% interest in the Gasoducto del Pacífico gas pipeline, which is a project that allows Repsol YPF to supply Chile with gas from the Neuquén basin. In 2005, Repsol YPF supplied an average of 1.0 million cubic meters of gas per day through this pipeline.

 

    The supply of gas from the northwest basin to electric companies in the northern part of Chile, through the Gas Atacama and Norandino gas pipeline, which reached an average of 3.2 million cubic meters of gas per day in 2005.

 

    The supply in 2005 of an average of 1.0 million cubic meters per day to the thermal power plant of Uruguayana (Brazil).

 

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    In spite of the aforesaid projects, during 2004, the Department of Energy established the Program for the Rationalization of Natural Gas Exports and the use of Shipping Capacity, which required cutbacks on natural gas exports with a view to satisfy the Argentine domestic market. The Program was replaced by the Supplementary Program for Supplying the Domestic Natural Gas Market approved by Resolution SE Nº 659/04, under which the Argentine State required producers/exporters to inject additional volumes (“Additional Injection”) of natural gas into the domestic market to supply the demand of certain domestic consumers. For details see Section 6. “Financial Information—Legal Proceedings” under Argentina.

 

  2.2.1.4.2 LNG

On April 29, 2005, Repsol YPF and Gas Natural SDG reached an agreement for both companies to intensify their collaboration in the LNG business areas of exploration, production, transportation, trading and wholesale marketing. In the summer of 2005, Repsol YPF and Gas Natural formally constituted their joint venture for the LNG business holding its first board meeting and initiating its trading activities, wholesale marketing and the transportation of LNG.

In the area of exploration, production and liquefaction (upstream) the agreement contemplates the partnership to develop new projects where Repsol YPF will be the operator and holder of 60% of the assets. Gas Natural SDG will hold the remaining 40%.

In the area of transportation, trading and wholesale marketing (midstream), the agreement contemplates that the companies create a joint venture aimed at the wholesale marketing and transportation of LNG. Both Repsol YPF and Gas Natural will hold 50% stakes in this joint venture. The Chairman of the joint venture will be elected on a rotational basis and Gas Natural SDG will name the chief executive officer of the joint venture. The new company will become one of the largest companies in the world based on the volume of LNG that it trades.

Pursuant to the agreement, Gas Natural SDG and Repsol YPF will also develop in a coordinated manner diverse regasification plant projects where Gas Natural SDG will be the operator and the regasification rights will be allocated to the new joint venture.

Algeria

In 2004, Repsol YPF (60%) and Gas Natural SDG (40%) signed the integrated LNG project Gassi Touil awarded by the Algerian authorities. The project includes exploration, production, liquefaction and LNG marketing in the Gassi Touil Rhourde Nous-Hamra area, located in the eastern part of Algeria. The natural gas liquefaction plant will be constructed in Arzew and it is planned to go into commercial operation in 2009. The plant will have a capacity of 5.2 billion cubic meters per year of LNG, and it can be expanded with the addition of a second train.

In March 2006, Repsol YPF (48%), Gas Natural (32%) and Sonatrach (20%), as part of the integrated LNG project Gassi Toui, signed an agreement for the establishment of a joint venture, Sociedad de Licuefacción (“SDL”), which will construct and later operate the natural gas liquefaction plant in Arzew.

Iran

In 2004, Repsol YPF and Shell signed a cooperation agreement with the National Iranian Oil Company (NIOC) for the so-called “Persian LNG Project.” The project is located in Tombak and it is planned to consist of two liquefaction trains of 8.1 million tonnes per year each. The final investment decision has not yet been made.

Mexico

In February 2004, Mexican authorities awarded Repsol YPF a site for the construction of a regasification plant in the port of Lázaro Cárdenas, which is located on the Pacific Coast of Mexico. The initial capacity of this plant would be approximately four bcm per year which could potentially be expanded to 10 bcm per year.

 

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Currently, Repsol YPF is assessing whether or not to continue this project.

Peru

On August 1, 2005, the signing of the final agreements with the U.S. oil company Hunt Oil, for the development of the Peru LNG project (in which Repsol YPF obtained a 20% stake) and the Camisea field (in which Repsol YPF obtained a 10% stake in blocks 88 and 56) was announced. The acquisition of the stake in blocks 88 and 56 was approved by the Peruvian government on December 13, 2005, and on December 16, 2005 the contracts between Repsol YPF and the other consortium partners were signed. The project includes the construction and operation of a liquefaction plant in Pampa Melchorita, which is expected to be operational in 2009. The supply of natural gas will be made with the production from blocks 88 and 56 and will reach the plant through the Camisea-Lima pipeline.

The agreement provides for the exclusive commercialization by Repsol YPF of the 4 million tonnes per year of the LNG production that is expected from the liquefaction plant. The gas will be sold on the west coast of the United States and Mexico. The purchase agreement reached with Peru LNG will have a 18.5-year term from its effective date.

The agreements also include the indirect acquisition by Repsol YPF of a 10% stake in Transportadora de Gas del Perú S.A. (TGP), a company that transports natural gas from Camisea through the trans-Andean pipeline.

Trinidad and Tobago

Repsol YPF holds an interest in Atlantic LNG, which is a joint venture with, among others, BP and BG plc. Atlantic LNG is based in Trinidad and Tobago and operates a LNG plant at Point Fortin, Trinidad. This plant commenced production in April 1999 with the first liquefaction train, in which Repsol YPF holds a 20% stake. This liquefaction train has an annual production capacity of approximately three million tonnes of LNG. In the first quarter of 2000, Atlantic LNG received approval from the government of Trinidad and Tobago to expand operations, including installation of two additional gas liquefaction trains in which Repsol YPF holds a 25% stake. One of these trains started operations in 2002 and the other in 2003. These two new facilities have a combined installed production capacity of approximately 7 million tonnes of LNG per year, of which Repsol YPF has agreed to buy approximately 2.7 billion cubic meters per year pursuant to long-term gas contracts. These two facilities have increased Atlantic LNG’s total annual LNG output to approximately 10 million tonnes of LNG per year. The cost of building the two new trains was US$1.1 billion.

On December 15, 2005, the fourth liquefaction train of the Atlantic LNG plant started operating. The fourth train, in which Repsol YPF holds a 22.2% stake, has a production capacity of 5.2 million tonnes per year. The project includes the construction of a second wharf and of a fourth LNG storage tank. The fourth train increases the production capacity of the Atlantic LNG plant to 15 million tonnes per year and will keep up Trinidad and Tobago’s position as supplier of LNG to the Atlantic basin markets.

Repsol YPF believes that one of the advantages of the project in Trinidad and Tobago is its geographic location, which permits it to supply markets such as the United States, the Caribbean and Europe under advantageous economic conditions. The European market can be supplied through swap contracts with other suppliers. Repsol YPF believes that, by using other sources to satisfy the needs of the Spanish market, the project in Trinidad and Tobago will enable it to take advantages of price opportunities in the American market and to reduce transport costs.

United States and Canada

In September 2003, Repsol YPF delivered to the Norwegian company Statoil its first shipment of LNG from Atlantic LNG’s third train in Trinidad and Tobago, which was destined for the Cove Point regasification plant on

 

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the East Coast of the United States. This first shipment consisted of 135,000 cubic meters of LNG and is part of the 2.7 billion cubic meters of gas per year that Repsol YPF holds in trains two and three of Atlantic LNG, in which it has a 25% interest.

In the fourth quarter of 2003, Repsol YPF and Shell Western LNG Ltd. signed a contract to supply LNG (providing up to 2 billion cubic meters of LNG until 2005) from Trinidad and Tobago to the Cove Point regasification plant on the East Coast of the United States.

In 2005, Repsol YPF sold approximately 2.6 billion cubic meters of LNG in the United States and in the Caribbean markets.

In June 2005, Repsol YPF and Irving Oil Limited signed an agreement to develop the first LNG regasification terminal on Canada’s east coast. The agreement contemplates the creation of a new company, Canaport LNG, which will construct and operate the terminal, which will supply natural gas to the markets in the area and the northeastern coast of the United States. The plant, located in Saint John, New Brunswick, Canada, will have a regasification capacity of 10 bcm per year of LNG, with the option to expand to 20 bcm per year. Repsol YPF, which will supply natural gas to the terminal, will have a 75% participation in the plant.

The re-gasification plant is expected to start operating and supplying natural gas to the market at the end of 2008 or the beginning of 2009. Irving Oil will market the LNG re-gasified at this plant on the Atlantic coast of Canada and Repsol YPF will market it in the rest of Canada and in the United States.

In May 2006, the Final Investment Decision (FID) was made.

Transport of LNG

Repsol YPF leases three time charter tankers with a total capacity of 416,500 cubic meters for shipping LNG from Trinidad and Tobago, two of which have been in service since 2002 and one of which has been in service since 2004. In January 2005, Repsol YPF signed a new time charter contract for another tanker of 138,000 cubic meters, which is under construction and scheduled to be delivered and put in service in 2007.

In addition, Gas Natural leases two time charter tankers for shipping LNG with a total capacity of 276,000 cubic meters, and at December 31, 2005, Gas Natural had six additional time charter tankers with a total capacity of 433,333 cubic meters for shipping LNG.

Repsol YPF and Gas Natural have signed a time charter contract for a 20-year period that may be extended for two five-year periods, for a liquefied natural gas (LNG) tanker that will cover the transport needs in the coming years in the Atlantic Basin. The tanker will have a capacity of 138,000 cubic meters, and will enter into service for Repsol YPF and Gas Natural in 2009. This contract is in addition to that entered into between Repsol YPF and Gas Natural in January 2005 for the acquisition of a tanker with the same capacity, which is being built in the Izar (Sestao) shipyards and will be delivered in December 2007.

 

  2.2.1.4.3 Natural Gas Liquids

Argentina. Repsol YPF developed Mega to increase its ability to separate liquid petroleum products from natural gas. Mega allowed Repsol YPF in 2001, through the fractioning of gas liquid, to increase production at the Loma La Lata gas field by approximately 5.0 million cubic meters per day.

YPF owns 38% of Mega, while Petrobras and Dow Chemical have a 34% and 28% stake, respectively.

Mega includes:

 

    A separation plant, which is located in Loma La Lata, in the Province of Neuquén.

 

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    A natural gas liquids fractioning plant, which produces ethane, propane, butane and natural gasoline. This plant is located in the city of Bahía Blanca in the Province of Buenos Aires.

 

    A pipeline, which links both plants and transports natural gas liquids.

 

    Transportation, storage and port facilities in the proximity of the fractioning plant.

Mega required an investment of approximately US$715 million and commenced operations at the beginning of 2001. Mega’s maximum annual production capacity is 1.35 million tonnes of gasoline, LPG and ethane. Repsol YPF is Mega’s main supplier of natural gas. The fractioning plant production is used in the petrochemical operations of PBB Polisur, and is also exported by tanker to Brazil.

 

  2.2.2 Refining and Marketing

Refining and Marketing operations contributed 43.55% of the total operating income of Repsol YPF in 2005, and 33.82% in 2004.

Repsol YPF’s Refining and Marketing business unit comprises refining, transportation and marketing (both at the retail and wholesale level) of petroleum products and distribution and retail sale of LPG, including butane and propane. Repsol YPF conducts refining activities in three countries as operator and is the leading refiner in the Spanish and Argentine markets. Repsol YPF operates five refineries in Spain with a total installed capacity of 740,000 barrels per day and four refineries in Latin America (Argentina and Peru) with a total installed capacity of 421,500 barrels per day. Repsol YPF conducts distribution and marketing activities in 12 countries and is the leader in the Spanish and Argentine markets. Repsol YPF’s network of points of sale was made up of 3,618 service stations and gas pumps in Spain and 3,235 service stations and gas pumps outside Spain (mainly in Latin America) at December 31, 2005. Additionally, Repsol YPF has interests in one refinery in Argentina and in two refineries in Brazil, which are operated by other companies.

On June 24, 2004, Repsol YPF acquired the marketing and logistical assets (excluding the LPG and lubricant businesses) from Royal Dutch/Shell in Portugal. The acquisition was cleared by the European Commission on September 13, 2004 and closed on October 1, 2004. As a result of the acquisition, Repsol YPF acquired 303 service stations, the direct sales of fuels, bitumen and marine fuels and the storage terminals from Shell. The acquisition increased the number of service stations owned by Repsol YPF in Portugal fourfold and made Repsol YPF the third largest retail operator in the country. In addition, Repsol YPF became the second largest operator in terms of direct petroleum product sales.

On October 29, 2004, Repsol YPF agreed to buy Falk S.p.A., owner of a service station network of 44 points of sale in Italy. This transaction was closed on January 1, 2005.

On December 9, 2004 Repsol YPF agreed with Shell to acquire Shell’s LPG business in Portugal, consisting of Shell Gas (LPG and its subsidiaries Spelta in Madeira (100%) and SAAGA in the Azores Islands (25%)).

The EU Antitrust authorities approved the acquisition on March 3, 2005 and the transaction became effective as of April 1, 2005. The transaction includes the commercial assets of the bottled and bulk business and two bottling plants in Maltosinhos and Banatica. The acquisition increased Repsol YPF’s market share from 5% to 21.2%, with total sales of 179,087 tonnes in 2005, which makes us the third largest operator in the market.

With the acquisition becoming effective on April 1, 2005, the name of Shell Gas was changed to Repsol Butano Portugal.

On December 28, 2004, Repsol YPF acquired a 51% stake in Energy Infrastructure India Limited (EIIL), via Energy Infrastructure Butano Asia (EIBA BV). EIIL will develop an integrated project for the distribution of LPG in the north-eastern states of India, which have a population of more than 400 million people.

 

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  2.2.2.1 Refining

Repsol YPF’s refineries produce a wide range of petroleum products, including automotive and industrial fuels, lubricants, basic petrochemicals, asphalt and coke. Repsol YPF conducts its refining business in Spain through Repsol Petróleo and Petronor, in which it has 99.97% and 85.98% ownership interests, respectively. Repsol Petróleo and Petronor are, in the aggregate, the largest domestic refining operation in Spain and hold 57% of the estimated domestic refining capacity in terms of effective installed capacity in primary distillation as of December 31, 2005.

Repsol YPF initiated operations in Latin America in 1996 with the acquisition, through the consortium Refinadores del Perú (Refipesa), of a 25.7% interest in the La Pampilla refinery (Relapasa). In December 2003, the consortium was dissolved and Repsol YPF now has a direct participation of 51.03% in the refinery. Repsol YPF is the technical operator of the Pampilla refinery.

Repsol YPF owns and operates three refineries in Argentina: La Plata, Luján de Cuyo and Plaza Huincul, which have a total installed capacity of 319,500 barrels per day and account for 51% of Argentina’s refining capacity in terms of effective installed capacity in primary distillation as of December 31, 2005. Additionally, Repsol YPF has interests in one refinery in Argentina and in two refineries in Brazil, which are operated by other companies.

 

  2.2.2.1.1 Installed Capacity, Supply and Production

The following table sets forth the capacities of Repsol YPF’s wholly and partially-owned refineries at December 31, 2005:

 

     Primary
Distillation
   Conversion
Index(1)
   Lubricants
     (thousand
barrels per
calendar day)
   (%)    (thousand
tonnes per year)

Refining capacity and configuration(2)

        

Spain

        

Cartagena

   100    —      135

La Coruña

   120    65    —  

Puertollano

   140    70    110

Tarragona

   160    47    —  

Bilbao

   220    32    —  
          

Total Repsol YPF (Spain)

   740    43    245
            

Argentina

        

La Plata

   189    69    255

Luján de Cuyo

   106    110    —  

Plaza Huincul

   25    —      —  

Refinor(3)

   13    —      —  
          

Total Repsol YPF (Argentina)

   333    74    255
            

Peru

        

La Pampilla

   102    24    —  

Brazil

        

REFAP(4)

   54    12    —  

Manguinhos(5)

   4    14    —  
          

Total Repsol YPF (Brazil)

   58    12    —  
          

Total Repsol YPF

   1,233    48    500
            

 

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(1) Stated as the ratio of fluid catalytic cracking (“FCC”) equivalent capacity to primary distillation capacity.
(2) Capacities stated according to Repsol YPF consolidation criteria: all refineries reported on a 100% basis, except Refinor (50%), REFAP (30%) and Manguinhos (30.71%).
(3) Total primary distillation capacity of 26,100 barrels per calendar day.
(4) Total primary distillation capacity of 180,000 barrels per calendar day.
(5) Total primary distillation capacity of 14,000 barrels per calendar day.

During 2005, Repsol YPF’s refineries processed 55.3 million tonnes of crude oil, of which 27% was from Repsol YPF’s own production and the remaining crude was purchased either through contracts or in the “spot” markets. In connection with a long-standing relationship with Pemex, Repsol YPF purchases from Pemex an amount of barrels per day which is fixed annually. In 2005, 2004 and 2003, that amount was fixed at approximately 108,600, 108,000 and 96,000 barrels per day, respectively. The 2006 amount has not yet been fixed, but it is estimated at 105,000 barrels per day. A total of 8.7 million tonnes of crude oil and 1.8 million tonnes of intermediate and finished products were bought and resold in 2005. All of these operations are denominated in U.S. dollars.

The following table sets forth the origin of crude oil processed during 2005, 2004 and 2003:

 

     2005     2004     2003  

Middle East

   14 %   15 %   13 %

North Africa

   14     15     16  

West Africa

   9     7     8  

Latin America

   46     45     46  

Europe

   17     18     17  
                  

Total

   100 %   100 %   100 %
                  

The following table sets forth Repsol YPF’s refining production figures for its principal products for the periods indicated:

 

     2005    2004    2003

Feedstock processed(1)(2)

        

Crude oil

   55.3    54.9    53.4

Other feedstock

   5.4    5.2    5.2
              

Total

   60.7    60.1    58.6
              

Refining production(1)(3)

        

Intermediate distillates

   26,752    26,178    24,890

Gasoline

   11,915    11,796    11,913

Fuel oil

   8,419    8,224    8,337

LPG

   1,646    1,691    1,728

Asphalts(4)

   1,619    1,650    1,596

Lubricants

   441    476    456

Other (except petrochemical)

   3,132    3,220    2,921
              

Total

   53,924    53,235    51,841
              

(1) Information presented in accordance with Repsol YPF’s consolidation criteria: all refineries reported on a 100% basis, except Refinor (50%), REFAP (30%) and Manguinhos (30.71%).
(2) Millions of tonnes.
(3) Thousands of tonnes.
(4) Includes asphalt production of Asfaltos Españoles S.A. (ASESA), a company in which each Repsol YPF and CEPSA holds 50%. 50% of ASESA’s products are marketed by Repsol YPF.

 

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Spain. Repsol YPF’s refineries in Spain operated at an average capacity of 91.3% in 2005, as compared to 92.5% in 2004 and as compared to an estimated 91.5% for all Spanish refineries in 2005. In 2005, Repsol YPF’s five Spanish refineries refined 33.8 million tonnes of crude oil, which represents 55.5% of all crude oil refined in Spain. The geographic distribution of Repsol YPF’s refineries and their proximity to the principal Spanish centers of consumption provide significant competitive advantages. Two refineries (at Cartagena and Tarragona) are located on the Mediterranean coast, one (at La Coruña) is located on the northwest coast, the fourth (at Puertollano) is located inland alongside the major pipeline network and the fifth (at Bilbao) is located on the northern coast. The five refineries owned by Repsol YPF in Spain are undertaking a capital investment program for the purpose of adapting their production schemes to the strict European Union product quality requirements which took effect on January 1, 2005, which establish fuel specifications for 2005 and 2009. Pursuant to this program, a hydrocracking unit in Tarragona started operations in mid-2002 and a mild hydrocracking unit in Puertollano started operations in mid-2004, an isomerization unit in Tarragona started operations in March 2005, an FCC naphta desulphurization unit in Bilbao started operations in August 2005 and a FCC feedstock hydrotreatment in La Coruña started operations in August 2005. See “—Regulation of the Petroleum Industry—Spain—Oil and Petroleum Derivatives—Liquid Hydrocarbons.”

At December 31, 2005, Repsol YPF had storage facilities with 30.6 million barrels of crude capacity and 45.6 million barrels of refined product capacity.

The Spanish government requires that entities involved in the production or distribution of petroleum products in Spain maintain minimum levels of reserves of those products. Under legislation enacted in 1994, Corporación de Reservas Estratégicas (CORES) was created by the Spanish government to establish, manage and maintain levels of strategic reserves of crude oil and petroleum products. In 2005, 84,000 tonnes of products were sold to CORES. Repsol YPF complies in all material respects with current regulations relating to CORES.

Argentina. Since June 23, 1999, Repsol YPF, through YPF, has owned and operated the refineries of La Plata, Luján de Cuyo and Plaza Huincul. In 2005 YPF’s refineries in Argentina operated at an average capacity of 94.4% compared to the 93.2% in 2004.

With an installed capacity of 189,000 barrels per day the La Plata refinery has the largest refining capacity in Argentina. It is located 60 km from Buenos Aires and is equipped with three distillation units, two vacuum distillation units, two catalytic cracking units, two coking units, a coker naphtha hydrotreater unit, a platforming unit, a gasoline hydrotreater, a diesel hydrofinishing unit, an isomerization unit and a lubricants unit.

The Luján de Cuyo refinery has an installed capacity of 105,500 barrels per day. It is located in the Province of Mendoza and supplies the central region of Argentina through the Luján de Cuyo- San Lorenzo pipeline. It also supplies products to the eastern region of the country for export and to the northern part of the Province of Buenos Aires. This refinery is equipped with two distillation units, a vacuum distillation unit, two coking units, one catalytic cracking unit, a platforming unit, an MTBE unit, an isomerization unit, an alkylation unit, and hydrocracking and hydrotreating units. In May 2005, the Lujan de Cuyo Refinery was audited by prestigious international insurance companies, achieving a “Better than average” rating, positioning the industrial complex above international refineries safety.

Plaza Huincul refinery is located in the Province of Neuquén and has a capacity of 25,000 barrels per day.

YPF also has a 50% participation in the Refinor refinery, which is in the Province of Salta.

In 2005, total crude oil processed in Argentina amounted to 15.5 million tonnes.

Peru. La Pampilla, which is located 25 Km north of Lima, has a total refining capacity of approximately 102,000 barrels per day and, according to Repsol YPF estimates, accounted for more than 50% of Peru’s refining capacity at December 31, 2005. In 2005, La Pampilla operated at an average capacity of 79.5%, as compared to 66.5% in 2004. La Pampilla benefits from its proximity to Lima, which Repsol YPF estimates to represent more than 50% of Peru’s demand for oil, and from the long distance to alternative sources of supply the Gulf of Mexico. During 2005, the La Pampilla refinery processed 4.2 million tonnes of crude oil.

 

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Repsol YPF is undertaking several projects aimed at increasing the conversion capacity of the La Pampilla refinery. In 2002, the revamping of the existing vacuum and FCC units was completed. A new vacuum unit has been constructed and began operating in February 2005, and the start-up procedures for a visbreaker began in April 2005 . These projects will result in diminished output of fuel oil and a corresponding increase in light refined products of higher added-value.

Brazil. Repsol YPF has a 30.71% interest in the refinery at Manguinhos in Río de Janeiro and a 30% interest in the REFAP refinery in southern Brazil. The interest in the REFAP refinery was acquired by Repsol YPF pursuant to a swap agreement with Petrobras in 2001. See Note 37 to the Consolidated Financial Statements.

 

  2.2.2.1.2 Sales and Distribution

The following table sets forth the sales of petroleum products broken down by product and markets. (This table does not include LPG sales to Repsol YPF’s related distribution companies. See “—Operations—Refining and Marketing—LPG.”)

 

     2005    2004    2003    05 vs 04     04 vs 03  
     (thousand tonnes) (1)(2)(3)             

Sales in Spain

   33,631    33,028    31,909    1.8 %   3.5 %

- Own marketing

   21,628    21,325    21,443    1.4     -0.6  

- Light products

   17,193    17,127    16,550    0.4     3.5  

- Other products

   4,435    4,198    4,893    5.6     -14.2  

-Other Sales in Domestic Market

   7,277    6,810    6,418    6.9     6.1  

- Light products

   5,381    4,964    4,323    8.4     14.8  

- Other products

   1,896    1,846    2,095    2.7     -11.9  

-Exports

   4,726    4,893    4,048    -3.4     20.9  

- Light products

   1,684    1,609    1,322    4.7     21.7  

- Other products

   3,042    3,284    2,726    -7.4     20.5  

Sales in ABB

   15,815    15,073    15,110    4.9     -0.2  

- Own marketing

   9,502    8,172    7,618    16.3     7.3  

- Light products

   7,692    6,640    6,297    15.8     5.4  

- Other products

   1,810    1,532    1,321    18.1     16.0  

-Other Sales in Domestic Market

   2,644    2,796    2,843    -5.4     -1.7  

- Light products

   1,709    1,948    1,941    -12.3     0.4  

- Other products

   935    848    902    10.3     -0.6  

- Exports

   3,669    4,105    4,649    -10.6     -11.7  

- Light products

   2,236    2,427    3,167    -7.9     -23.4  

- Other products

   1,433    1,678    1,482    -14.6     13.2  

Sales in rest of the world

   8,494    6,867    6,558    23.7     4.7  

- Own marketing

   5,313    4,043    3,795    31.4     6.5  

- Light products

   4,633    3,234    2,969    43.3     8.9  

- Other products

   680    809    826    -15.9     -2.1  

- Other Sales in Domestic Market

   1,560    1,969    1,769    -20.8     11.3  

- Light products

   1,203    1,594    1,402    -24.5     13.7  

- Other products

   357    375    367    -4.8     2.2  

- Exports

   1,621    855    994    89.6     -14.0  

- Light products

   475    70    0    578.6     100.0  

- Other products

   1,146    785    994    46.0     -21.0  

Total Sales

   57,940    54,968    53,577    5.4     2.6  

-Own marketing

   36,443    33,540    32,856    8.7     2.1  

- Light products

   29,518    27,001    25,816    9.3     4.6  

- Other products

   6,925    6,539    7,040    5.9     -7.1  

-Other Sales in Domestic Market

   11,481    11,575    11,030    -0.8     4.9  

- Light products

   8,293    8,506    7,666    -2.5     11.0  

- Other products

   3,188    3,069    3,364    3.9     -8.8  

- Exports

   10,016    9,853    9,691    1.7     1.7  

- Light products

   4,395    4,106    4,489    7.0     -8.5  

- Other products

   5,621    5,747    5,202    -2.2     10.5  

 

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(1) Information includes 50% of Refinor refinery (Argentina), 30% of REFAP refinery (Brazil) and 30.71% of Manguinhos refinery (Brazil).
(2) Other Sales in Domestic Market: includes sales to operators and bunker.
(3) Exports: Expressed from the country of origin.

 

  2.2.2.2 Transport of Crude Oil and Distribution of Petroleum Products

Since March 2003, in accordance with Royal Decree Law 6/2000, Repsol YPF’s participation in CLH is 25% (5.33% indirectly held through its affiliate Petronor) and, combined with the stakes of the other entities with refining capabilities in Spain, is 45%. See “—Regulation of the Petroleum Industry—Spain—Oil and Petroleum Derivatives—Liquid Hydrocarbons.”

CLH is the principal transporter of petroleum products in Spain. At December 31, 2005, CLH’s transportation network consisted of 3,475 km of refined product pipelines, two tankers and 20 trucks. CLH also owns 38 storage sites (all of them connected to the multiple pipeline network with the exception of Gijón, Motril and the four storage sites located in the Balearic Islands) and 30 distribution facilities in airports, which in the aggregate represent a capacity of approximately 6.5 million cubic meters.

Crude oil is transported from Cartagena to Puertollano through a 358 km crude oil pipeline. This crude oil pipeline started operations in 2000 and replaced the Málaga-Puertollano crude oil pipeline, both of which are owned by Repsol YPF.

Repsol YPF owns two crude oil pipelines in Argentina. One of the pipelines connects Puesto Hernández to the Luján de Cuyo refinery (528 km) and the other pipeline connects Puerto Rosales to the La Plata refinery (585 km) and extends to Shell’s refinery in Dock Sud at the Buenos Aires port (52 km). Repsol YPF also owns a plant for the storage and distribution of crude oil in Formosa with an operating capacity of 19,000 cubic meters and two tanks in the city of Berisso in the Province of Buenos Aires with a capacity of 60,000 cubic meters. Repsol YPF owns 37% of Oldelval, which is the operator of 888 km of pipelines and whose main pipeline is a double 513 km pipeline that connects the Neuquén basin and Puerto Rosales. At December 31, 2005, Repsol YPF had an 18% interest in the 428 Km Transandean pipeline, which transports crude oil from Argentina to Concepción in Chile. This pipeline has stopped operations on December 29, 2005. Repsol YPF also owns 33.15% of Termap, which is the operator of two storage and port facilities: Caleta Córdova (in the Province of Chubut), which has a capacity of 264,000 cubic meters, and Caleta Olivia (in the Province of Santa Cruz), which has a capacity of 246,000 cubic meters. Finally, Repsol YPF has a 30% interest in Oiltanking Ebytem, which is the operator of the maritime terminal of Puerto Rosales, which has a capacity of 480,000 cubic meters, and of the crude oil pipeline that connects the Repsol YPF Puerto Rosales—La Plata crude oil pipeline from Brandsen, which has a capacity of 60,000 cubic meters, to the ESSO refinery in Campana (168 km) in the Province of Buenos Aires.

In Argentina, Repsol YPF also operates a network of multiple pipelines for the transportation of refined products with a total length of 1,801 km and owns 16 plants for the storage and distribution of refined products with an approximate operating capacity of 983,620 cubic meters. Three of these plants are annexed to the refineries of Luján de Cuyo, La Plata and Plaza Huincul. Ten of these plants have maritime or fluvial connections. Repsol YPF operates 54 airport facilities, 44 of which it owns and which have a capacity of 24,000 cubic meters, and owns 27 trucks, 116 suppliers and 16 dispensers.

In Chile, Repsol YPF leases three tanks with an aggregate of 25,000 cubic meters for storage of gasoline and gas oil. These tanks are located at the facilities of Oxiquin, close to the ENAP refinery. The plant is connected through a pipeline to a maritime loading/unloading facility where vessels dock to unload gasoline and gas oil. The facilities of Oxiquin also lease four tanks in Coronel for storage of gasoline, kerosene and gas oil with a total capacity of 27,000 cubic meters. Repsol YPF also owns a plant for storage and distribution of refining products at Lautaro with a capacity of 900 cubic meters. Additionally, Repsol YPF leases storage capacity of 3,500 cubic meters at Maipu and one of 1,500 cubic meters at Linares from ENAP.

 

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In Peru, Repsol YPF has a total leased capacity of approximately 106,000 cubic meters.

At December 31, 2005, Repsol YPF had leased time charter ship tankers for the transport of crude oil and/or oil products for a total combined capacity of 782,686 cubic meters, of which 70% correspond to the transport of crude oil and 30% correspond to the transport of oil products.

In 2005, Repsol YPF signed three new time charter contracts for a total additional combined capacity of 215,332 cubic meters, for delivery in 2006, of which 78% correspond to the transport of crude oil and the rest to the transport of oil products.

In Argentina, Repsol YPF leased time charter tankers for shipping other products and crude oil with a total capacity of 84,527 and 175,000 cubic meters, respectively. In Peru, Relapasa leased time charter vessels for the transport of products with a total capacity of 90,000 cubic meters.

 

  2.2.2.3 Marketing

Repsol YPF’s points of sale (service stations and gas pumps) as of December 31, 2005 were as follows:

 

     Controlled by
Repsol
YPF(1)
   Flagged(2)    Total

Marketing operations

        

Spain

   2,859    759    3,618

Argentina(3)

   186    1,644    1,830

Peru

   86    69    155

Ecuador

   52    69    121

Chile

   171    40    211

Brazil

   41    374    415

Portugal

   246    182    428

Italy

   44    31    75
              

Total

   3,685    3,168    6,853
              

(1) Owned by Repsol YPF or controlled by Repsol YPF under long-term commercial contracts or other types of contractual relationships that secure a long-term direct influence over such points of sale.
(2) The term “flagged” refers to service stations owned by third parties with which Repsol YPF has signed a reflagging contract that provides Repsol YPF with the rights (i) to become such service stations’ exclusive supplier and (ii) to brand the service station with its brand name. The average contract term is five years in Spain and eight years in Argentina.
(3) Includes 50% of Refinor service stations.

The number of service stations at December 31, 2005 decreased to 6,853 service stations from 6,913 service stations at December 31, 2004 mainly as a result of the termination of agreements with flagged service stations and the closure of less profitable points of sale. See “—Operations—Refining and Marketing.”

Spain. Repsol YPF’s marketing strategy in Spain is to keep its market share in sales through service stations.

Repsol YPF’s strategy also includes increasing its margins through sales of products other than gas, increasing the loyalty of its customers and retaining the Campsa, Petronor and Repsol brand names, thereby differentiating its products in Spain by positioning each brand individually.

 

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Repsol YPF sells gasoline to the public in Spain under the Repsol, Campsa y Petronor brand names with the following distribution at December 31, 2005:

 

     Points of sale

Points of sale by brand

  

CAMPSA

   1,532

Repsol

   1,690

Petronor

   369

No brand

   27
    

Total

   3,618
    

In Spain, at December 31, 2005, Repsol YPF had “strong links” with 2,859 of its points of sale (of which 927 were operated by Repsol YPF), which represent 79% of its points of sale and reflects the high degree of connection within Repsol YPF’s point of sales network. The remaining 21% of Repsol YPF’s points of sale were flagged. Repsol YPF operates 26% of its total points of sale in Spain. The sales of its own chain account for 30.1% of the total sales of the service station chains.

Repsol YPF supplies oil products not only through its own sales network but also through other operators. Repsol YPF believes that its network of refineries in Spain positions it to be a competitive supplier of oil products to other operators.

The Spanish market for petroleum products is a mature market. In order to maintain its market share and profitability, Repsol YPF offers higher value-added products and services, the most important of which are the following: Autoclub, Gasoleo de Automoción “e+”, the Repsol Supercor Service Stations (which Repsol YPF operates jointly with El Corte Inglés, which is Spain’s largest department store), the Repsol YPF VISA card and Solred Card.

In January 2005, Repsol YPF launched e+10 diesel, which has a sulfur content lower than 10 mg/Kg (ppm) and a system for deactivation of metals.

The Repsol Supercor service stations sell a wide variety of consumer goods in addition to gasoline. At December 31, 2005, Repsol YPF owned 29 of the 32 stations operated under this brand name, which are located principally in Madrid, Barcelona and Málaga. The Repsol YPF VISA card, which was launched in November 1998, is the first of its type to be issued by an oil company in Spain and provides special advantages to its holders. The advantages include cash-back for purchases of fuel and services and other products at Repsol, Campsa and Petronor service stations belonging to the Solred Network. The card also provides discounts on services and purchases made at other commercial establishments. BBVA and La Caixa provided support for the launching of Repsol YPF VISA. In 1991, the Solred Card, which provides special advantages for members of a number of clubs and corporate clients was launched.

Discounts granted by Repsol YPF to holders of Repsol YPF VISA and Solred cards for purchases of fuel and other products and services in the Group’s service stations are deducted from the operating revenues reported by the Group.

Repsol YPF believes that, as of December 31, 2005, its competitors in Spain with local refining capacity (Cepsa, Elf and B.P. Oil España) had links with approximately 25.7% of the points of sale in the Spanish market. Repsol YPF estimates that, as of December 31, 2005, approximately 3,089 service stations are owned or flagged by companies that do not own refineries in Spain, as compared to 2,945 at December 31, 2004 and 2,772 at December 31, 2003.

Royal Decree Law 6/2000 established a requirement to inform the Ministry of Economy of the current sale prices at the service station’s network and a prohibition on opening new points of sale for a period of five years

 

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for wholesale distributors with a market share greater than 30% (three years in the case of wholesale distributors with a market share between 15% and 30%). Repsol YPF’s service stations currently represent 40.1% of the total number of service stations in Spain. After the prohibition established by Royal Decree has expired in June 2005, Repsol YPF continues to focus on improving the quality of its chain. The measures set forth in Royal Decree Law 6/2000 also facilitate the installation of new service stations in large commercial establishments. See “—Regulation of the Petroleum Industry—Spain—Oil and Petroleum Derivatives—Liquid Hydrocarbons.”

Argentina. Repsol YPF’s presence in Argentina consists of 1,830 service stations, of which 1,794 are YPF-branded, and the remainder are Refinor-branded service stations co-owned by Repsol YPF and Refinor (through YPF’s 50% participation in Refinor). OPESSA (a 100% subsidiary of Repsol YPF) operates 155 service stations.

Repsol YPF estimates that, as of December 31, 2005, YPF’s points of sale accounted for 29.9% of the Argentine market. In Argentina, Shell, Petrobras and Esso are Repsol YPF’s main competitors and own approximately 13.9%, 12.2% and 8.2%, respectively, of the points of sale in Argentina.

Peru. Through Repsol Commercial SAC, Repsol YPF’s network as of December 31, 2005 consisted of 155 points of sale, 86 of which were directly owned and 55 of which were directly operated.

Ecuador. Through Repsol YPF Comercial del Ecuador, Repsol YPF’s network as of December 31, 2005 consisted of 121 points of sale, 52 of which were directly owned and 13 of which were directly operated.

Chile. Repsol YPF Chile, as of December 31, 2005, operated a network of 211 points of sale, 171 of which were “strongly-linked” and 40 of which were affiliated. OPESE (100% owned by Repsol YPF Chile) directly operated 40 points of sale.

Brazil. Repsol YPF Brazil’s network as of December 31, 2005 consisted of 415 points of sale (including those swapped with Petrobras), 41 of which were directly owned and directly operated.

Portugal. The acquisition of Shell’s chain of service stations in Portugal, which consists of 303 points of sale, of which 42 are company-owned and operated, has meant an increase in Repsol YPF’s share to 16.2% of the points of sale in Portugal in 2004. As of December 31, 2005, Repsol YPF had 428 points of sale in Portugal (246 owned, 182 flagged), 83 of which were directly operated through GESPOST, a wholly-owned subsidiary of Repsol Portugal. This represents about 15% of all points of sale in the market as at December 31, 2005.

Italy. Repsol YPF had 44 directly owned points of sale and 31 flagged points of sale in Italy as of December 31, 2005.

Repsol YPF also invested significant amounts of money to increase the number of strongly-linked service stations in its network and to construct new service stations. Repsol YPF intends to continue its investments to improve connections within the service stations network and to increase the number of stations it directly operates.

Other Petroleum Markets. Repsol YPF also sells petroleum products to the industrial, marine and aviation markets. Products sold in these markets include diesel fuel, kerosene, fuel oil, lubricants, asphalt, petroleum coke and other derivative products.

In 2002, the lubricants, derivatives and asphalts activities started operating as one worldwide business unit. Effective as of January 2, 2002, the three entities responsible for these activities, Repsol Distribución, Repsol Derivados and Repsol Productos Asfálticos, were merged into a new entity named Repsol YPF Lubricantes y Especialidades, S.A. This new operational structure, which incorporates the European and Latin American businesses, facilitates the management of these operations by contributing to a more streamlined corporate structure.

 

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Repsol YPF, through Repsol Petróleo, holds a 50% interest in Asfaltos Españoles, S.A. (ASESA), which is a company that produces asphalt, a 100% interest in Repsol YPF Lubricantes y Especialidades, S.A. (formerly Repsol Productos Asfálticos) and a 100% interest in Asfalnor (through Petronor), both of which distribute and market asphalt products.

 

  2.2.2.4 LPG

Sales of LPG during the last three years by region and type of product are as follows:

 

     2005    2004    2003
     (thousand tonnes)

Sales volume of LPG(1)

        

Spain

   1,921    1,955    1,992

Argentina

   314    310    308

Rest of Latin America

   918    863    809

Rest of the World

   189    89    84
              

Total

   3,342    3,217    3,193
              

Sales volume of LPG(1)

        

Bottled

   2,110    2,199    2,124

Bulk, pipeline and others(2)

   1,232    1,018    1,069
              

Total

   3,342    3,217    3,193
              

(1) Includes sales to related distribution companies.
(2) Includes sales to the automobile market, petrochemical, LPG operators and others.

Repsol YPF reorganized its international LPG activities through the transfer of all of its share holding interests in LPG activities to Repsol Butano, which will oversee these activities.

After the reorganization of the international LPG activities through transfer of its shareholding interests to Repsol Butano, Repsol YPF seeks to strengthen its position in the markets in which it already operates and to undertake new investments in strategic markets. To this end, Repsol Butano acquired the LPG division from Shell in Portugal (Shell Gas (LPG) S.A.). As a result of the acquisition, Repsol YPF has become the third largest operator in Portugal with a market share of close to 21.2%. In 2004, Repsol YPF also formalized its participation in Energy Infrastructure India Limited, which is a company that seeks to market LPG in India.

Spain. Repsol YPF’s LPG distribution activities are conducted by Repsol Butano, which has been distributing LPG to Spanish households and industrial users for over 40 years and is currently the largest wholesaler and retailer of LPG in Spain. Repsol Butano supplies bottled LPG to more than 10 million customers in Spain covering the entire Spanish market, except for the Canary Islands, with a market share of 81% in Spain. While the vast majority of its sales of bottled LPG are to the household market, it also sells LPG in bulk form to industrial, commercial and household customers for use as a fuel.

LPG bottling takes place at Repsol Butano’s 19 plants located throughout Spain. After LPG is bottled at a plant, it is delivered to Repsol Butano’s network of approximately 660 bottled gas distribution agents. The distribution agents deliver LPG to retail customers at home. Repsol Butano has approximately 32 million bottles for storage and delivery of LPG in circulation.

Bottled LPG is used almost exclusively as a household fuel for cooking, water heaters and, in some cases, heating. The growth of the Spanish economy, with significant increases in residential housing and family income combined with limited availability of natural gas in some parts of Spain, has allowed Repsol Butano to become the largest bottled LPG distributor in Europe in terms of revenues and volume. Bottled LPG accounted for 65.3% of Repsol Butano’s total sales volume in 2005.

 

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Approximately 31.7% of Repsol Butano’s sales in 2005 consisted of bulk LPG. Bulk LPG is used as fuel in the agricultural, industrial and household markets and for transportation. Repsol Butano sells most bulk LPG directly to end users. Bulk LPG is used as an industrial fuel for industrial ovens and heating in the farming industry. Bulk LPG is used in the household market, particularly in multiple unit dwellings, for the same uses as bottled LPG. Most bulk LPG is delivered by tanker trucks. Repsol Butano, however, distributes LPG via pipelines connected to industrial and household users and believes that such distribution may be an important intermediate step between the bottled LPG market and the natural gas market in the future.

Repsol Butano sold 1.92 million tonnes of LPG in 2005, as compared to 1.96 million tonnes in 2004 and 1.99 million tonnes in 2003. In 2005, approximately 53% of Repsol Butano’s supply of raw material was obtained from Spanish refineries, of which 35% came from refineries affiliated to Repsol YPF and the remaining 18% from Cepsa and BP, and the remainder was purchased from sources located in the North Sea and Algeria.

Repsol YPF expects that, as a direct result of the introduction of natural gas as an alternative to LPG in key urban markets in Spain, a portion of the LPG customer base growth over time will be diverted to natural gas. Therefore, despite sustained level of bulk sales of LPG Repsol YPF believes that the total volume of LPG sales will undergo a slight decrease.

In October 2000, the Spanish government established a system to determine maximum retail prices for bottled LPG exceeding eight kilograms by reference to a maximum price, set every April and October by the Spanish government on the basis of international prices of LPG during the previous 12 months, and a maximum markup that may be charged over such reference price, which is reviewed annually by the Spanish government. In 2005, Regulation ITC/2475/2005 of July 28, modified the system for the determination of maximum prices before taxes for sales to the public of bottled liquefied petroleum gases equaling or exceeding 8 kgs of such gases, used as combustible or fuel for domestic, commercial or industrial purposes.

 

    The concept of maximum prices consisting of a raw material component and a commercialization cost component was maintained.

 

    The Regulation modifies the reference period for the determination of the raw material component which was reduced from a 12 month to a six month average.

 

    The price revision period was changed from semiannually (April, October) to quarterly periods starting January, April, July and October.

Regulation ITC/247/2005 was replaced by Regulation ITC/2065/2006. The new regulation maintains the same principles as described above.

See “—Regulation of the Petroleum Industry—Spain—Oil and Petroleum Derivatives—Liquid Petroleum Gas.” In 2005, the average selling price for bottled LPG in Spain, which includes home delivery, was approximately 55% lower than the average selling price elsewhere in Europe, which does not include home delivery.

In March 2004, Repsol Butano acquired 51% of Vía Red for €1.3 million. The principal objective of this business is home delivery of the most widely-used products in Spain. Currently the business has 210 distributors in 36 provinces and is developing a business plan to use the distribution network of Repsol Butano to increase its activities in the provinces in which it is already present and extend its activities to new provinces.

 

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Argentina. YPF is the largest producer of LPG in Argentina and had a total production of 848,804 tonnes in 2005 (including 285,336 tonnes of LPG used as petrochemical feedstock internally). This represents approximately 25.4% of total LPG production in Argentina. YPF obtains LPG from natural gas processing plants and from its refineries and petrochemical plants as detailed in the following tables:

 

     Production
     (tonnes)

LPG from Natural Gas:(1)

  

Loma La Lata

   30,966

General Cerri

   27,291

El Portón

   123,829

San Sebastián

   16,883
    

Total

   198,970
    

(1) YPF owns 30% of San Sebastian plant; Loma La Lata and El Portón are 100% owned by YPF; General Cerri belongs to a third party, having a processing agreement with YPF.

 

     Production
     (tonnes)(1)

LPG from Refineries & Petrochemical Plants:

  

La Plata Refinery

   424,360

Luján de Cuyo Refinery

   181,329

Petroquímica La Plata

   44,145
    

Total production

   649,834
    

(1) Includes 285,336 tonnes of LPG used as petrochemical feedstock (olefins derivatives, polybutenes and Maleic).

YPF also holds a 50% interest in Refinor, a jointly-controlled company, which produced 347,462 tonnes of LPG in 2005.

YPF sells LPG mainly on the wholesale market to retailers (including Repsol YPF Gas) and the foreign market. YPF’s 2005 LPG sales can be broken down by market as follows:

 

     Sales Capacity
     (tonnes)

Domestic market

  

Supplies to Repsol YPF Gas

   226,017

To other bottlers/propane network distributors

   101,319

Other Wholesales (1)

   41,158

Foreign market/exports

  

Exports

   373,157
    

Total Sales

   741,651
    

(1) Includes more than 36,404 tonnes of LPG distributed to pipeline networks and natural gas clients with interruptible.

 

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The LPG division buys LPG from natural gas processing plants and from its refineries and petrochemical plants, it also buys LPG from third parties as detailed in the following table:

 

     Purchase
     (tonnes)

LPG Purchases:

  

Upstream

   198,968

Refineries

   336,984

Petrochemical

   27,514

Refinor(1)

   119,469

Others

   82,140
    

Total

   765,075
    

(1) YPF owns 50% of Refinor.

On the retail segment, Repsol YPF holds a 85% interest in Repsol YPF Gas S.A. through Repsol Butano, S.A. Pluspetrol holds the remaining 15%. Repsol YPF Gas distributed 277,421 tonnes of LPG to the retail market in Argentina in 2005 and has a market share of approximately 33.8%. Additionally, more than 36,404 tonnes of LPG were distributed to pipeline networks and natural gas clients with interruptible supply through YPF in 2005.

Bolivia. In September 2001, Repsol YPF formed a joint venture with SAMO, which is the first private company in the LPG market, called Repsol YPF Gas de Bolivia. Repsol YPF has a 51% stake in and control of Repsol YPF Gas de Bolivia. The sales of Repsol YPF Gas de Bolivia in 2005 were approximately 124,477 tonnes of LPG, which is equivalent to a market share of 36.9%.

In December 2002, Repsol YPF reorganized all LPG separation activities at the Paloma plant (the Mamoré block) and transferred them to Repsol YPF GLP de Bolivia (a wholly-owned subsidiary of Repsol Butano) seeking to strengthen the integrated management of the LPG chain. Repsol YPF GLP de Bolivia produced 35,132 metric tonnes of LPG in 2005 and participated in the marketing of 146,009 metric tonnes of LPG to retailers (including Repsol YPF Gas de Bolivia).

Chile. In November 2000, Repsol YPF acquired 45% of the capital stock of Lipigas Group, which is a leader in the Chilean market, with an option valid from 2003 until 2005, to acquire an additional 10%. The option expired in 2005 unexercised. The shareholders’ agreement signed with the other partners in the acquisition provides for shared operating control of the company. Lipigas had annual sales of 366,737 tonnes in 2005, which amounted to a 37.4% market share.

Peru. In 2005, Repsol Butano, through Repsol YPF Comercial del Perú, sold 253,883 metric tonnes of LPG (including 64,907 tonnes of wholesale), which represents a retail market share of 30.3%.

Ecuador. In 2005, Duragas, which is a wholly-owned subsidiary of Repsol Butano, had sales of 344,449 tonnes of LPG. Duragas is a leading participant in Ecuador’s LPG distribution market with a 38.4% market share.

Other Markets. Repsol YPF has extended its distribution of LPG to Portugal and France, maintaining the home service concept and adapting its business strategy to the special habits of each market. Repsol YPF is also active in Morocco through its 100% interest in National Gaz of Morocco, which is a company engaged in the distribution of LPG.

As of 2005, Repsol YPF is developing an integrated project in India for the supply of LPG via EIIL, a company in which Repsol YPF holds a controlling stake of 51%.

 

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Total annual sales in these countries were 189,021 tonnes of LPG in 2005.

Repsol YPF has been present in the Portuguese LPG market since 1993 and supplies the market from Repsol Butano plants in Spain. The sales of Repsol YPF in the Portuguese market through Repsol Portugal Gas de Petroleo Liquefeito reached 39,786 tonnes in 2005.

On December 9, 2004, Repsol YPF reached an agreement with Shell Petroleum Company for the acquisition of Shell Gas (LPG) S.A. in Portugal. On March 3, 2005, the competition authorities in Europe unconditionally cleared Repsol Butano’s acquisition of LPG Shell in Portugal. Since April 2005 sales have risen to 93,250 tonnes. Repsol YPF took control of the company, which was named Repsol Butano Portugal, on April 1, 2005.

The sales managed by Repsol YPF in 2005 in Portugal increased to 133,036 tonnes (12 months Repsol Portugal LPG and nine months Repsol Butano Portugal—excluding the first quarter of 2005 when the company was managed by Shell Gas) and including the first quarter of Shell Gas in 2005 to 179,087 tonnes.

Through this acquisition, Repsol YPF became the third largest operator in the Portuguese LPG market with a market share of 21.2%. Through this acquisition, Repsol YPF acquired commercial assets, including 700,000 bottled clients and 3,500 bulk clients, two bottling plants in Matosinhos and Banatica, a distribution subsidiary in Madeira and participation in SAAGA, which is an LPG storage company in the Azores. The use of the two plants on Portuguese territory will bring the product closer to the market, improve Repsol YPF’s response time and reduce logistical costs as compared to supplying the market from Spain. A plan is currently in progress to integrate both businesses in a way that would result in economies of scale, increase the density of clients and combine the logistical advantages of the facilities that are located close to the market with the security of supply from plants in Spain.

In 2004, Repsol YPF initiated a greenfield project to market bulk LPG in Brazil, a market considered strategic for the Group because it is seventh in the world market, second in Latin America and it is the natural destination of the Group’s current and future surplus in Argentina and Bolivia. In 2005, its second year of activity, sales to end customers reached 2,723 tonnes.

 

  2.2.3 Chemicals

In 2005, the Chemicals division generated operating income of €308 million, as compared to operating income of €262 million in 2004.

Repsol YPF leads the Spanish market in basic and derivative petrochemical products, polymers and intermediate products. Repsol YPF’s most significant production facilities are located in Spain (the Puertollano and Tarragona complexes), since November 30, 2004 in Portugal (the Sines complex) and Argentina (the La Plata, Plaza Huincul and Bahía Blanca complexes). The Chemicals division is responsible for management, feedstock, distribution and marketing principally in Europe and the Mercosur region. Most of these units are in the same industrial complexes as Repsol YPF’s refineries, which allows for a high degree of integration between both businesses.

 

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The following table shows the production capacity for the main products of basic and derivative petrochemicals at December 31, 2005.

 

     Europe    Latin America
     (thousand tonnes)

Production capacity

     

Basic petrochemicals

     

Ethylene

   1,260    —  

Propylene

   805    175

Butadiene

   202    —  

Benzene

   275    —  

Derivative petrochemicals

     

Polyolefins

     

Polyethylene(1)

   855    —  

Polypropylene

   520    —  

Intermediate Products

     

Propylene oxide, Polyols, Glycols and Styrene Monomer

   995    —  

Acrylonitrile/MMA

   166    —  

Rubber

   54    45

Others(2)

   84    —  

Industrial Products

     

BTX (Benzene, Toluene, Mixed Xylenes)

   —      244

Ortho/Paraxylene

   —      63

Ammonia/Urea

   —      933

Methanol

   —      411

Others(3)

   —      285

(1) Includes EVA (ethylene vinyl acetate) copolymers.
(2) Includes styrene derivatives, PMMA (polymethyl methacrylate) and fine chemicals.
(3) Includes oxo-alcohols, maleic anhydride, solvents, cyclohexane, LAB (lineal alkyl benzene), linear alkyl benzene sulphonate, PIB (polyisobutylene) and others.

The table below presents Repsol YPF’s sales volume in 2005, 2004 and 2003 of petrochemical products:

 

     2005    2004    2003
     (thousand tonnes)

Petrochemical sales by type of product

        

Basic petrochemicals

   979    420    426

Derivative petrochemicals

   3,665    3,684    3,542
              

Total

   4,644    4,104    3,968
              

Petrochemical sales by region

        

Spain

   1,481    1,342    1,293

ABB

   1,102    909    868

Rest of the World

   2,061    1,853    1,807
              

Total

   4,644    4,104    3,968
              

Repsol YPF produces, distributes and directly markets petrochemical products. With respect to a part of its portfolio of petrochemical products, Repsol YPF also acts through the following affiliated companies:

Europe and Rest of the World (RoW): (i) Polidux produces and markets styrene derivatives and propylene compounds, (ii) Repsol Polivar and Repsol Bronderslev produce PMMA (polymethyl methacrylate) products,

 

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(iii) General Química focuses on the production of rubber chemicals, agrochemicals and organic dyes, and (iv) Dynasol (50% subsidiary of Repsol YPF) owns rubber production assets.

ABB (Argentina, Bolivia and Brazil): Profertil (a 50% subsidiary of Repsol YPF) produces urea and ammonia in Bahía Blanca (Argentina).

During the first quarter of 2005, Repsol YPF, pursuant to its strategy, sold its share in Petroken (50% subsidiary of Repsol YPF) and in PBB Polisur (28% subsidiary of Repsol YPF).

 

  2.2.3.1 Basic Petrochemicals

Repsol YPF’s basic petrochemical production is focused on obtaining olefins and aromatics and has an annual capacity of 1,260 thousand tonnes of ethylene in olefins and 519 thousand tonnes of aromatics.

Repsol YPF’s basic petrochemical production operations—except for the Sines petrochemical complex, which is located next to a refinery not owned by Repsol YPF—are closely integrated with Repsol YPF’s refining activities, as olefin and aromatics production units are physically located within Repsol YPF’s refineries. The advantages which result from this structure include flexible supply of feedstocks to the olefin cracker, efficient use of byproducts (such as hydrogen and pyrolysis gasoline) and synergies in power supply. Repsol YPF’s basic and derivative petrochemicals operations are also well-integrated.

Repsol YPF’s sales of basic petrochemicals products in 2005 were 979 thousand tonnes, much greater than sales in 2004 due to the fact that it includes a whole year of sales from the Sines (Portugal) petrochemical complex. Accordingly, 253 thousand tonnes were sold in Spain, 168 thousand tonnes were sold in Argentina, Bolivia and Brazil and 558 thousand tonnes were sold in other markets.

 

  2.2.3.2 Derivative Petrochemicals

Repsol YPF classifies its derivative petrochemicals products in three categories: polyolefins, intermediate products and industrial products.

Polyolefins include a wide variety of polymers which are produced principally in Spain at the Tarragona and Puertollano complexes and in Portugal at the Sines complex since November 30, 2004.

Intermediate products include a wide variety of petrochemical products, such as styrene, propylene oxide, glycols, polyols, acrylonitrile, rubber, pigments and organic dyes.

Industrial products include a varied group of feedstocks for chemical, industrial, manufacturing and agricultural activities. Industrial products are used in the production of, among other things, polymers, resins solvents, lubricant oils and detergents. Several examples of industrial products which Repsol YPF produces are benzene, toluene, xylenes, linear alkylbenzene, urea and methanol. Industrial products are produced in Argentina at the Ensenada, Bahía Blanca and Plaza Huincul facilities.

Derivative products allow for high integration, not only with basic petrochemicals, but also with upstream activities, as evidenced, for instance, by the integration of the ammonia/urea and methanol plants which use natural gas as raw material.

Derivative petrochemical products sales in 2005 were 3,665 thousand tonnes, of which 1,228 thousand tonnes were sold in Spain, 934 thousand tonnes in ABB and 1,503 thousand tonnes in other markets.

In 2004, Repsol YPF made investments in order to expand the capacity of the propylene oxide/styrene and derivative complex in Tarragona by 33%. This project shall be launched at the end of 2006. This complex uses

 

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state-of-the-art technology owned by Repsol YPF and available to only two other companies in the world. On November 30, 2004, the acquisition of Borealis Polímeros Limitada from Borealis A/S closed. The acquisition includes all the assets of the Sines complex in Portugal and reflects the strategy of strengthening the growth of strategic businesses (basic petrochemicals and polyolefins), increasing Repsol YPF’s presence in the markets on the Iberian Peninsula and Southern Europe, complementing the portfolio of products with new high value added applications and balancing the deficit of ethylene and propylene in Tarragona.

On February 14, 2005, Repsol YPF signed an agreement with the Dutch company Basell to purchase a 50% stake in Transformadora de Propileno A.I.E. The operation includes a 160,000 tonne per year polypropylene plant in the Tarragona Petrochemical Complex (Spain), in which Repsol YPF already held 50%. This operation has been approved by the competent authorities in Spain in September 2005. It has boosted Repsol YPF’s polypropylene production capacity by 15% and strengthened Repsol YPF’s polyolefin presence in Europe, representing a step forward in one of its strategic areas for growth.

Investments in 2005 have been principally directed to promote our growth strategy (the acquisition of a 50% interest in Transformadora de Propileno A.I.E. and the expansion of the capacity of the propylene oxide/styrene plant in Tarragona ), as well as the improvement and optimization of the recently acquired complex in Sines. In addition, investments have been made to improve our existing units, achieve minor capacity increases, improve product quality and improve safety and environmental standards.

 

  2.2.4 Gas and Electricity

Gas and Electricity activities contributed 6.3% to Repsol YPF’s operating income in 2005, and 6.6% in 2004.

Repsol YPF is involved, directly or through its affiliates, in the natural gas and electricity sectors. In the natural gas sector, Repsol YPF is engaged in the supply, storage, transportation, distribution and marketing of natural gas in Spain, the distribution and marketing of natural gas in Italy, Argentina and Mexico and the distribution of natural gas in Brazil and Colombia. In the electricity sector, Repsol YPF is engaged in power generation in Spain, Puerto Rico and Argentina and marketing in Spain.

Since April 2002, from an operational point of view, the downstream business of Gas and Electricity (including electricity generation and natural gas distribution) has been integrated under Gas Natural whereas the upstream business of Gas and Electricity has remained under Repsol YPF.

Prior to May 2002, Repsol YPF had a 47.04% stake in Gas Natural and consolidated this interest using the global integration method. In May 2002, Repsol YPF sold 23% of Gas Natural. Since the date of that sale, Repsol YPF has consolidated its remaining interest in Gas Natural by the proportional integration method. See “—Natural Gas—Spain.”

In connection with the sale of 23% of Gas Natural, Repsol YPF and La Caixa d’Estalvis i Pensions de Barcelona amended their Agreement, dated January 11, 2000, with respect to Gas Natural through the execution of a Novation Agreement, further amended through the execution of two Addenda to the Novation Agreement, dated December 16, 2002 and June 20, 2003. The most significant aspects of these agreements with La Caixa are the following:

 

    Repsol YPF and La Caixa will jointly control Gas Natural in accordance with the principles of transparency, independence and professional diligence.

 

    The Board of Directors of Gas Natural will be composed of 17 members. Repsol YPF and La Caixa will each have the right to nominate five directors. Repsol YPF and la Caixa will vote in favor of each other’s nominees. One director will be appointed by Caixa de Catalunya and the remaining six directors will be independent directors.

 

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    La Caixa will nominate the Chairman of the Board of Directors of Gas Natural and Repsol YPF will nominate the Managing Director. Repsol YPF’s and La Caixa’s directors will vote in favor of each other’s nominees for these positions.

 

    The Executive Committee of the Board of Directors of Gas Natural will be composed of eight members, consisting of three members nominated by each of Repsol YPF and La Caixa out of the directors they respectively nominated to the Board of Directors of Gas Natural, including the Chairman of the Board of Directors and the Managing Director. The other two members of the Executive Committee will be independent directors.

 

    The partners will jointly agree, prior to submission to the Board of Directors of Gas Natural, on (i) the strategic plan of Gas Natural, which will include all decisions affecting the strategy of Gas Natural, (ii) the corporate structure of Gas Natural, (iii) the annual budget of Gas Natural, (iv) any business combinations and (v) any acquisitions or disposal of strategic assets of Gas Natural.

These agreements will remain effective for as long as both parties hold a minimum participation in Gas Natural of 15%.

See Section 3. “Operating and Financial Review and Prospects—Recent Developments—Gas Natural’s takeover bid for Endesa.”

In March 2004, Repsol YPF increased its holding in Gas Natural to 30.85%.

Since the 2002 sale, Repsol YPF and Gas Natural have been cooperating to coordinate the “midstream” business through the creation of separate legal entities for those activities that require a separate corporate entity (e.g., integrated projects) or through specific collaboration agreements where mutual assistance and cooperation in carrying out midstream activities can give rise to synergies and other benefits for both parties.

In April 2005, Repsol YPF and Gas Natural SDG reached an agreement for both companies to intensify their collaboration in the LNG business areas of exploration, production, transportation, trading and wholesale marketing.

In the area of exploration, production and liquefaction (upstream), the agreement contemplates the partnership to develop new projects where Repsol YPF will be the operator and holder of 60% of the assets. Gas Natural SDG will hold the remaining 40%.

In the area of transportation, trading and wholesale marketing (midstream), the agreement contemplates both companies creating a joint venture aimed at the wholesale marketing and transportation of LNG. Both Repsol YPF and Gas Natural will hold 50% stakes in this joint venture. The chairman of the joint venture will be elected on a rotational basis, and Gas Natural SDG will nominate the chief executive officer.

Pursuant to the agreement, Gas Natural SDG and Repsol YPF will also develop in a coordinated manner diverse regasification plant projects where Gas Natural SDG will be the operator and the regasification rights will be allocated to the new joint venture. See “—Operations—Exploration and Production.”

The initial term of this collaboration agreement is 10 years.

 

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  2.2.4.1 Natural Gas

The table below shows Repsol YPF’s natural gas sales volumes by region in the last three years.

 

     2005    2004    2003
     (billions of cubic meters)

Natural gas sales by region(1)

        

Spain

   23.36    20.99    20.34

America

   8.59    7.92    7.15

Rest of the World

   4.16    3.94    2.84
              

Total

   36.11    32.85    30.34
              

(1) Table includes 100% of sales volumes reported by Gas Natural, although Repsol YPF owned 30.85% of Gas Natural at December 31, 2005 and 2004 and 27.15% at December 31, 2003 and accounts for it using the proportional integration method under IFRS because, since January 1, 2002, Gas Natural reports 100% of the natural gas sales volumes of each of its consolidated subsidiaries, regardless of Gas Natural’s stake in such subsidiaries. Since 2004, natural gas sales in Spain have included LNG supplied to wholesale customers in Spain, whereas in prior years these sales were included within “Rest of the World”. Natural gas sales for 2003 have been restated in accordance with this criterion.

Argentina

Repsol YPF participates in the distribution of natural gas in Buenos Aires through Metrogas (a subsidiary of YPF) and Gas Natural BAN (a subsidiary of Gas Natural), which are two of the largest natural gas distributors in Argentina. Since January 1, 2002, Metrogas is accounted for under the equity method.

Gas Natural has a 72% participation in the Invergas consortium, which holds, together with Gas Natural SDG -Argentina, 70% of Gas Natural BAN. Gas Natural BAN, which distributes natural gas in northern Buenos Aires, is one of the main natural gas distributors in Argentina. In 2005, Gas Natural BAN sold approximately 2.45 billion cubic meters of natural gas to 1.3 million customers in Buenos Aires, as compared to 2.43 billion cubic meters to 1.3 million customers in 2004 and 2.49 billion cubic meters to 1.2 million customers in 2003.

Repsol YPF currently holds through its subsidiary YPF Inversora Energética, S.A. a 45.3% stake in Gas Argentino (“GASA”), which in turn holds a 70% stake in Metrogas, which is a natural gas distributor in southern Buenos Aires and one of the main distributors in Argentina. During 2005, Metrogas distributed approximately 7.67 billion cubic meters of natural gas to 2.0 million customers in comparison with approximately 7.82 billion cubic meters of natural gas distributed to 1.9 million customers in 2004. The economic crisis that affected the country at the end of 2001 and beginning of 2002 caused a severe deterioration of the financial and operational situation of GASA. Thus the decision was made on March 25, 2002 to suspend payment of principal and interest on its entire financial debt. From then on, Metrogas’ management has focused on an efficient and rational use of its cash flow in order to be able to comply with all of the legal requirements agreed with the Argentine government with respect to its services. After negotiating a restructuring of the outstanding debt with its creditors, GASA has reached and executed on December 7, 2005 an agreement (the Master Restructuring Agreement or MRA) with its creditors, by which they would exchange debt for equity in GASA and/or Metrogas. After this exchange, YPF Inversora Energética will hold a 31.7% stake in GASA. The agreement has been presented to the Argentine entities CNDC and ENARGAS and is subject to their approval as condition precedent to the closing of the MRA. At the same time, Metrogas has reached an agreement with its main creditors in order to restructure its financial debt and align its future financial commitments to the expected generation of funds. The main objective of the restructuring process is to modify certain terms and conditions included in the loan and negotiable agreements, by adjusting interest rates and the amortization period so as to align the cash flow required for repayment of the indebtedness with debt service capacity. Accordingly, on April 20, 2006, Metrogas entered into an out-of-court preventive agreement (“APE”) with creditors representing approximately 95% of its unsecured indebtedness which has become effective in May 2006.

 

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Brazil

In Brazil, Gas Natural distributes natural gas in the metropolitan area and throughout the state of Rio de Janeiro. On April 26, 2000, Gas Natural was awarded a gas distribution concession in the state of São Paulo, which has an area of 53,000 km2 and a population of 2.5 million people. This concession enhances Gas Natural’s presence in Brazil, where Gas Natural started operations in July 1997 as operator for Companhia Distribuidora de Gas do Rio de Janeiro CEG and CEG RIO (formerly Riogás). In 2005, it sold approximately 3.72 billion cubic meters of natural gas to 0.7 million customers.

In July 2001, Gas Natural and Iberdrola signed an agreement involving Iberdrola’s interests in CEG (Brazil), CEG Rio (Brazil) and Gas Natural ESP (Colombia) and Gas Natural’s participation in Gas Natural Mexico. Pursuant to this agreement, Gas Natural acquired in March 2002 an additional 9.9% interest in CEG, 13.1% in CEG RIO and 14.6% in Gas Natural ESP and sold a 13.25% interest in Gas Natural México.

The agreement signed with Iberdrola increased Gas Natural’s interests in CEG to 28.8% from 18.9% and in CEG RIO to 38.3% from 25.1%.

In November 2003, Gas Natural entered into a stock purchase agreement with Enron to acquire Enron’s 25.4% interest in Compañía Distribuidora de Gas do Río de Janeiro or CEG as well as its 33.8% interest in CEG RIO. This transaction was completed in July 2004, and it has increased Gas Natural’s interest in CEG to 54.2% and to 72.0% in CEG RIO. In July 2005, Petrobras exercised a call option over 12.4% of CEG RIO, which results in Gas Natural Holding 59.6% in that Company.

Colombia

Through Gas Natural ESP, Gas Natural distributes natural gas in the capital of Colombia, Santa Fé de Bogotá, and, after the acquisition of Gasoriente, in the eastern region of Colombia. Additionally, in 1998 a consortium in which Gas Natural participates obtained a concession to distribute natural gas in the Cundi-Boyacensean area, which is located northeast of Bogotá. In 2005, Gas Natural sold in Colombia approximately 0.96 billion cubic meters of natural gas to 1.6 million customers.

The agreement signed with Iberdrola increased Gas Natural’s interest in Gas Natural ESP to 59.1% from 44.3%. See “—Operations—Natural Gas—Brazil.”

Mexico

In March 1998, Gas Natural México was awarded a concession to distribute natural gas in Monterrey, which is one of the largest consumers of natural gas in Latin America with a total population of more than six million inhabitants. In addition to natural gas distribution in Monterrey, Gas Natural México currently distributes natural gas in the cities of Toluca, Nuevo Laredo and Saltillo. In 1998, Gas Natural México obtained the concession for distribution of natural gas in the state of Guanajuato, which has a population of more than two million people. In December 1999, Gas Natural México was awarded the concession for the distribution of natural gas in the El Bajío Norte region, which includes the states of Aguascalientes, Zacatecas and San Luis de Potosí that have a combined population of about two million people. With the acquisition of Metrogas in 2000, Gas Natural México now distributes gas in Mexico City. In 2005, Gas Natural México sold approximately 1.46 billion cubic meters of natural gas to 1.1 million customers, as compared to 1.45 billion cubic meters of natural gas to 1.1 million customers in 2004.

The agreement signed with Iberdrola reduced Gas Natural’s interest in Gas Natural México to 86.75% from 100%. See “—Operations—Natural Gas—Brazil.”

Spain

Gas Natural, in which Repsol YPF has a 30.85% interest, is Spain’s largest natural gas distributor in terms of revenues and volume. See “—Operations—Gas and Electricity.” Gas Natural’s main activity is the distribution

 

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of natural gas to the residential and commercial sector as well as the industrial and electricity sectors. It supplies natural gas to Madrid and Barcelona and, through its holdings in 10 regional distributors, to nearly all of Spain. Repsol YPF estimates that Gas Natural has an approximate market share of 54% of the Spanish market.

Enagas owns most of the gas transportation and storage infrastructure in Spain. In June 2002, pursuant to the limitations on ownership of Enagas imposed by Royal Decree Law 6/2000, which limits the participation of any one group to 35%, Gas Natural sold 59.1% of Enagas in a secondary public offering for approximately €917 million (thereby reducing its interest in Enagas to 40.9%) and granted the institutional underwriters of the offering the right to buy the additional 5.9% that made up the 65% interest that must be sold (a “green shoe” option). Repsol YPF’s share in the sale proceeds amounted to approximately €221 million, which represents capital gains of approximately €97 million. Pursuant to Law 62/2003, no person may own, directly or indirectly, more than 5% of Enagas’ capital stock. The law imposes a period of up to three years to dispose of such shares. See “—Regulation of the Petroleum Industry—Spain—Natural Gas System.” In 2004 and 2005, Gas Natural sold additional shares of Enagas and, as of December 31, 2005, Gas Natural’s interest in Enagas was 12.8%. As of March 31, 2006, Gas Natural’s interest in Enagas was 9.2%.

Enagas’ infrastructure system in Spain consists principally of three coastal terminals for the receipt, storage and regasification of LNG, a network of high-pressure pipelines for bulk transmission of gas and low-pressure mains for local gas distribution and two underground gas storage facilities. The LACAL/Laq-Calahorra and Maghreb-Europe’s pipelines link gas fields in Norway and Algeria with the transmission network of Enagas.

In 2005, Gas Natural sold approximately 23.36 billion cubic meters of natural gas to 5.1 million customers in Spain, as compared to 20.99 billion cubic meters to 4.8 million customers in 2004 and 18.87 billion cubic meters to 4.5 million customers in 2003. The 2005 and 2004 natural gas sales figure in Spain includes LNG supplied to wholesale customers in Spain, whereas in prior years such sales were included within the “Rest of the World” category. If LNG sales to wholesale customers in Spain in 2003 had been included in the “Spain” category, the 2003 natural gas sales figure in Spain would have been 20.34 billion cubic meters.

Gas Natural purchases its gas supplies mainly through take-or-pay purchase contracts for LNG with producers in Algeria, Libya, Trinidad and Tobago, Nigeria and the Middle East. It also purchases natural gas from Algerian, Norwegian and Spanish fields.

Gas Natural is a party to a 25-year contract to purchase natural gas from Sonatrach, which is the Algerian state oil and gas company, at prices related to market prices in amounts ranging from 3.2 billion cubic meters in 1996 to 6.0 billion cubic meters per annum from 2000 through 2020. Such purchases are made principally on a take-or-pay basis. Gas Natural has also entered into a long-term contract with a Norwegian company for the supply of piped gas from the North Sea fields of Troll via Belgium and France through the Lacq-Calahorra pipeline. This contract expires in 2030.

Gas Natural has also entered into long-term contracts to acquire LNG from Nigeria, Trinidad and Tobago and the Middle East.

Gas Natural owns, through a 100% interest in SAGANE, a 72.6% interest in Europe-Maghreb Pipeline Ltd. (EMPL), which owns the exclusive right to operate the section of the Maghreb-Europe gas pipeline in Morocco and the section under the Straits of Gibraltar connecting the Algerian gas wells in Hassi R’Mel with the Spanish and European transmission systems. Transgas, which is a Portuguese gas distributor that uses part of the capacity of the Maghreb-Europe pipeline, holds the remaining 27.4% of EMPL.

Pursuant to Royal Decree Law 6/2000, 25% of the natural gas supplied by Sonatrach was allocated for a period of three years (2001-2003) to natural gas commercializers for resale to consumers in the liberalized market. The remaining 75% was allocated to Enagas for its supply to distributors that resell natural gas to consumers at regulated tariffs. After this three-year period, the contract has been assigned on a preferential basis

 

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to Enagas, which supplies this natural gas first to consumers at regulated tariffs and sells any remainder in the open market. See “—Regulation of the Petroleum Industry—Spain—Natural Gas System.”

In connection with the Sonatrach natural gas purchase contract, EMPL committed to construct, finance and operate the Maghreb-Europe pipeline, which extends 540 km in Morocco and 45 km under the Straits of Gibraltar to connect with the Spanish natural gas pipeline system. The 48-inch pipeline with an initial capacity of nine billion cubic meters per year was completed in 1996. Since January 1, 2005, the capacity of this pipeline has been increased to approximately 11.7 billion cubic meters per year. This pipeline constitutes a significant element in Repsol YPF’s natural gas supply strategy, because it secures a significant supply of gas at reduced transportation costs. At the European level, the pipeline represents an element of strategic importance, because it will help to strengthen the diversification of energy supplies for the entire continent. The Maghreb-Europe pipeline has allowed for a substantial increase in deliveries from Algeria. However, the increase in importance of Algeria as a supplier country is expected to be reduced over time as a result of Repsol YPF’s international supply diversification policy.

Puerto Rico

In October 2003, Gas Natural purchased Enron’s assets in EcoEléctrica. These assets, which were valued at US$179 million, include 47.5% of EcoEléctrica and 50% of the voting rights in this company, exclusive natural gas supply rights to the plant as well as a fuels operating and management agreement. This plant has a 540 MW combined-cycle generation plant and a regasification plant with a regasification capacity of 160,000 cubic meters per hour.

Repsol YPF believes that this acquisition represents an important step towards the development of trading operations in the Atlantic basin and is expected to provide Gas Natural with an important competitive advantage to carry out the supply of natural gas in Puerto Rico jointly with Repsol YPF, with which it already has an agreement.

Italy

In January 2004, Gas Natural purchased Grupo Brancato, which is the first private operator of gas on the island of Sicily. This transaction marks the entrance of Gas Natural to the gas distribution market in Italy.

Grupo Brancato consists of three distributors, one marketing company and two service companies, which have a presence in 73 Sicilian municipalities and three municipalities in the Abruzzo region. These companies have 93,000 customers.

In August 2004, Gas Natural signed a purchase agreement for Grupo Smedigas, which consists of one distributor and one marketer of natural gas that operate on the island of Sicily. Grupo Smedigas distributes natural gas in 24 municipalities in Sicily and has 54,000 clients.

In September 2004, Gas Natural purchased Grupo Nettis, which consists of six distributors, marketers and service companies that operate in the natural gas sector. Grupo Nettis operates in 24 municipalities in the regions of the La Puglia, Calabria and Sicily and has 91,000 clients.

In 2005, Gas Natural sold in Italy approximately 1.24 billion cubic meters of natural gas to 0.3 million customers in Italy.

 

  2.2.4.2 Electricity

Spain. Repsol YPF has a total installed capacity in cogeneration plants of 595 MW:

 

    In 2003, Repsol YPF acquired Iberdrola’s 50% stake in PIESA and now holds 100% of PIESA. This company owns three co-generation facilities in Tarragona, La Coruña and Gajano (Santander) with a total capacity of 175 MW.

 

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    Another co-generation facility, with 90 MW of capacity, started operations at the petrochemical facilities in Tarragona.

 

    330 MW already in existence at the refineries and petrochemical centers of Repsol YPF in Spain.

Repsol YPF also participates in three combined cycle power stations with an aggregate installed capacity of 3,600 MW:

 

    Bahía de Bizkaia Electricidad, S.L. (BBE), where Repsol YPF has a 25% stake, is an 800 MW combined cycle plant (CCGT) in the port of Bilbao. Adjacent to this power plant is a regasification facility, Bahía de Bizkaia Gas, S.L. (BBG), in which Repsol YPF also participates with a 25% interest.

 

    Through its interest in Gas Natural, San Roque and Sant Adriá del Besós, Repsol YPF participates in two 400 MW combined cycle plants (CCGT), located in Cádiz and Barcelona. Similarly through Gas Natural, in 2005 an 800 MW CCGT in La Rioja and a 1200 MW CCGT in Cartagena commenced operations. In Tarragona an 800 MW CCGT is under construction.

In 2004, Gas Natural acquired Banco Sabadell’s participation in wind farms, which represent an aggregate installed capacity of 138 MW (net capacity of 51 MW attributable to Gas Natural).

In April 2005, Gas Natural acquired DERSA, which is a company that also holds participations in wind farms in Spain with total installed capacity of 470 MW (net capacity of 228 MW attributable to Gas Natural) and 1,228 MW in new projects (net capacity of 1,020 MW attributable to Gas Natural).

Argentina-Generation. Repsol YPF participates in four power stations with an aggregate installed capacity of 1,685 MW:

 

    A 45% stake in Central Térmica Tucumán (410 MW combined cycle),

 

    A 45% stake in Central Térmica San Miguel de Tucumán (370 MW combined cycle),

 

    A 50% stake in Filo Morado (63 MW), and

 

    A 40% stake in Central Dock Sud (775 MW combined cycle and 67 MW gas turbines).

In 2005, these plants generated approximately 8,940 GWh in the aggregate.

Repsol YPF also operates power plants, which are supplied with natural gas produced by Repsol YPF, that produce power for use by Repsol YPF in other business units:

 

    Los Perales power plant (74 MW), which is located in the Los Perales natural gas field,

 

    Chihuido de la Sierra Negra power plant (40 MW), and

 

    The power plant located at the Plaza Huincul refinery (40 MW).

 

  2.2.5 Environmental Matters

Repsol YPF’s operations are subject to environmental protection laws and regulations of the European Union, Spain and its autonomous communities, Argentina and other countries in which Repsol YPF’s operations are located. These laws and regulations, which tend to become more stringent over time, address the general impact of industrial operations on the environment, including emissions into the air and water, the disposal or remediation of soil or water contaminated with hazardous or toxic waste, fuel specifications to address air emissions and the effect of the environment on health and safety. We have made and will continue to make expenditures to comply with these laws and regulations. Compliance with more stringent laws or regulations, as well as more vigorous enforcement policies of regulatory agencies, could in the future require additional expenditures by Repsol YPF for the installation and operation of systems and equipment for remedial measures

 

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and could affect Repsol YPF’s operations generally. In addition, violations of these laws and regulations may result in the imposition of administrative or criminal fines or penalties or may lead to personal injury claims or other tort liabilities.

Environmental factors are an important consideration in the planning, designing and operating of all Repsol YPF’s facilities. To ensure that Repsol YPF complies with all pertinent environmental principles, Repsol YPF created an Environmental Management System (EMS) in 1996. An Environmental Committee, which is formed by top management representatives from the operating areas, the Corporate Director for Resources and other Corporate Directors, formulates Repsol YPF’s environmental policy and coordinates its implementation among the operating areas. Under the EMS, the operating units must obtain an ISO 14001 Certification for their environmental management systems. At December 31, 2005, nine refineries, nine chemical plants, 19 Exploration and Production operations, geophysical operations in Argentina, 19 logistic terminals, 15 lubricants, asphalts and specialties factories and their corresponding distribution system, 24 marine supply facilities, 149 service stations, 11 LPG factories and two underground gas storage facilities covering almost all major industrial sites of Repsol YPF, were ISO 14001 certified.

Each of Repsol YPF’s operating units conduct significant programs to ensure that their operations are carried out in an environmentally acceptable manner. In 2005, 2004 and 2003, Repsol YPF spent €126.8 million, €100.9 million and €79.2 million, respectively, on environmental programs that included improving effluent treatment equipment, increasing the capacity and efficiency of sulfur recovery units at Repsol YPF’s refineries, energy saving and efficiency, reducing air emissions of pollutants from processing units, increasing the injection of produced water in upstream operations and reducing the release of volatile organic compounds during the storage and delivery of gasoline for motor vehicles from terminals to service stations. Because many environmental costs are inextricably intertwined with general operating costs at our facilities, some of our environmental and cost estimates are developed using the American Petroleum Institute guidelines with adjustments made to account for the characteristics and technical criteria of Repsol YPF.

Some of the most relevant issues that could affect Repsol YPF’s operations in the future relate to climate change, environmental quality of products, the Integrated Pollution Prevention and Control IPPC European Directive 96/61/EC, Royal Decree 430/2004 on limiting atmospheric emissions from Large Combustion Plants, Royal Decree 9/2005 on activities that are potentially soil-polluting as well as the environmental responsibility bill.

Regarding climate change issues, the Repsol YPF facilities affected by the European Directive for Trading of CO2 Emissions (2003/803/CE) applied for and obtained the corresponding emission permits according to the requirements of Law 1/2005. All of the plants successfully passed the emission verification exercise because their reports were validated in February 2006.

On the other hand, the Carbon Management Plan, approved at the end of 2004, was carried out successfully in 2005, and Repsol YPF achieved milestones in the three fundamental areas defined in the plan: global and joint action in the carbon market, intensification of the search for reduction opportunities through Clean Development Mechanism projects and the creation of measures to achieve energy efficiency and savings additional to those that have been implemented over the last few years.

In 2005, Repsol YPF continued to make investments in order to comply with the new specifications for gasoline and gas oil that resulted from Directive 2003/17/CE (which came into force in Spain on December 15, 2003 pursuant to Royal Decree 1700/2003) and Directive 2003/30/CE regarding the use of biofuels and other renewable fuels for transportation in Spain and Resolution Secretary of Energy (SE) 398 and 324/2003 annex I, in Argentina. Repsol YPF invested €186.2 million in 2005 to improve and construct new units in its refineries in order to comply with fuel specifications and expects to make additional investments in its industrial plants in Spain and Argentina in the following years.

 

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As for the 96/61/CE IPPC (Integrated Pollution Prevention and Control) Directive, the facilities affected by this law will have to obtain the Comprehensive Environmental Authorization in 2007. Repsol YPF also intends to take any actions in the industrial sites covered or affected by the Directive. While we cannot at this time estimate the total costs Repsol YPF will incur to comply with the IPPC Directive, the actions required to be taken are extensive and additional expenditures may be required.

In accordance with Royal Decree 9/2005 regarding activities capable of polluting the soil which was approved in January 2005, all of the producing centers in Spain have begun working on the preliminary report, which, according to the cited rule, should be presented before January of 2007.

Finally, the Spanish Department of the Environment is working on a bill that they hope will be approved in 2006, which shall implement the European Directive regarding environmental responsibility. In such law, the holders of the designated installations will be obligated to provide guarantees in order to carry out their activities.

United States. Laws and regulations relating to health and environmental quality in the United States affect nearly all of YPF Holdings’ (a subsidiary of YPF) operations in the United States.

In connection with the sale of Diamond Shamrock Chemicals Company (“Chemicals”) to a subsidiary of Occidental Petroleum Corporation (“Occidental”) in 1986, Maxus Energy Corporation (“Maxus”) agreed to indemnify Chemicals and Occidental from and against certain liabilities relating to the business and activities of Chemicals prior to the September 4, 1986 closing date (the “Closing Date”), including certain environmental liabilities relating to certain chemical plants and waste disposal sites used by Chemicals prior to the Closing Date.

In addition, under the agreement pursuant to which Maxus sold Chemicals to Occidental, Maxus is obligated to indemnify Chemicals and Occidental for certain environmental costs incurred on projects involving remedial activities relating to chemical plant sites or other property used in the conduct of the business of Chemicals as of the Closing Date and for any period of time following the Closing Date which relate to, result from or arise out of conditions, events or circumstances discovered by Chemicals and as to which Chemicals provided written notice prior to September 4, 1996, irrespective of when Chemicals incurs and gives notice of such costs.

See Section 6. “Financial Information—Legal Proceedings” for a discussion relating to certain legal proceedings and regulatory developments in respect of certain plant sites of Repsol YPF and its affiliates and third party sites.

The environmental policy of Tierra Solutions Inc. (“Tierra”) is the result of the alleged obligations of Maxus, as described in the previous sections, as a consequence of actions or facts occurred in the decades of the 1940s and 1970s and attributed to Maxus by the predecessor companies of Chemicals. Notwithstanding those actions and existing liabilities relating thereto, at the present time, with respect to the present operations of the affiliates of YPF Holdings, no violations of or conflicts with effective environmental legislation in the U.S. have been detected.

 

  2.2.6 Insurance

In line with industry practice, Repsol YPF insures its assets and activities worldwide. Among the risks insured are damage to property, consequential interruptions in its business and civil liability to third parties arising out of Repsol YPF’s operations. Repsol YPF’s insurance policies also include indemnification limits and deductibles. Repsol YPF considers its level of insurance coverage to be, in general, appropriate for the risks inherent in its business.

 

  2.3 Regulation of the Petroleum Industry

Repsol YPF is subject to regulations relating to the petroleum industry in Spain, Argentina and each country in which it operates.

 

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  2.3.1 Spain

Spain currently has legislation to liberalize the oil industry, the most recent manifestation of which is Hydrocarbons Sector Law 34/1998, of October 7, which has been supplemented by other provisions and implemented through numerous royal decrees and ministerial orders.

The Law seeks to provide integrated regulations for the vertically integrated oil industry, which includes research and exploitation of deposits, refining, transport, storage and distribution of crude oil or derivative products, through the acquisition, production, transport, distribution and sale of gas fuels through pipelines.

Law 34/1998 establishes the criteria for allocating powers among the Spanish government and the central and regional administrations. It is based on the idea that the hydrocarbons market is unique and global, and makes one Central and Regional Administration participants in the most general aspects of planning and ordering the sector.

The National Energy Commission is the public agency attached to the Ministry of Industry, Tourism and Commerce that is in charge of ensuring effective competition, objectivity and transparency in the electricity and liquid and gaseous hydrocarbons markets and to the benefit of all market participants, including consumers.

It acts as a consultative body to the Central Administration and participates in the energy planning process and in the preparation of general rules that affect the energy markets. It also acts as an arbitration panel in conflicts that arise among participants in the hydrocarbon sector, in particular, conflicts regarding contracts that grant third parties access to the transportation and distribution networks.

Recent Royal Decree-Law 5/2005, of March 11, contains provisions relating to the energy markets. Among these provisions, the definitions of “main operator” and “dominant operator” should be noted.

A company is considered a “dominant operator” when it has, as a group, a market share equal or superior to a 10% of the market in which it is operating.

A company is considered a “main operator” when it is among the five Companies with greater market share in any of the different energy sectors defined by the Law.

The definition of “main operator” is important because it affects the limitations on the exercise of voting rights and the appointing of members of the administrative body in more than one main operator in the fuel production and distribution, liquid petroleum gas production and supply and natural gas production and supply markets, which were established in Royal Decree-Law 6/2000. In this context, main operator is understood to mean the companies that hold the five highest shares of the market in question.

The limitations established in Royal Decree-Law 6/2000 are the following:

 

    Individuals or legal entities that, directly or indirectly, have an interest of more than 3% in the capital stock or voting rights of two or more main operators in the same market may not exercise the voting rights corresponding to an interest in excess of 3% in more than one of such companies.

 

    No individual or legal entity may appoint, either directly or indirectly, members of the administrative body of more than one main operator in the same market.

 

    A main operator may not exercise the voting rights corresponding to an interest in excess of 3% in the capital stock of another main operator in the same market, nor appoint members of its administrative body.

 

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These prohibitions do not apply to parent companies that are main operators vis-à-vis their subsidiaries that are also main operators, provided that the structure is imposed by law or is the consequence of a redistribution of securities or assets between companies belonging to the same group.

The National Energy Commission, as the regulatory agency for the energy market, may authorize the exercise of the voting rights corresponding to the excess interest or the appointment of members of the administrative body, provided that such authorization does not promote the exchange of strategic information between two or more main operators in the same market.

Regarding the “dominant operator”, the Law, so far, has no established limitations in connection with the Petroleum industry. So far, being a “dominant operator” only implies some limitation or additional liabilities in the Electricity sector.

Law 55/1999 contains special provisions with respect to the so-called “golden energy share.” Law 55/1999 establishes that shareholdings of at least 3% of the capital stock of energy companies such as Repsol YPF by government entities or other entities that are majority owned or controlled by government entities must be notified to the Administration. The Council of Ministers has two months from such notification to decide whether to allow the exercise of the rights corresponding to those shares or subject the exercise of such rights to certain conditions pursuant to, among other things, the principles of objectivity, transparency, equilibrium and proper operation of the energy markets and systems. Until the Council of Ministers makes its decision, either through silence or an express resolution, the entities in question may not exercise the voting rights corresponding to their shareholdings.

Royal Decree-Law 4/2006 expanded the functions of the Spanish National Energy Commission (“Comisión Nacional de Energía”). Under Royal Decree-Law 4/2006, prior administrative authorization must be sought for certain acquisitions or investments in companies that engage in regulated activities or activities that, although not regulated in the strict sense, are subject to significant oversight by administrative bodies in Spain. In light of the fact that to date the Spanish National Energy Commission has not published guidance on how it will apply Royal Decree-Law 4/2006, the extent to which Royal Decree-Law 4/2006 applies to, and the impact such Decree-Law might have on, Repsol YPF and its affiliates is unclear. There is no precedent of a decision of the Spanish National Energy Commission relating to the application of Royal Decree-Law 4/2006 to companies in the liquid hydrocarbons sector.

 

  2.3.1.1 Exploration, Research and Exploitation of Hydrocarbons

Hydrocarbon deposits and underground storages existing on Spanish territory and in the territorial marine subsoil and ocean bottoms which are under Spanish sovereignty are considered public properties.

All foreign and domestic persons may conduct exploration, research and exploitation activities in the hydrocarbon sector so long as any such person obtains the required authorizations, permits and/or concessions, which will be granted only to those persons possessing the requisite technical and financial resources to perform such activities. Law 34/1998, and the rules and regulations promulgated thereunder, require the process of granting authorizations, permits and concessions to be objective, transparent and nondiscriminatory.

The underground storage facility regime and which entities can and/or will perform the role of the “operators” are regulated by Law 34/1998.

 

  2.3.1.2 Oil and Petroleum Derivatives

Crude oil refining activities and the transportation, storage, distribution and sale of petroleum derivatives (including LPG) are liberalized, although the construction and use of the facilities at which such activities are carried out are subject to prior governmental authorization.

 

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Petroleum derivative prices are liberalized, with the exception of LPG, which is subject, in most cases, to price caps.

 

  2.3.1.2.1 Liquid Hydrocarbons

The construction and operation of refining facilities, as well as the construction and operation of petroleum product transportation and storage facilities that provide services to wholesale operators, are subject to prior authorization. The granting of such authorization requires that the facility meet (i) the relevant technical and safety requirements (ii) the relevant conditions relating to environmental protection and (iii) the relevant zoning requirements of the locality.

Wholesale operators that are not owned by refining companies or companies majority-owned by refining companies are subject to prior governmental authorization. The authorizations are granted only to those operators possessing the requisite legal, technical and financial resources to perform such activities and guarantee certain minimum safety stocks.

Retail distributors’ activities are liberalized, although the construction and use of the facilities at which such operations are conducted are subject to prior governmental authorization.

Exclusive supply agreements entered into by wholesale operators and owners of vehicle supply facilities may be agreed on a firm sales or commission basis.

Third parties may freely access transportation and storage facilities, such as the facilities of Compañía Logística de Hidrocarburos S.A. (“CLH”), on conditions agreed on an objective, transparent and nondiscriminatory basis. The Spanish government has the discretion to establish access tolls for mainland territories and for those areas of the Spanish territory where alternative transport or storage facilities do not exist or are insufficient. As of the date of this annual report, the Spanish government has not exercised this discretion.

CLH Property. Pursuant to Royal Decree Law 6/2000, no person may hold, directly or indirectly, ownership of more than 25% of the capital stock of CLH Royal Decree Law 6/2000 further provides that the aggregate direct or indirect ownership interest in CLH of entities with refining capacity in Spain may not exceed 45% of CLH’s capital. The political and voting rights of stock held in excess of 25% interest are suspended. In 2002 and 2003, Repsol YPF and other entities with refining capacity in Spain sold part of their interest in CLH, and Repsol YPF’s ownership interest in CLH no longer exceeds the 25% limit. The impact on the Group’s 2002 operating income resulting from the reduction of Repsol YPF’s ownership in CLH amounted to €173 million.

Technical Specifications of Biofuels. Royal Decree 61/2006, establishes the specifications for gasoline, gas-oil, fuel-oil and liquid petroleum gas and the use of biocarbons.

The aforementioned Royal Decree establishes the new technical specifications for petroleum derivatives and, in particular, the maximum sulfur content from January 1, 2009 in gasoline and automotive diesel (Class A), and from January 1, 2008 for agricultural and maritime diesel (Class B) and heating fuel oil (Class C). In addition, the technical specifications for biocarbons that result from the addition of ethanol into gasoline and biofuels into automotive diesel were also established.

Service Stations. Royal Decree-Law 6/2000 established that wholesale operators of petroleum products in Spain, whose distribution network consists of more than 30% of the service stations in Spain, may not increase the number of their service stations until June 25, 2005.

Repsol YPF did not have to record any impairment as a result of this limitation.

In addition, the Royal Decree provided that large commercial establishments, such as shopping complexes, constructed after June 25, 2000 that are classified as “large commercial centers” under Spanish law, must include

 

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at least one facility for supply of petroleum products for vehicles. These facilities may not enter into preferential exclusive supply contracts with a single wholesale operator of petroleum products, such as Repsol YPF.

 

  2.3.1.2.2 Liquid Petroleum Gas

Wholesale operators of LPG must apply for a permit to operate, which will be granted only to those entities (i) that possess the requisite legal, technical and financial resources to perform such operations, (ii) guarantee certain minimum safety stocks, (iii) whose storage and bottling facilities meet the relevant safety and technical conditions and (iv) that provide technical assistance services to end users and retail distributors.

Retail distributors of bulk LPG must also apply for a permit to operate, which will be granted only to those entities (i) that possess the requisite legal, technical and financial resources to perform such operations and (ii) whose storage facilities meet the relevant safety and technical conditions. Such permits are not required for entities wishing to supply bulk LPG to vehicles from fixed retail distribution facilities of petroleum products.

Retail distributors of bottled LPG do not require a permit to operate, although the storage and retail sale facilities at which such operations are conducted must meet certain safety and technical conditions. Further, retail distributors are required to provide their customers with technical assistance services. Retail distributors can provide such services either themselves or through a wholesale operator.

Law 34/1998 prohibits exclusive supply agreements between operators and retail distributors of bottled LPG, except agreements between operators and agents that form part of their distribution network. However, to qualify for this exemption, the networks must guarantee home delivery of bottled LPG.

To the extent that the competitive conditions of the bottled and pipelined LPG distribution market are deemed inadequate, the Spanish government may establish maximum prices for sales to the public through a formula determined by a regulation. It is not expected that deregulation of LPG prices will occur so long as Repsol Butano continues to have a significant market share. Since 1998, the prices of bulk LPG and LPG sold in bottles smaller than eight kilograms have been liberalized.

Bottled LPG prices in containers with a capacity of eight kilograms or more have been subject to a system of price controls since November 1993. In October 2000, the method for determining bottled LPG maximum prices was changed. However, this change did not have any effect on the Group’s operations, assets or future cash flows, and no impairment resulted from such change.

Currently, the maximum pre-tax retail price for LPG bottled in containers with a capacity of eight kilograms or more is determined in January, April, July and October of each year using the formula contained in Order ITC/2745/2005, of July 28, which determination takes into account average international prices over the six prior months plus mark-up costs. The Order fixed the maximum mark-up costs at 0.353643 euro per kilogram and authorized the Ministry of the Economy to update the maximum annually in light of foreseeable changes in the sector’s costs and productivity.

Likewise, the supply of LPG through pipelines to end users and the supply of bulk LPG to LPG distribution companies through pipelines is subject to maximum prices established by the Spanish government pursuant to a Ministerial Order of November 5, 1993. The maximum prices are set each month based on a formula that takes into account the cost of raw materials and freight in international markets in the month prior to the respective month of application and mark-up costs. The amount of the current mark-up costs was fixed by a Ministerial Order of November 16, 1998 at 0.2854 euro per kilogram and has not changed since then.

 

  2.3.1.2.3 Supply Guaranty

Law 34/1998 established the right of all consumers to a supply of petroleum derivatives in the national territory under certain conditions. The Law has been further developed in 2004 through Royal Decree 1716/2004.

 

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Pursuant to Royal Decree 1716/2004, operators authorized to engage in wholesale distribution of petroleum products must at all times maintain minimum safety stocks equal to 90 days of their annual sales volume on the national market (excluding sales to other wholesale distributors). The same obligation applies to (i) retail distributors with regard to their annual sales volume on the national market not supplied by wholesale operators; and (ii) consumers of petroleum fuels with regard to their annual consumption not supplied by either wholesale operators or retail distributors.

The minimum safety stocks include strategic reserves with a volume equal to half the minimum safety stocks of petroleum products, excluding LPG.

In the LPG sector, wholesale operators must at all times maintain minimum safety stocks equal to 20 days of their annual sales volume on the national market (excluding sales to other wholesale operators). The same obligation applies to (i) retail distributors of bulk LPG and retail marketers of bottled LPG with regard to their annual sales volume on the national market not supplied by wholesale operators; and (ii) LPG consumers with regard to their annual consumption not supplied by wholesale operators, retail distributors of bulk LPG or retail marketers of bottled LPG.

The minimum safety stocks for LPG do not include strategic reserves.

Under legislation enacted in 1994, Corporación de Reservas Estratégicas (CORES), a Spanish government corporation was created. Its functions include, among others, the creation, maintenance and management of the strategic reserves and control over the minimum safety stocks of petroleum products, including LPG. Currently, its legal and operating regime is set forth in Royal Decree 1716/2004.

In the event of a petroleum product shortage, the Council of Ministers, among other measures, has the authority to subject the minimum safety stocks, including strategic reserves, to an intervention regime under the direct control of CORES.

 

  2.3.1.3 Natural Gas System

Regulation of Activities and Agents Acting in the System. Law 34/1998 regulates the definitions of carrier, distributor and commercializer, all of whose activities are performed under the system of free competition.

Carriers are legal persons who own LNG regasification facilities, transport or storage facilities.

Distributors are legal persons who own distribution facilities, whose function is to supply natural gas through pipelines, as well as to build, maintain and operate the distribution facilities designed to deliver natural gas to the points of consumption.

Commercializers are companies that purchase natural gas from third party facilities to sell it to consumers or to other commercializers.

The system’s technical manager is the carrier that owns most of the basic natural gas network facilities. The technical manager is responsible for the technical management of the basic network and the secondary carrier network and guarantees the continuity and safety of the supply and appropriate coordination among access points, storage facilities, transportation and distribution. Enagas, S.A. performs the role of technical manager of the system. Royal Decree-Law 6/2000 provided that no entity may own, directly or indirectly, more than 35% of the capital stock of Enagas. In June 2002, Gas Natural sold 59.1% of Enagas in a secondary public offering. The impact on the Group’s operating income was a reduction of €23 million. See Section 3. “Operating and Financial Review and Prospects—Results of Operations by Business Segment—Gas and Electricity.” Pursuant to Law 62/2003, no entity may own, directly or indirectly, more than 5% of the capital stock of Enagas, S.A. The voting rights and rights to determine Enagas’ policy of stock held in excess of the 5% cap will be suspended.

 

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Regasification, storage, transportation and distribution activities are regulated activities, whose economic and operational regime must be in accordance with Law 34/1998. Companies that perform these activities may not perform commercialization activities.

Commercialization activities are liberalized (and therefore the economic regime is determined by participants). Companies dedicated to natural gas commercialization may not have additional corporate objectives in the gas sector and may not perform regasification, storage, transport or distribution activities.

Natural gas may be purchased by: a) carriers for sale to other carriers or distributors; b) qualified consumers; and c) commercializers for sale to qualified consumers or other commercializers.

Entities authorized to buy natural gas have a right to access regasification, storage, transportation and distribution facilities under nondiscriminatory, transparent and objective conditions, subject to payment of a toll that is fixed by a regulation. Royal Decree-Law 5/2005, of March 11, provides for a potential exemption from the obligation to provide access to third parties to the natural gas system facilities to new transportation facilities and facilities that significantly increase the capacity of existing infrastructures. Such exemption would exclude the facility in question from the sector’s rate system.

Since January 1, 2003, all consumers, regardless of their level of consumption, are qualified consumers and may choose between buying natural gas from distributors in the regulated market or from commercializers in the liberalized market.

The construction, operation, modification and closing of basic network and carrier network facilities and gas distribution facilities require prior government authorizations, which are similar to the authorizations required for commercialization activities.

When Law 34/1998 took effect, all concessions relating to the supply of fuel gas through pipelines were cancelled and replaced by government authorizations. As a result, concessions granted pursuant to the prior 1987 law were expressly cancelled.

New authorizations to build distribution facilities may not be granted to a natural gas distribution zone with an administrative authorization.

As of January 1, 2003, no company or group of companies acting in the natural gas sector can collectively provide natural gas for consumption in Spain in an amount in excess of 70% of domestic consumption. The Spanish government is authorized to modify that percentage based on changes in the sector and the sector’s business structure.

Price Regulation. Law 34/1998 distinguishes between regulated activities, whose economic and operational systems must be in accordance with the Law, and commercialization activities, whose economic regime is determined by participants.

Under the scope of Royal Decree 949/2001, which implemented criteria and principles related to compensation for regulated activities, the Ministry of the Economy has issued different ministerial orders that establish the compensation for the various regulated activities, as well as tariffs, tolls and royalties payable in respect of the regulated activities of transportation and distribution. Today, following the implementation of Law 24/2005, the Ministry of the Economy establishes the fixed tariffs, tolls and royalties, which are the same throughout Spain and are considered as maximum prices.

The sales price for natural gas in the regulated market is based, among other factors, on:

 

    The cost of raw materials, which is determined based on the average CIF purchase price of natural gas paid by carriers and includes costs incurred in placing the gas in the basic network.

 

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    The average of the applicable costs relating to regasification, transport, distribution and storage.

 

    The applicable carriers’ costs incurred in supplying natural gas to distributors for sale in the regulated market.

 

    The applicable distributors’ costs incurred in supplying natural gas.

The tolls and royalties for use of the regasification, storage, transportation and distribution facilities are fundamentally determined by:

 

    Demand forecasts for natural gas for the year in which they are to be applied.

 

    Compensation for regulated activities in the natural gas system.

 

    Forecasts of usage of regasification, storage, transportation and distribution facilities.

Currently, the sales price for natural gas in the regulated market, tolls and royalties related to third party access to natural gas facilities and compensation for regulated activities are contained in the following Ministerial Orders: Order ITC 3655/2005, Order ITC/4099/2005, Order ITC/4101/2005 and Order ITC/4100/2005.

Application of Gas from the Algeria Contract. Pursuant to Royal Decree-Law 6/2000, 25% of the natural gas supplied through the Maghreb-Europe gas pipeline in 2001, 2002 and 2003 under the contract with Sonatrach, the Algerian state oil company, was assigned to commercializer companies for sale in the liberalized market. The remaining 75% was assigned to Enagas, S.A. for sale to distributors for subsequent sale in the regulated market.

Starting on January 1, 2004, the natural gas supplied pursuant to the contract with Sonatrach is applied preferentially to the regulated market.

Supply Guaranty. All consumers living in a geographic area that corresponds to the scope of any particular authorization have the right to receive gas fuels supplied through pipelines under the conditions established in Law 34/1998.

In order to ensure supply, Law 34/1998 established the obligation of maintaining minimum safety stocks for specified carriers, distributors and qualified consumers who make use of the right of access to natural gas facilities and are not supplied by an authorized merchant. Such obligations have been developed by Royal Decree 1716/2004. Pursuant to the Royal Decree, carriers that introduce natural gas into the system, and marketers and consumers that make use of the access right, must maintain minimum safety stocks equal to 35 days of their firm sales volume or annual consumption.

In addition, carriers and marketers that introduce natural gas into the system must diversify their supplies so that the volume of the supplies coming from the main supplier country for the Spanish gas market is less than 60% of their supplies. The same obligation applies to consumers that purchase natural gas directly in the main supplier country for the Spanish gas market in annual quantities over 10 GWh.

CORES is responsible for ensuring compliance with the obligations to maintain minimum safety stocks and diversify supplies.

 

  2.3.1.4 Antitrust

European Union Regulation 2790/1999 governing vertical restraints on competition came into force on January 1, 2000 and will be applicable until May 31, 2010. Regulation 2790/1999 increases restrictions imposed on exclusivity agreements between, among others, petroleum product suppliers and petroleum product distributors operating in European Union markets.

 

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Prior to the effectiveness of Regulation 2790/1999, exclusive supply agreements between suppliers and independently owned service stations that operated as resellers in the market benefited from a block exemption from Section 81.1 of the European Community Constitutive Treaty, which forbids anticompetitive agreements. This exemption was applicable as long as the exclusivity arrangements did not contain certain “hard core” restrictions, such as resale price maintenance obligations, and did not exceed a period of 10 years, except if the reseller operated from premises leased by the supplier. In this case, an exclusivity agreement could extend for up to the period of the underlying lease.

Repsol YPF’s exclusive supply agreements with independent retailers did not formally fall within the block exemption regulation because the majority of the independent retailers operate as Repsol YPF’s agents and, therefore, are not deemed to be resellers. To obtain exemption for these contracts from Section 81.1, Repsol YPF relied on “ad hoc” “comfort letters” issued by the Competition Directorate General of the European Commission after an examination of the existing contracts and the relevant market. Repsol YPF also relied on the application by analogy of the existing block exemption to Repsol YPF’s contracts.

Regulation 2790/1999 deprives suppliers, such as Repsol YPF, of the protection of the block exemption in the following cases:

 

    in any market where the supplier’s market share exceeds 30% (i.e., Spain in Repsol YPF’s case)

 

    in the case of any exclusivity contract that lasts more than five years, except where the distributor operates from premises owned by the supplier or premises owned by the supplier and leased to third parties independent from the supplier.

Regulation 2790/1999 allowed exclusivity arrangements in place at May 31, 2000 to continue to be exempt from the new requirements until December 31, 2001. The interpretative guidelines issued by the European Commission in October 2000 confirmed the validity of the contracts that by December 31, 2000 had a remaining term of no more than five years.

Although Repsol YPF’s exclusivity agreements continue to be valid under the new regulations, Repsol YPF initiated informal contacts with the Competition Directorate General of the European Commission. Additionally, to better comply with the new regulations, the duration of Repsol YPF’s new contracts is limited to five years. With respect to the old contracts that by December 31, 2000 exceeded the five-year time limit, Repsol YPF has informed its distributors of its decision to terminate these contracts before the end of such period (whenever these old contracts reach five years in duration) and to ask for a proportional reimbursement of the investments made by the supplier.

Finally, in order to obtain the maximum assurance under European Community laws on December 20, 2001, all distribution contracts between Repsol YPF and service stations were presented to the EU Commission to be cleared either by a declaration of compatibility with the Treaty of Rome or by their individual exemption pursuant to Section 81.3 of the Treaty.

The Commission made its final decision accepting the commitments offered by Repsol YPF. Repsol Comercial de Productos Petrolíferos (RCPP) will allow all service stations with which it has signed long-term supply contracts to terminate these contracts, subject to compensation. The mechanism to calculate the compensation has been designed so as to give a financial incentive to stations to end their long-term contracts. Furthermore, RCPP will not sign any new exclusive supply contracts with a duration exceeding five years. RCPP will also abstain from purchasing stations that it does not supply. Finally, RCPP will ensure complete freedom to service stations in its network to offer discounts on the retail price.

On September 1, 1999, the Service for the Defense of Competition (“Servicio de Defensa de la Competencia”) began a preliminary inquiry into whether it should be permissible for suppliers to treat agents and resellers differently with respect to retail pricing agreements. Under Spanish law, suppliers may set retail prices

 

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to be charged to consumers by agents but may not determine the retail prices which resellers charge to consumers. If the Service for the Defense of Competition consider that differential pricing arrangements for resellers and agents are impermissible, and the Tribunal for the Defense of Competition (“Tribunal de la Competencia”) upholds that view the prohibition on determining retail pricing may be extended to Repsol YPF’s agreements with its distributors.

During the same process, on September 1, 1999, the Service for the Defense of Competition also began a preliminary inquiry into whether an exclusivity agreement between a petroleum-products supplier and a distributor should be legally permissible for a period longer than five years where the distributor operates facilities leased by the supplier to the distributor and the distributor has granted the supplier usufruct or surface rights on the premises. Repsol YPF believes that there are sound economic reasons, including those based on the investments made by suppliers in distribution facilities, in favor of permitting extended exclusivity arrangements between suppliers and distributors operating on premises leased to a distributor by a supplier.

The Service for the Defense of Competition made an unfavorable assessment of the above mentioned issues, bringing an administrative proceeding before the Tribunal for the Defense of Competition, which ruled against Repsol YPF on the first issue, i.e., the agent/reseller controversy, but acquitted Repsol YPF of the other charge, i.e., the use of surface and usufruct rights as a means to avoid the time limit of five years. The Tribunal did not consider those contracts unlawful under competition rules. Due to the infringement arising from the first issue, a fine of €3 million was imposed. Repsol YPF has appealed to the administrative court whose ruling is still pending.

The Tribunal for the Defense of Competition ruled against Repsol Butano S.A., Repsol YPF’s subsidiary that sells bottled LPG, imposing a €1.5 million fine, as it considered illegal some restrictions imposed by Repsol Butano on its distributors, such as after-contract non-competition clauses and prohibitions on the use of spare parts provided by other companies. Although this ruling has been appealed, Repsol Butano decided to modify its contracts to reflect the Tribunal for the Defense of Competition’s decision. The Service for the Defense of Competition issued a report supporting the granting of an individual authorization to this modified contract. Throughout this process, Repsol YPF continued to substitute new contracts for the old ones, which process was completed in 2003. Despite the favorable opinion by the Service, the Tribunal for the Defense of Competition has denied authorization to new contracts due to their exclusivity. Consequently, Repsol Butano, S.A. has made a petition to the Court of Justice seeking amendment of the decision, maintaining in the meantime the existing relations with the agents until such time that it obtains the corresponding judicial pronouncement.

The European Commission has launched an extensive investigation into several markets related to tire manufacturing services. Towards the end of 2002, General Química S.A., Repsol YPF’s subsidiary which produces rubber chemicals and rubber additives, such as many other companies in Europe and the United States, was investigated in the context of an antitrust investigation. This investigation resulted in a decision by which a €3.38 million fine was imposed on General Química, S.A. and jointly and severally on Repsol Química, S.A. and Repsol YPF. This decision has been appealed before the First Instance Court of the EU whose ruling is still pending.

Around the same time, Repsol YPF Lubricantes y Especialidades S.A., Repsol YPF’s subsidiary that produces, among other products, bitumen, was also investigated by the European Union in another antitrust investigation, together with other companies. On March 25, 2003, the European Commission visited several European producers under an investigation of the hydrogen peroxide, plastic softening agents, solvents and methacrylates markets. Repsol YPF was not among the companies that were investigated but has collaborated by providing the Commission, since 2003, with answers to its questions related to the acrylates market.

The EU Commission has not yet confirmed whether either Repsol YPF or any of its affiliates will be subject to proceedings as a result of these investigations.

 

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The European Commission has cleared some of Repsol YPF’s transactions involving mergers. For example, the European Commission cleared the acquisition from Shell of assets in Portugal related to fuels, lubricants and bitumen. Clearance was granted on 13 September 2004, because, although there was some overlap in both companies’ businesses, the view of the European Commission was that there is enough competition from other companies to keep the markets competitive. Also, the acquisition of the LPG facilities of Shell Portugal received separate clearance from the Commission on March 3, 2005, because the Commission viewed that this operation has increased competition in the market by making it easier for Repsol Butano to challenge Galp’s dominant position. Finally, the European Commission cleared the acquisition of Borealis’ petrochemical assets on 19 November 2004 in Portugal. The Commission granted clearance quickly, because its view was that the combination of both companies’ market shares does not pose any competition concerns and there is a sufficient number of other competitors.

 

  2.3.2 Argentina

 

  2.3.2.1 Overview

The Argentine oil and gas industry is regulated by Law No. 17,319, which is referred to as the Hydrocarbons Law, adopted in 1967. The executive branch of the Argentine government applies this law through the national Secretary of Energy. The regulatory framework of the Hydrocarbons Law was established on the assumption that the reservoirs of hydrocarbons would be national properties and Yacimientos Petroliferos Fiscales Sociedad del Estado, YPF’s predecessor, would lead the oil and gas industry and operate under a different framework than private companies. In 1992, Law No. 24.145, referred to as the Privatization Law, privatized YPF and was designed to implement the transfer of ownership of reservoirs to the provinces, subject to the existing rights of holders of exploration permits and production concessions. However, because an amendment to the Hydrocarbons Law has not been enacted, the transfer of property to the provinces has not been implemented. In August 2003, executive Decree No. 546/03 transferred to the provinces the right to grant hydrocarbons exploitation and transportation concessions in certain locations designated as “transfer areas” and in other areas designated by the competent provincial authorities.

In October 1994, the national constitution was amended. Article 124 establishes that natural resources existing within any province’s territory are property of such province. Article 75 of the national constitution allows Congress to enact laws to develop mineral resources existing within the national territory. The governments of the provinces, in which the mineral and hydrocarbon reservoirs are located, will be responsible for carrying out these laws. Legislators have submitted to Congress new drafts of the Hydrocarbons Law. These drafts establish the provinces’ ownership of the hydrocarbon reservoirs in accordance with Article 124. This notwithstanding, the enactment of the reforms is still pending.

On January 6, 2002, the Argentine Congress enacted Law No. 25,561, the Public Emergency and Foreign Exchange System Reform Law, which represented a profound change in the economic model, and rescinded the Convertibility Law No. 23,928, which had been in effect since 1991 and had pegged the peso to the dollar on a one-to-one basis. In addition, Law No. 25,561 granted the executive branch of the Argentine government authority to enact all necessary regulations in order to overcome the economic crisis in which the country was then immersed.

After the enactment of the Public Emergency and Foreign Exchange System Reform Law, several other laws and regulations have been enacted. The following are the most significant measures enacted to date in Argentina:

 

   

Conversion into pesos of (i) all funds deposited in financial institutions at an exchange rate of Ps.1.40 = US$1.00 and (ii) all obligations (e.g., loans) with financial institutions denominated in foreign currency and governed by Argentine law at an exchange rate of Ps.1.00 = US$1.00. The deposits and obligations converted into pesos will be thereafter adjusted by a reference stabilization index, the Coeficiente de Estabilidad de Referencia (CER), to be published by the Argentine Central Bank. The aforementioned

 

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adjustments became effective retroactively as of February 4, 2002. Law No. 25,642 suspended the application of the CER to obligations of up to Ps.400,000 until September 30, 2002. Obligations governed by non-Argentine law have not been converted to pesos under the new laws. Substantially all of YPF’s dollar-denominated debt is governed by non-Argentine law.

 

    Conversion into pesos at an exchange rate of Ps.1.00 = US$1.00 of all obligations outstanding among private parties at January 6, 2002 that are governed by Argentine law and payable in foreign currency. The obligations so converted into pesos will be adjusted through the CER index, as explained above. In the case of non-financial obligations, if as a result of the mandatory conversion into pesos the resulting intrinsic value of the goods or services that are the object of the obligation are higher or lower than its price expressed in pesos, then either party may request an equitable adjustment of the price. If they cannot agree on such equitable price adjustment, either party may resort to the courts. Decree No. 689/02 established an exception to the Public Emergency and Foreign Exchange System Reform Law and Regulations and provides that the prices of long-term natural gas sale and transportation agreements executed before the enactment of the Decree and denominated in US dollars will not be converted into pesos (Ps.1 = US$1) when the natural gas is exported to third countries.

 

    Conversion into pesos at an exchange rate of Ps.1.00 = US$1.00 of all tariffs of public services and the imposition of a period of renegotiation with the governmental authorities thereafter.

 

    Imposition of customs duties on the export of hydrocarbons with instructions to the executive branch of the Argentine government to set the applicable rate thereof. Executive Decrees No. 310/2002 and No. 809/2002 (as amended by resolutions 335/04, 336/04 and 337/04 issued by the Ministry of Economy and Production) imposed certain customs duties on crude oil, LPG, gasoline, diesel and certain refined products exports. On May 26, 2004, through the issuance of Decree No. 645/04, an export duty on the export of natural gas and LNG was established at a rate of 20%. Moreover, on August 4, 2004, the Ministry of Economy and Production issued resolution 532/04 establishing a progressive scheme of export duties for crude oil, with rates ranging from 25% to 45%, depending on the quotation of the WTI reference price at the time of the exportation. See “—Regulation of the Petroleum Industry—Argentina—Taxation.”

In October 2004, the Argentine Congress enacted law No. 25.943 creating a new state-owned energy company Energía Argentina Sociedad Anónima (ENARSA). The corporate purpose of ENARSA is the exploration and exploitation of solid, liquid and gaseous hydrocarbons, the transport, storage, distribution, commercialization and industrialization of these products, as well as the transportation and distribution of gas and the generation, transportation, distribution and commercialization of electricity. Moreover, law 25.943 granted ENARSA exploration permits over all the national off shore areas not covered by exploration permits or exploitation concessions at the time of the enactment of the law.

 

  2.3.2.2 Exploration and Production

The Hydrocarbons Law establishes the basic legal framework for the regulation of oil and gas exploration and production in Argentina. The Hydrocarbons Law empowers the executive branch to establish a national policy for development of Argentina’s hydrocarbon reserves and has the principal purpose of satisfying domestic demand.

The Hydrocarbons Law permits surface reconnaissance of territory not covered by exploration permits or production concessions upon authorization by the Secretary of Energy and with permission of the private property owner. Information gained as a result of surface reconnaissance must be provided to the Secretary of Energy. The Secretary of Energy may not disclose this information for two years without permission of the party who conducted the reconnaissance, except in connection with the grant of exploration permits or production concessions.

Under the Hydrocarbons Law, the executive branch may grant exploration permits after submission of competitive bids. Permits granted to third parties in connection with the deregulation and demonopolization

 

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process were granted in accordance with procedures specified in the Oil Deregulation Decrees, and permits covering areas in which YPF was operating at the date of the Privatization Law were granted to YPF by such law. In 1991, the executive branch established a program under the Hydrocarbons Law (known as the Argentina Plan) pursuant to which exploration permits may be auctioned. The holder of an exploration permit has the exclusive right to perform the operations necessary or appropriate for the exploration of oil and gas within the area specified by the permit. Each exploration permit may cover only unproved areas not to exceed 10,000 square km (15,000 km2 offshore) and may have a term of up to 14 years (17 years for offshore exploration). The 14-year term is divided into three basic terms and one extension term. At the expiration of each of the first two basic terms, the acreage covered by the permit is reduced, at a minimum, to 50% of the remaining acreage covered by the permit. At the expiration of the three basic terms, the permit holder is required to revert all of the remaining acreage to the Argentine government, unless the holder requests an extension term, in which case such grant is limited to 50% of the remaining acreage.

If the holder of an exploration permit discovers commercially exploitable quantities of oil or gas, the holder may obtain an exclusive concession for the production and development of this oil and gas. A production concession gives the holder the exclusive right to produce oil and gas from the area covered by the concession for a term of 25 years (plus, in certain cases, a part of the unexpired portion of the underlying exploration permit). The term may be extended for an additional 10 years by application to the executive branch. A production concession also confers on the holder the right to conduct all activities necessary or appropriate for the production of oil and gas, provided that such activities do not interfere with the activities of other holders of exploration permits and production concessions. A production concession entitles the holder to obtain a transportation concession for the oil and gas produced. See “—Regulation of the Petroleum Industry—Argentina—Transportation.”

Exploration permits and production concessions require holders to carry out all necessary work to find or extract hydrocarbons, using appropriate techniques, and to make specified investments. In addition, holders are required to:

 

    avoid damage to oil fields and waste of hydrocarbons,

 

    adopt adequate measures to avoid accidents and damage to agricultural activities, fishing industry, communications networks and the water table, and

 

    comply with all applicable federal, provincial and municipal laws and regulations.

Holders of production concessions, including YPF, also are required to pay royalties to the province where production occurs in the amount of 12% of the well-head price (equal to the FOB price less transportation costs and certain other reductions) of crude oil produced and 12% of the value of the used volume of natural gas produced, based on the sales price, less transportation, storage and treatment costs. Any oil and gas produced by the holder of an exploration permit prior to the grant of a production concession is subject to the payment of a 15% royalty.

Exploration permits and production or transportation concessions will terminate upon any of the following events:

 

    failure to pay annual surface taxes within three months of the due date;

 

    failure to pay royalties within three months of the due date;

 

    substantial and unjustifiable failure to comply with specified production, conservation, investment, work or other obligations;

 

    repeated failure to provide information to or facilitate inspection by authorities or to utilize adequate technology in operations;

 

    in the case of exploration permits, failure to apply for a production concession within 30 days of determining the existence of commercially exploitable quantities of hydrocarbons;

 

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    bankruptcy of the permit or concession holder;

 

    death or end of legal existence of the permit or concession holder; or

 

    failure to transport hydrocarbons for third parties on a non-discriminatory basis or repeated violation of the authorized tariffs for such transportation.

When a production concession expires or terminates, all oil and gas wells, operating and maintenance equipment and facilities automatically revert to the Argentine government, without payment to the holder of the concession.

The Privatization Law granted YPF 24 exploration permits covering approximately 132,735 km2 and 50 production concessions covering approximately 32,560 km2. The Hydrocarbons Law limits the number and total area of exploration permits or production concessions that may be held by any one entity. YPF was exempted from such limit with regard to the exploration permits and production concessions awarded to it by Law 24,145. The National Directorate of Economy of Hydrocarbons (“Dirección Nacional de Economía de los Hidrocarburos”), applying a restrictive interpretation of Section 25 and 34 of Law 17,319, has objected to the award of new exploration permits and production concessions in which YPF has a 100% interest. If such limit is applied in the future, it may affect YPF’s ability to acquire 100% of new exploration permits and/or exploitation concessions. As a consequence of the transfer of ownership of certain hydrocarbons areas to the provinces in accordance with Decree No. 1055/89 and Law 24,145, YPF participates in competitive bidding rounds organized since 2000 by the provincial government of Neuquén for the award of contracts for the exploration of hydrocarbons.

 

  2.3.2.3 Security Zones Legislation

Argentine law restricts the ability of non-Argentine companies to own real estate, oil concessions or mineral rights located within, or with respect to areas defined as, security zones (principally border areas). Prior approval of the Argentine government may be required:

 

    for non-Argentine shareholders to acquire control of YPF, or

 

    if and when the majority of the shares of YPF belong to non-Argentine shareholders, for any additional acquisition of real estate, mineral rights, oil or other Argentine government concessions located within, or with respect to, security zones. Because approval of Class A shares is required for a change in control of YPF under its Bylaws, and approval of the executive branch or provincial governments is required for the grant or transfer of oil concessions, Repsol YPF believes that possible additional requirements under the security zone legislation will not have a significant impact on its operations.

 

  2.3.2.4 Natural Gas

In June 1992, Law No. 24,076, referred to as the Natural Gas Law, was passed providing for the privatization of Gas del Estado and the deregulation of the price of natural gas. To effect the privatization of Gas del Estado, the five main trunk lines of the gas transmission system were divided into two systems principally on a geographical basis (the northern and the southern trunk pipeline systems). This is designed to give both systems access to gas sources and to the main centers of demand in and around Buenos Aires. These systems were transferred to two new transportation companies. The Gas del Estado distribution system was divided into eight regional distribution companies, including two distribution companies serving the greater Buenos Aires area. Shares of each of the transportation and distribution companies were sold to consortiums of private bidders. Likewise, in 1997, a distribution license for the Provinces of Chaco, Formosa, Entre Ríos, Corrientes and Misiones was granted to private bidders.

The regulatory structure for the natural gas industry creates an open-access system, under which gas producers such as YPF will have open access to future available capacity on transmission and distribution systems on a non-discriminatory basis.

 

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New cross-border gas pipelines have been built to interconnect Argentina, Chile, Brazil and Uruguay, and producers such as YPF are currently exporting natural gas to the Chilean and Brazilian markets. Exports of natural gas require prior approval by the Secretary of Energy. In 2001, Resolution No. 131/01 was passed by the Secretary of Energy to expedite the issuance of authorizations for natural gas exports (suspended by Resolution No. 265/04 issued by the Secretary of Energy in March 2004).

Decree No. 180/04, issued in January 2004, created a trust fund for the financing of transportation and distribution facilities under a global program for the issuance of debt values and certificates of participation approved by Resolution No. 185/04, issued by the Ministry of Federal Planning, Public Investment and Services on April 20, 2004.

 

  2.3.2.5 Transportation

The Hydrocarbons Law permits the executive branch to award 35-year concessions for the transportation of oil, gas and petroleum products following submission of competitive bids. Holders of production concessions are entitled to receive a transportation concession for the oil, gas and petroleum products they produce. The term of a transportation concession may be extended for an additional 10-year term upon application to the executive branch. The holder of a transportation concession has the right to:

 

    transport oil, gas and petroleum products; and

 

    construct and operate oil, gas and products pipelines, storage facilities, pump stations, compressor plants, roads, railways and other facilities and equipment necessary for the efficient operation of a pipeline system.

The holder of a transportation concession is obligated to transport hydrocarbons for third parties on a non-discriminatory basis for a fee. This obligation, however, applies to producers of oil or gas only to the extent that the concession holder has surplus capacity available and is expressly subordinated to the transportation requirements of the holder of the concession. Transportation tariffs are subject to approval by the Secretary of Energy for oil and petroleum products pipelines and by ENARGAS for gas pipelines. Upon expiration of a transportation concession, the pipelines and related facilities automatically revert to the Argentine government without payment to the holder. The Privatization Law granted YPF a 35–year transportation concession with respect to the pipelines operated by YPF at that time. Gas pipelines and distribution systems sold in connection with the privatization of Gas del Estado are subject to a different regime under the Natural Gas Law.

 

  2.3.2.6 Refining

Crude oil refining activities conducted by oil producers or others are subject to Argentine government registration requirements and safety and environmental regulations and to provincial environmental legislation and municipal health and safety inspections. Registration in the registry of oil companies maintained by the Secretary of Energy also is required to operate a refinery in Argentina. The refineries operated by Repsol YPF are so registered. Registration is granted on the basis of general financial and technical standards.

 

  2.3.2.7 Market Regulation

Under the Hydrocarbons Law and the Oil Deregulation Decrees, holders of production concessions have the right to produce and own oil and gas and are allowed to dispose of such production in the market without restriction. In 2002, Decree No. 867/02 declared a temporary emergency for the provision of hydrocarbons within Argentina for the period May through September 2002 and authorized the Secretary of Energy to establish the volume of crude oil and LPG to be sold in the domestic market until September 30, 2002. Moreover, Resolutions 140/02 and 166/02 (both derogated) established for the period June through September 2002 a percentage ceiling on crude oil exports.

 

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At present YPF, as well as private companies producing oil and gas under service contracts with YPF, following conversion of such contracts to concessions, may sell their production in domestic or export markets, and refiners may obtain crude oil from suppliers within or outside Argentina.

The Hydrocarbons Law authorizes the executive branch to regulate the Argentine oil and gas markets and prohibits the export of crude oil during any period in which the executive branch finds domestic production to be insufficient to satisfy domestic demand. If the executive branch restricts the export of oil and petroleum products or the free disposition of natural gas, the Oil Deregulation Decrees provide that producers, refiners and exporters shall receive a price:

 

    in the case of crude oil and petroleum products, not lower than that of similar imported crude oil and petroleum products; and

 

    in the case of natural gas, not less than 35% of the international price per cubic meter of Arabian light oil, 34 API.

Resolution No. 85/2003 of the Secretary of Energy ratified the agreement signed by crude oil producers, including YPF, and refiners for the stability of the price of crude oil, gasoline and gas oil. This agreement provides that during the first quarter of 2003, the crude oil forwarded to refineries by producers will be invoiced and paid based on a WTI crude oil reference price of US$28.50 per barrel. The difference between this reference price and the actual WTI crude oil price will be assigned to an “adjustment of price account” and the producer will receive the difference between the reference price and the actual WTI price from the moment the actual WTI price falls below the reference price. The amounts assigned to the adjustment of price account will yield an annual interest rate equal to the higher of (i) LIBOR plus 2% or (ii) 8% per year. Crude oil sale agreements effective or entered into between January and March 2003 are to incorporate an additional clause reflecting this mechanism. This clause will be reviewed on a monthly basis and may be terminated by any party if (i) the peso exchange rate depreciates below Ps.3.65 = US$1 (Banco de la Nación Argentina seller quotation), (ii) WTI crude oil prices exceed US$35 per barrel for 10 consecutive quotation days, (iii) WTI crude oil prices fall below US$22 per barrel for 10 consecutive quotation days or (iv) taxes and/or export duties applicable to oil producers are increased. At present, the crude oil supplied by producers such as YPF to local refineries is invoiced taking into account the effect of the custom duties on the export of crude oil over the actual WTI prices.

On February 25, 2003 oil producers and refiners entered into a supplementary agreement to the agreement for the stability of the price of crude oil, gasoline and gas oil. The parties to this supplementary agreement agreed to extend the agreement for the stability of the crude oil, gasoline and gas oil until March 31, 2003 and to fix a maximum WTI reference price of US$36 per barrel in any agreement for the delivery of crude oil to the local market entered into between oil producers and refiners until March 31, 2003. This agreement was extended all over 2003 and through May 2004. Moreover, the parties agreed that the amounts assigned to the adjustment of price account will yield an annual interest rate equal to the higher of: (i) LIBOR plus 2% or (ii) 7% per year.

On April 2002, the national government and the main oil companies, including YPF, reached an agreement to regulate a subsidy provided by the Argentine government to the public bus transportation companies. This agreement, named “Convenio de Estabilidad de Suministro de Gas Oil” was approved by decree No. 652/02 and assured the transportation companies their necessary supply of gas oil at a fixed price of Ps.0.75 per liter from April 22, 2002 to July 31, 2002. Additionally, it provides that the oil companies will compensate for the difference between the fixed price and the market price using the credit generated by such difference through compensation against the payments that the oil companies have to pay in relation to their oil exports (custom duties). This agreement was extended through August 31, 2002. Through a new price-stabilization agreement, the subsidy was extended through December 31, 2004. Moreover, the subsidized gas oil price was increased up to Ps.0.82 per liter.

The Department of National Energy passed a series of resolutions which affect the fuel market, in particular: Resolution SE No. 1102/04 which established the register for outlets of liquid fuels, own consumption, storage,

 

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distributors and sellers of fuel and bulk hydrocarbons and compressed natural gas; Resolution SE No. 1104/2004 which established an information component for wholesale prices as an integral part of the federal information system for fuels as well as a means of communication of quantities sold by producers and sellers of fuels; Resolution SE 1834/79 which obligates the operators of service stations and/or outlets and/or consumers of liquid fuels and hydrocarbons which have requested supply but were not supplied to inform the Energy Department about this situation; Resolution SE 1879/05 which provides that fuel refining companies which have registered with the Energy Department and which have contracts which provide for some type of exclusivity between the refining company and the fuel outlet must ensure a continuous, steady, regular and non-discriminatory supply to the market allowing the outlet to procure the products form a different source at the cost of the refining company in case of extra costs; and Resolution 1869/04 which re-establishes the register for gas oil and crude oil export businesses and obligates the producers, sellers, refining companies and any other agency which intends to export gas oil or crude oil to register such transaction and to show that the internal demand has been satisfied and that it has offered the product for export.

In January 2004, Decree No. 180/04 created the Gas Electronic Market for the trade of daily spot sales of gas and secondary market of transportation and distribution services and established information duties for buyers and sellers of natural gas in relation to their respective commercial operations, required as a condition to be authorized to inject into, and transport through the transportation systems any volumes of natural gas (further regulated by Resolution No. 1146/04 issued on November 9, 2004 and Resolution No. 882/2005 issued by the Secretary of Energy ). According to Decree No. 180/04, all daily spot sales of natural gas must be traded within the Gas Electronic Market.

In January 2004, executive decree No. 181/04 authorized the Department of Energy to negotiate with producers a pricing mechanism for natural gas supplied to industries and electric generation companies. Domestic market prices at the retail market level were excluded from these negotiations. On April 2, 2004, the Department of Energy and gas producers signed an agreement which was ratified by Resolution No. 208/04 issued by the Ministry of Federal Planning, Public Investment and Services. The aim of the agreement is the implementation of a scheme for the normalization of the natural gas price. The main aspects of the agreement are as follows: i) initially price adjustments are applied exclusively to gas supplied by producers to industrial users, new direct consumers and electricity generators (to the extent that electricity is destined for the domestic market); ii) prices are adjusted as of May 10, 2004; and iii) the Secretary of Energy will implement in the future a progressive scheme for the normalization of the price of natural gas destined to residential users and small commercial users.

In March 2004, the Secretary of Energy issued resolution No. 265/04 adopting measures intended to ensure the adequate supply of natural gas to the domestic market and regulate its consequences on the electricity wholesale prices. Among the measures adopted were:

 

    the suspension of all exports of surpluses of natural gas that may be needed for internal consumption;

 

    the suspension of automatic approvals of requests to export natural gas;

 

    the suspension of all applications for new authorizations to export natural gas filed or to be filed before the Secretary of Energy; and

 

    authorizing the Sub-Secretary of Fuels to formulate a rationalization plan of gas exports and transportation capacity.

In March 2004, the Sub-Secretary of Fuels, pursuant to the authority given to it under resolution No. 265/04, issued regulation No. 27/04 establishing a rationalization plan of gas exports and transportation capacity. Among other things, regulation No. 27/04 established a limit on natural gas exports authorizations, which, absent an express authorization by the Sub-Secretary of Fuels, may not be granted for volumes exceeding exports registered during 2003.

 

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In June 2004, the Department of Energy issued Resolution No. 659/04 removing the limit on natural gas exports authorizations (based on comparison of export volumes in 2004 with export volumes in 2003) established by Regulation 27/04. In addition, Resolution 659/04 established a new program for the adequate supply of natural gas to the domestic market (which substitutes the program created by Regulation No. 27/04). Under Resolution No. 659/04 (amended by Resolution No. 1681/04), natural gas exports may be affected due to shortages of natural gas in the domestic market, since exporting producers may be required to deliver to the domestic market additional volumes of natural gas which are not contractually committed by such producers in order to cover the internal demand of natural gas (additional injection requirements). The export of natural gas under export permits previously granted to producers is conditioned to the fulfillment of the additional injection requirements imposed over exporting producers by governmental authorities. Such program was further amended and complemented by Resolution No. 752/04 issued by the Department of Energy in May 2005, which impaired the conditions for exporting producers for exporting natural gas, and created a mechanism under which the Department of Energy may require from exporting producers the injection of additional volumes for domestic consumers during a seasonal period (Permanent Additional Injection), such volumes of natural gas are also not committed by the exporting producers. Based on the provisions of regulation No. 27/04, Resolution No. 659/04 and Resolution No. 752/04, the Department of Energy and/or the Sub-Department for Fuels have instructed YPF to re direct natural gas export volumes to the internal market affecting natural gas exports. YPF has challenged the validity of the aforementioned regulations and resolutions, and has asserted the occurrence of a Force Majeure event under the corresponding natural gas purchase and sales agreements. The counterparties to such agreements have rejected such assertion.

Resolution No. 752/04, also established a mechanism (further regulated by Resolutions No. 2020/05 and 257/06) under which industrial and commercial consumers, above certain consumption levels, that previously purchased natural gas from distributors, to purchase gas directly from the producers. According to such resolution, as of certain dates distributors were no longer able to supply gas to such industrial and commercial consumers, and such consumers could require the producers to transfer their natural gas supply commitments with distributors. Likewise, Resolutions No. 752/05 establishes (i) a special market, open and anonymous, for compressed natural gas stations to purchase natural gas under regulated commercial conditions, the demand requirements of which are ensured by the Department of Energy with Permanent Additional Injection required from exporting producers, and (ii) a mechanism of standardized irrevocable offers for electric power generators and industrial and commercial consumers to obtain supply of natural gas, the satisfaction of which is also ensured by the Department of Energy with Permanent Additional Injection required from exporting producers.

 

  2.3.2.8 Taxation

Holders of exploration permits and production concessions are subject to federal, provincial and municipal taxes and regular customs duties on imports. The Hydrocarbons Law grants such holders a legal guarantee against new taxes and certain tax increases at the provincial and municipal levels. Holders of exploration permits and production concessions must pay an annual surface tax based on the area held. In addition, “net profit” (as defined in the Hydrocarbons Law) of holders of permits or concessions accruing from activity as such holders is subject to a special 55% income tax. This tax has never been applied. Each permit or concession granted to an entity other than YPF has provided that the holder is subject instead to the general Argentine tax regime, and a decree of the executive branch provides that YPF is subject to the general Argentine tax regime.

Following the introduction of market prices for downstream petroleum products in connection with the deregulation of the petroleum industry, Law No. 23,966 established a volume-based tax on transfers of certain types of fuel, replacing the prior fuel tax regime that was based on the regulated price. Law No. 25,745 modified, effective as of August 2003, the mechanism for calculating the tax, replacing the old fixed value per liter according to the type of fuel for a percentage to apply to the sales price, maintaining as the minimum tax the old fixed value.

In compliance with the provisions of the Public Emergency and Foreign Exchange System Reform Law, the Argentine government imposed (via the Executive Decrees Nos. 310/2002 and 809/2002, as amended by

 

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resolutions 335/04, 336/04 and 337/04 issued by the Ministry of Economy and Production on May 11, 2004) customs duties on the export of crude oil at a rate of 25%, butane, methane and LPG at a rate of 20% and gasoline and diesel at a rate of 5%. Moreover, on May 26, 2004, through the issuance of Decree No. 645/04, an export duty on the export of natural gas and LNG was established at a rate of 20%. Finally, on August 4, 2004, the Ministry of Economy and Production issued resolution 532/04 establishing a progressive scheme of export duties for crude oil, with rates ranging from 25% to 45% depending on the quotation of the WTI reference price at the time of the exportation.

Certain contracts under which YPF exports gas provide that any tax (which definition YPF believes is inclusive of the above mentioned export duties) that is created after the execution of such agreements will be borne by the buyer. Consequently, Repsol YPF believes that it is reasonable to assume that the applicable export duty will be not entirely borne by YPF.

 

  2.3.2.9 Antitrust Agreement

On June 16, 1999, the Argentine Ministry of Economy and Public Works delivered a letter to Repsol YPF setting forth a series of obligations that Repsol YPF would be required to assume in the event that Repsol YPF acquires a majority of the share capital of YPF. Repsol YPF has, in a letter dated June 17, 1999, accepted the Ministry’s requirements, which are described below:

 

    Repsol YPF must instruct YPF not to renew specified contracts under which YPF purchases natural gas. Repsol YPF estimates that these contracts accounted for approximately 15% of the natural gas sold in Argentina by YPF and Repsol YPF in 1998.

 

    By January 1, 2001, Repsol YPF was required to divest itself of Argentine refining capacity equal to 4% of total Argentine installed capacity at December 31, 1998 and of a number of service stations that account for a sales volume equivalent to that of Eg3 in 1998. Both of these requirements were satisfied through the swap agreement with Petrobras. In addition to Eg3, the swap agreement encompasses other assets located in Argentina. Repsol YPF received assets in Brazil valued at approximately US$559 million. See “—Operations—Refining and Marketing.”

 

    Until the gas contracts referred to above have expired, Repsol YPF may not participate in any new electricity generation project.

 

    Repsol YPF must eliminate from YPF’s LPG export contracts any provision prohibiting reimportation by the buyer.

 

    By December 1, 2002, Repsol YPF must reduce its share of the Argentine retail LPG market by 4%. Repsol YPF estimates that the combined Repsol YPF/YPF share of this market was approximately 38% at December 31, 1998.

 

    During the period until December 1, 2002, Repsol YPF must pass on in the form of price reductions any benefits resulting from economies of scale in its Argentine LPG operations resulting from the YPF acquisition. Repsol YPF believes that these benefits consisted mainly of cost reductions, which could be passed directly to consumers.

Repsol YPF believes that it is in compliance with all the obligations required in the letter delivered on June 16, 1999 by the Argentine Ministry of the Economy and Public Works, and the Argentine government has not raised any objections to the performance of those obligations.

On March 14, 2000, the Secretariat for the Defense of Competition and the Consumer of the Ministry of Economy (“Secretaría de Defensa de la Competencia y del Consumidor del Ministerio de Economía”) issued a press release stipulating the following series of guidelines establishing the manner in which Repsol YPF must meet its obligation under the June 16, 1999 letter of the Argentine Ministry of Economy and Public Works requiring that Repsol YPF dispose of refining assets and service stations in Argentina in connection with its acquisition of control of YPF:

(1) Repsol YPF must make the required sale of service stations to a single purchaser.

 

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(2) The block of service stations and refining capacity to be sold must correspond to an equivalent of Repsol YPF’s share of the relevant geographical and product markets prior to its acquisition of YPF in 1999. The sale of the block of service stations must keep Repsol YPF’s market share at YPF’s pre- acquisition market share levels. Repsol YPF must transfer refining capacity sufficient to permit adequate supply of the block of service stations transferred.

(3) The entity acquiring the service stations and refining assets must have no agreements with Repsol YPF. In addition, Repsol YPF may not transfer the assets to any related entity or to an entity which has a market share greater than 10% for each of refining and service station activities in Argentina.

(4) The Secretariat for the Defense of Competition and the Consumer may supervise Repsol YPF’s divestment of the specified assets. The Tribunal de Defensa de la Competencia will have the authority to review Repsol YPF’s disposal of the specified refining assets and service stations.

Repsol YPF met all of the above requirements upon execution of the asset swap agreement entered into with Petrobras in December 2001.

Repsol YPF believes that the acquisition of YPF will not be subject to further antitrust scrutiny in Argentina under existing law. However, the Ministry of Economy has not stated that there will be no further antitrust scrutiny, and no assurances can be given that Repsol YPF will not be required to accept additional undertakings or other measures intended to address any perceived anti-competitive effects of the YPF acquisition.

 

  2.3.2.10 Repatriation of Foreign Currency

Executive Decree No. 1589/89, relating to the Deregulation of the Upstream Oil Industry, allows YPF and other companies engaged in oil and gas production activities in Argentina to freely sell and dispose of the hydrocarbons they produce. Additionally, under Decree No.1589/89, YPF and other oil producers are entitled to keep out of Argentina up to 70% of foreign currency proceeds they receive from crude oil and gas sales, but are required to repatriate the remaining 30% through the exchange markets of Argentina.

In July 2002, Argentina’s Attorney General issued an opinion (“Dictamen 235”) which would have effectively required YPF to liquidate 100% of its export receivables in Argentina, instead of the 30% provided in Decree No. 1589/89. The Attorney General’s opinion was based on the assumption that Decree No. 1589/89 had been superseded by other decrees (Decree No. 530/91 and 1606/01) issued by the Argentine government. Subsequent to this opinion, however, the Argentine government issued Decree No. 1912/02 ordering the Central Bank to apply the 70/30% regime set out in Decree No. 1589/89. Nevertheless, on December 5, 2002, representatives of the Central Bank, responding formally to an inquiry from the Argentine Bankers Association, stated that the Central Bank would apply the Attorney General’s opinion. On December 9, 2002, YPF filed a declaratory judgment action (“Acción Declarativa de Certeza”) before a federal court requesting the judge to clarify the uncertainty generated by the opinion and statements of the Attorney General and the Central Bank and confirm YPF’s right to freely dispose of up to 70% of its export receivables. On December 9, 2002, the federal judge issued an injunction ordering the Argentine government, the Central Bank and the Ministry of the Economy to refrain from interfering with YPF’s access to and use of 70% of the foreign exchange proceeds from its exports. This decision was appealed by the Central Bank and the Ministry of Economy.

On December 27, 2002, the government issued Decree No. 2703/02, effective as of January 1, 2003, setting forth a minimum repatriation limit of 30% with respect to proceeds from the export of hydrocarbons and by-products and leaving the remaining portion freely disposable. However, when referring to the minimum repatriation limit of 30%, the decree only mentions the foreign exchange proceeds from freely disposable exports of crude oil and its by-products. Although the recitals and the first part of Section 1 of Decree No. 2703/02 mention natural gas and LPG as covered by this regime, there are no express references to natural gas or LPG in the rest of Section 1. However, taking into account the rights granted by Decree No. 1589/89, YPF applies this regime to the export of crude oil, LPG and natural gas. It is worth noting that the recitals of Decree No. 2703/02

 

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restate the interpretation maintained by the Attorney General in the sense that Decree No. 1589/89 has been repealed by Decree Nos. 530/91 and 1606/01. This interpretation prompted the filing of the above mentioned declaratory judgment action. Moreover, since Decree No. 2703/02 is effective as from January 1, 2003, and, in light of the Attorney General’s opinion, it is unclear whether hydrocarbon exporters would be required to repatriate the total amount of their 2002 export proceeds or whether the existing hydrocarbons regulatory framework will prevail, YPF has expanded the object of the declaratory judgment action before the federal court to request that the judge expressly state that Decree No. 530/91 did not derogate Decree No. 1589/89 and, thus, that the right of free disposal of export receivables was effective between issuance of Decree No. 1606/01 and Decree 2703/02. On December 1, 2003, the National Administrative Court of Appeals decided that the issuance of Decree No. 2703/02, which allows companies in the oil and gas sector to keep abroad up to 70% of the export proceeds, rendered the injunction unnecessary. On December 15, 2003, YPF filed a motion for clarification asking the court to clarify whether the exemption was available to oil and gas companies during the period between the issuance of Decree No. 1606/01 and the issuance of Decree 2703/02. On February 6, 2004, the Court of Appeals dismissed YPF’s motion for clarification, indicating that the regulations included in Decree 2703/02 were sufficiently clear, and confirmed the lifting of the injunction that prohibited the Central Bank and the Ministry of Economy from interfering with YPF’s access to foreign exchange proceeds, as described above. On February 19, 2004, YPF filed an extraordinary appeal before the Supreme Court challenging the December 1, 2003 decision of the Court of Appeals and requesting the restatement of the injunction against the Central Bank and the Ministry of Economy. The Federal Court of Appeals dismissed the extraordinary appeal. However, the Court of First Instance hearing the case considered that the lawsuit has an economic nature. Taking into account the fact that there is a new special system in place allowing for the free disposal of up to 70% of the foreign currency proceeds from hydrocarbon exports, it was deemed advisable to abandon the suit as a procedural strategy. Should the Central Bank eventually request the conversion of the foreign currency proceeds derived from hydrocarbon exports made from the issuance of Decree 1606/01 to the date on which Decree 2703/02 became effective, YPF may challenge such decisions or proceedings through administrative appeals procedures, as well as request precautionary measures within the frame of other judicial proceedings. See Section 6. “Financial Information—Legal Proceedings—Argentina.”

 

  2.4 Description of Property

Most of Repsol YPF’s property, consisting of service stations, refineries, manufacturing facilities inventory, storage facilities and transportation facilities, is located in Spain and Argentina. Repsol YPF also has interests in crude oil and natural gas reserves. Most of these reserves are located outside of Spain, with most being located in Argentina, Bolivia and Trinidad and Tobago.

There are several classes of property which Repsol YPF does not own in fee. Repsol YPF’s petroleum exploration and production rights are in general based on sovereign grants of a concession. Upon the expiration of the concession, the exploration and production assets of Repsol YPF associated with a particular property subject to the relevant concession revert to the sovereign. In addition, at December 31, 2005, Repsol YPF leased 2,336 service stations to third parties, 1,903 of which were located in Spain and 25 in Argentina, and 3,168 service stations are owned by third parties and operated under a supply contract with Repsol YPF for the distribution of Repsol YPF products, of which 759 were located in Spain and 1,644 in Argentina.

Law 34/1998 revoked the concessions held by Enagas and Gas Natural to operate Spain’s primary transport and distribution networks of natural gas pipelines and conveyed to Enagas and Gas Natural outright ownership of the networks. Under Law 34/1998, as amended by Royal Decree-Law 5/2005, new authorizations to build distribution facilities may not be granted for a natural gas distribution zone with an administrative authorization. There are, however, no limitations on entrants in areas served by the transport network.

 

  2.5 Seasonality

Among Repsol YPF’s activities, its LPG and natural gas businesses have the most significant degree of seasonality in relation to climatological conditions, with increased activity in winter and decreased activity in

 

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summer in the Northern Hemisphere. Repsol YPF’s activities in Latin America, however, partially offset this effect as winters in the Southern Hemisphere coincide with summers in the Northern Hemisphere, thus reducing the seasonality effect on Repsol YPF’s natural gas business.

On the other hand, now that Repsol YPF accounts for its interest in Gas Natural following the proportional consolidation method (whereas prior to the end of May 2002 Gas Natural’s results were consolidated using the global integration method), the contribution of the natural gas business to Repsol YPF’s results of operations has declined significantly. In addition, the changes to the compensation system approved by the Spanish government in February 2002 have stabilized notably the amount of revenues from distribution activities throughout the year.

 

  2.6 Risk Control Systems

Repsol YPF does business in many countries, under a number of regulatory frameworks and in all the activities of the oil and gas business. As a result, Repsol YPF incurs:

 

    Market risks stemming from the volatility in the prices of oil, natural gas and their products, exchange rates and interest rates.

 

    Counterparty risk, stemming from financial agreements and from commercial commitments to vendors or clients.

 

    Liquidity and solvency risks.

 

    Legal and regulatory risks (including the risks of changes in tax legislation, industry and environmental regulations, exchange regimes, production limits, limits on exports, etc.).

 

    Operational risks (including the risks of accidents and natural catastrophes, uncertainty regarding the physical characteristics of the oil and gas fields, and reputation, security and environmental risks).

 

    Economic environment risks (resulting from the international business cycle and the local business cycles of the countries where it does business, technological innovations in the industries in which it operates, etc.).

The company considers that its salient risks are those that could jeopardize the achievement of the goals of its strategic plan and particularly that of maintaining its financial flexibility and solvency in the long term. Repsol YPF is prudent in the management of its assets and businesses. Nevertheless, many of the risks mentioned above are inherent in its business and beyond the control of the company, so that they cannot be entirely eliminated.

Repsol YPF has an organization, procedures and systems that allow it to identify, measure, assess, set priorities and control the risks to which the group is exposed and to decide to what extent such risks will be accepted, managed, mitigated or avoided. Risk analysis is an integral part of decision-making in the group, both at centralized management level and in the management of the various business units, and special attention is given to the correlation of different risks and to the possible effects of diversification in the aggregate.

The Company has the following independent analysis, supervision and control units specialized in different risk management aspects:

 

    An Internal Audit Unit, which focuses on the on-going assessment and enhancement of existing controls with a view to guaranteeing that potential risks of all kinds (control, business, image, etc.) that could affect the achievement of the strategic goals of the Repsol YPF Group are identified, measured and controlled at all times.

 

   

Corporate Risk Management Unit, which is in charge of (i) developing corporate risk policies, (ii) coordinating the development of specific policies and provisions relating to financial and non-financial risks of the various business units and departments, ensuring their consistency and the

 

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consistency of all such policies and provisions with the corporate risk policies and (iii) promoting best practices in measuring and assessing risks and hedging strategies.

 

    Insurance Unit, which is charged with (i) reviewing and assessing accidental risks that may affect the assets and activities of the group, (ii) determining the most efficient policy to finance these risks by the best possible combination of self-insurance and transfer of risk, (iii) implementing such insurance as may be deemed advisable in each case and (iv) negotiating the compensations for insured accidents.

 

    Central Credit Risk Unit, which is charged with (i) reviewing and controlling the credit risk stemming from commercial relations with third parties as a result of the activities of the Group, (ii) proposing risk policies and counterparty risk limits and (iii) determining allowance criteria—application of allowance for insolvency, refinancing and actions for the recovery of debts.

 

    Environment and Safety Unit, whose purpose is to establish the Group’s courses of action in all its associated fields and create the basic conditions for their consistent application to all business units. To that end, it proposes policies, strategies and corporate regulations, defines and sets environmental, safety and quality management systems of the Group and promotes and coordinates their execution. It is also responsible for providing guidance, coordination, follow-up and advice to business units in their actions, while the business units retain responsibility for their own management and performance in those fields.

 

    Corporate Reputation Unit, which is responsible for directing and coordinating management activities with the organization units involved and assessing all corporate reputational values and risks in line with the guidelines and policies of the Corporate Reputation Committee and the Corporate Division of Communication and Head of the Chairman’s Office to guarantee that Repsol YPF’s corporate reputation model and strategy are followed.

 

    Financial Reporting Internal Control Unit, responsible for monitoring and management of the internal economic and financial reporting control system, currently being introduced to comply with the requirements of section 404 of the Sarbanes-Oxley Act.

 

    Reserves Control Unit, which aims to make sure that the estimates of Repsol YPF proved reserves comply with prevailing legislation on the different securities markets on which Repsol YPF is listed. It also makes internal audits of reserves, coordinates certification of reserves by external auditors and assesses the quality controls on reserve reporting, making the appropriate suggestions within a process of continuous improvement and application of best practices.

In addition, there are several functional and business committees entrusted with the oversight of risk management activities within their field of responsibility. The risk control functions of units with market risk management responsibilities have been properly segregated and have the required independence to guarantee effective control.

At the corporate level, the most important control systems and devices of Repsol YPF are the following:

 

    Preparation and continuous revision of the Repsol YPF Group Risk Map, whose contents are the following:

 

    Inventory of risks for the activities of the Group.

 

    Operational controls to mitigate the influence of the risks detected.

 

    Development and continuous follow-up of the Strategic Plan and the Annual Budget in order to detect and, if required, rectify significant deviations affecting the achievement of the pre-established goals.

 

    Existence of internal Rules and Procedures regulating all the activities of the Group.

 

    Availability of consistent and integrated Information Systems and control mechanisms to guarantee the reliability and completeness of the economic and financial information released by the Repsol YPF Group.

 

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3. Operating and Financial Review and Prospects

You should read the information in this section together with the Consolidated Financial Statements and the related notes included in this annual report. Repsol YPF prepares its consolidated financial statements in accordance with IFRS, which differ in certain significant respects from U.S. GAAP. See Note 42 to the Consolidated Financial Statements.

 

  3.1 Factors Affecting Repsol YPF’s Consolidated Results of Operations

 

  3.1.1 Main Factors

Crude Oil and Natural Gas Prices. Changes in crude oil and natural gas international benchmark prices and natural gas regional prices, significantly affect Repsol YPF’s earnings. In 2005, exploration and production activities represented approximately 53% of Repsol YPF’s operating income, compared to 65% in 2004. Higher crude oil and natural gas prices have a positive effect on Repsol YPF’s results of operations as our upstream exploration and production businesses benefit from the resulting increases in prices realized from production. Lower crude oil and natural gas prices have a negative effect on the results of exploration and production by reducing the economic recoverability of discovered reserves and the prices realized from production. See Section 9. “Quantitative and Qualitative Disclosure About Market Risk.”

Per barrel Brent crude oil benchmark prices averaged US$54.52 in 2005 and US$38.27 in 2004. Political developments throughout the world (especially in the Middle East), the outcome of meetings of the Organization of the Petroleum Exporting Countries (OPEC) as well as significant conflicts, like Iraq, can particularly affect world oil supply and oil prices. Per million Btu Henry Hub natural gas benchmark prices averaged US$9.02 in 2005 and US$6.18 in 2004 and, per thousand standard cubic feet, Repsol YPF’s realization price for natural gas sales in Argentina averaged US$1.34 in 2005 and US$1.07 in 2004.

The effect of changes in the price of crude oil and other raw materials on chemicals, refining, marketing and gas margins, depends on the speed with which petroleum products and LPG prices charged by Repsol YPF are revised to reflect such changes.

Refining margins. Refining margins affect Refining and Marketing results. These margins are affected by many factors, including, among others, end user demand for oil products, the level of crude market supply, which may also influence the level of product market supply for extended periods, the light-heavy crude oil and product supply and demand balance and refining capacity utilization.

Natural Gas market in Spain. The natural gas market in Spain has been progressively liberalized. Natural gas prices in the regulated market are subject to a system of price ceilings, which determines maximum prices of natural gas mainly on the basis of the cost of raw materials and transmission and distribution costs. See Section 2. “Information on Repsol YPF—Regulation of the Petroleum Industry—Spain—Natural Gas System.”

The Spanish market for gas activities is becoming increasingly competitive. Since October 1999, the Spanish government has granted operating licenses for natural gas marketing to more than 30 new competitors of Repsol YPF. Law 34/1998 also established third-party access rights for “qualified consumers”, sellers and transporters to use Enagas’ and Gas Natural’s facilities for the receipt, storage and transportation of natural gas on a nondiscriminatory and transparent basis, subject to tariffs that receive regulatory approval. Royal Decree Laws 6/1999 and 6/2000 have accelerated the entry of new competitors into the Spanish natural gas distribution and supply markets, by reducing the minimum consumption standard that consumers must meet to become “qualified consumers” and, thus, be able to freely choose their natural gas supplier. These consumption standards have been gradually eliminated and, since January 1, 2003, all consumers may freely choose a supplier. During 2005, sales in this liberalized market were approximately 27 billion cubic meters, representing approximately 83% of total natural gas sales in Spain. See Section 2. “Information on Repsol YPF—Regulation of the Petroleum Industry—Spain—Natural Gas System.”

 

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Exchange rates: Repsol YPF faces exchange rate risk because the revenues and cash receipts it receives from sales of crude oil, natural gas and refined products are generally denominated in U.S. dollars or influenced by the U.S. dollar exchange rate, while a significant portion of Repsol YPF’s expenses are denominated in the local currency of the countries where it operates, principally the euro and the Argentine peso. While an increase in the value of the U.S. dollar against these currencies tends to increase Repsol YPF’s net income, such an increase would also increase the value of Repsol YPF’s debt as the majority of its debt is denominated in U.S. dollars (either directly or synthetically through currency forward contracts). By contrast, a decrease in the value of the U.S. dollar against these currencies tends to decrease Repsol YPF’s net income and reduce the value of its debt. In addition, Repsol YPF publishes its financial statements in euro by translating assets and liabilities expressed in currencies other than euro at period-end exchange rates and revenues and expenses expressed in currencies other than the euro at average exchange rates for the period. Therefore, fluctuations in the exchange rates used to translate these currencies into euro could have a material adverse effect on Repsol YPF’s financial statements expressed in euro.

Prices for LPG in Spain. Prices for LPG in Spain are subject to maximum selling price formulas which are established by the Spanish government. Prices of bottled LPG supplies of more than 8 kg and supplies of channeled LPG, both to the end user and to companies that distribute piped gas, are regulated. For bottled LPG, the Ministry of Industry, by Order ITC/2475/2005 of July 28, 2005, modified the calculation periods for the determination of the term of raw material for the maximum prices of bottled LPG, changing the period to be considered for the determination of the average quotes, freight charges and exchange rates from 12 months preceding the determination to six months preceding the determination. This Order also modified the validity periods from semiannually to quarterly, with updates in the months of January, April, July and October. Finally, this order updates commercialization costs, establishing a value of €0.354643/kg against the €0.317624/kg that was in effect until July 28, 2005. During 2005, there were no changes in the formulas that determine the maximum prices of piped gas. See Section 2. “Information on Repsol YPF—Regulation of the Petroleum Industry—Spain—Liquid Petroleum Gas.”

 

  3.1.2 Critical Accounting Policies

 

  3.1.2.1 Basis of Presentation of the Consolidated Financial Statements

Repsol YPF prepares its consolidated financial statements from its accounting records and those of the companies composing the Repsol YPF Group, which are presented in accordance with current legislation, the Spanish Corporations Law, IFRS and consolidation regulations.

The primary financial statements of Repsol YPF are those presented under IFRS. Such standards differ in certain material aspects from U.S. GAAP. Differences between IFRS and U.S. GAAP and their effect on consolidated net income for each of the years 2005 and 2004 and on consolidated shareholders’ equity as of December 31, 2005 and 2004, are presented in Note 42 to the Consolidated Financial Statements.

The preparation of the financial statements in conformity with IFRS as well as the additional note on differences between IFRS and U.S. GAAP and other required disclosures, require management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

  3.1.2.2 Critical Accounting Policies relating to the Primary Financial Statements

The preparation of financial statements in accordance with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at year end and the reported amounts of revenues and expenses during the year. Actual results could differ from the estimates and assumptions used.

 

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Certain accounting estimates are considered to be critical if a) the nature of the estimates and assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change; and b) the impact of the estimates and assumptions on Repsol YPF’s financial condition or operating performance is material.

The accounting principles and areas that require the most significant judgments and estimates to be used in the preparation of the Consolidated Financial Statements are: (i) oil and natural gas reserves; (ii) the impairment test for goodwill arising in business combinations; (iii) provisions for contingencies and environmental liabilities and (iv) income tax computation and deferred tax assets. The following summary provides further information about the critical accounting policies and the judgments that are made in the application of those policies. However, the accounting policies discussed below do not purport to be an exhaustive discussion of the uncertainties in the Group’s financial results that may occur from the application of all of Repsol YPF’s accounting policies. Materially different financial results might occur in the application of other accounting policies as well.

Oil and gas reserves

The estimation of oil and gas reserves is an integral part of the decision making process about oil and gas assets, such as whether development should proceed or enhanced recovery methods should be implemented. As further explained below, oil and gas reserve quantities are used for calculating depreciation of the related oil and gas assets using the unit-of-production rates and also for evaluating the impairment of our investments in upstream assets.

Repsol YPF prepares its assumptions and estimates regarding oil and gas reserves taking into consideration the rules and regulations established for the oil and gas industry by the U.S. Securities and Exchange Commission and the accounting principles laid down by the U.S. Financial Accounting Standards Board. In accordance with these rules, proved oil and gas reserves are the estimated quantities of crude oil, natural gas and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions, i.e. prices and costs as of the date on which the estimate is made. Prices include consideration of changes in existing prices provided only by contractual arrangements, but not on escalations based upon future conditions. Estimates of proved reserves only include volumes for which access to markets is assured with reasonable certainty. In order to estimate its proved reserves, Repsol YPF prepares internal studies and uses, to a certain extent, reports of independent engineers. The internal process for the estimation of proved reserves is internally audited by senior level geoscience and engineering professionals with significant technical experience, integrated in the Reserves Control Group. Although we are reasonably certain that the proved reserves will be produced, the timing and amount ultimately recovered might be affected by a number of factors, including completion of development projects, actual reservoir performance and significant changes in long-term oil and gas price levels. Proved reserve estimates are therefore subject to future revisions (either upward or downward) based on new information which becomes available, such as from development drilling and production activities, changes in prices, contract terms or development plans. See also Section 2. “Information on Repsol YPF—Operations—Exploration and Production—Oil and Gas Reserves.”

Proved developed oil and gas reserves are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Additional oil and gas expected to be obtained through the application of fluid injection or other improved recovery techniques for supplementing the natural forces and mechanisms of primary recovery are included as proved developed reserves only after testing by a pilot project or after the operation of an installed program has confirmed through production response that increased recovery will be achieved.

Proved undeveloped oil and gas reserves are reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion.

 

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Reserves on undrilled acreage are limited to those drilling units offsetting productive units that are reasonably certain of production when drilled. Proved reserves for other undrilled units can be claimed only where it can be demonstrated with certainty that there is continuity of production from the existing productive formation. Under no circumstances are estimates for proved undeveloped reserves attributable to any acreage for which an application of fluid injection or other improved recovery techniques is contemplated, unless such techniques have been proved effective by actual tests in the area and in the same reservoir. Over time, undeveloped reserves are reclassified into the developed category as new wells are drilled, existing wells are recompleted and/or facilities to collect and deliver the production from existing and future wells are installed. Major development projects typically take two to four years from the initial booking of the proved reserves to the start of production from these reserves.

Repsol YPF records its oil and gas exploration activities using the successful-efforts method. This involves the following accounting treatment of the different costs incurred:

 

    The costs arising from the acquisition of new interests in areas with proved and unproved reserves are capitalized under “Investments in areas with oil reserves” as they are incurred.

 

    The costs of acquiring interests in exploration for a period of time are capitalized at acquisition cost and are amortized with a charge to income (over a period no longer than the associated contract) as indicated in the “exploration costs” item below. If no reserves are found, previously capitalized amounts are booked as an expense on the income statement. If commercially exploitable wells are found, the costs are reclassified to “Investments in areas with oil reserves” and recorded at net book value when the wells are determined to be commercially exploitable. Wells are deemed “commercially exploitable” only if they are expected to generate a volume of commercially extractable reserves that justifies commercial development given conditions prevailing at the time they are recognized (e.g., taking into account prices, costs, production techniques, regulations, etc.).