20-F 1 d699006d20f.htm 20-F 20-F
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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, 2013

Commission file number: 1-12102

 

 

YPF Sociedad Anónima

(Exact name of registrant as specified in its charter)

 

 

Republic of Argentina

(Jurisdiction of incorporation or organization)

Macacha Güemes 515

C1106BKK Ciudad Autónoma de Buenos Aires, Argentina

(Address of principal executive offices)

Diego M. Pando

Tel: (011-54-11) 5441-5531

Facsimile Number: (011-54-11) 5441-2113

Macacha Güemes 515

C1106BKK Ciudad Autónoma de Buenos Aires, Argentina

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

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

American Depositary Shares, each representing one Class D Share, par value 10 pesos per share   New York Stock Exchange
Class D Shares   New York Stock Exchange*

 

* Listed not for trading but only in connection with the registration of American Depositary Shares.

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

The number of outstanding shares of each class of stock of YPF Sociedad Anónima as of December 31, 2013 was:

 

Class A Shares

     3,764   

Class B Shares

     7,624   

Class C Shares

     40,422   

Class D Shares

     393,260,983   
  

 

 

 
     393,312,793   

 

 

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  ¨

If this report is an annual or transition report, 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

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    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. (Check one):

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

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP  ¨

     International Financial Reporting Standards as issued by the International Accounting Standards Board:  x    Other  ¨

Indicate by check mark which financial statement item the registrant has elected to follow. Item 17 Item 18  x

If this is an annual report, 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

TABLE OF CONTENTS

 

     Page  

Conversion Table

     4   

References

     4   

Disclosure of Certain Information

     4   

Forward-Looking Statements

     4   

Oil and Gas Terms

     5   

PART I

     7   

ITEM 1. Identity of Directors, Senior Managers and Advisers

     7   

ITEM 2. Offer Statistics and Expected Timetable

     7   

ITEM 3. Key Information

     7   

Selected Financial Data

     7   

Exchange Regulations

     9   

Risk Factors

     10   

ITEM 4. Information on the Company

     22   

History and Development of YPF

     22   

The Argentine Market

     25   

History of YPF

     26   

Business Organization

     28   

Exploration and Production

     29   

Downstream

     58   

Research and Development

     69   

Competition

     70   

Environmental Matters

     70   

Property, Plant and Equipment

     74   

Insurance

     74   

Regulatory Framework and Relationship with the Argentine Government

     76   

ITEM 4A. Unresolved Staff Comments

     97   

ITEM 5. Operating and Financial Review and Prospects

     97   

Overview

     97   

Presentation of Financial Information

     97   

Segment Reporting

     97   

Summarized Income Statement

     98   

Factors Affecting Our Operations

     98   

Critical Accounting Policies

     104   

Principal Income Statement Line Items

     104   

Results of Operations

     106   

Liquidity and Capital Resources

     116   

Off-Balance Sheet Arrangements

     119   

Research and Development, Patents and Licenses, etc.

     120   

ITEM 6. Directors, Senior Management and Employees

     120   

Management of the Company

     120   

Board of Directors

     120   

Senior Management

     127   

The Audit Committee

     128   

Disclosure Committee

     129   

Compliance with New York Stock Exchange Listing Standards on Corporate Governance

     130   

Compensation of members of our Board of Directors and Supervisory Committee

     131   

Supervisory Committee

     132   

Employee Matters

     133   

ITEM 7. Major Shareholders and Related Party Transactions

     134   

Related Party Transactions

     135   

Argentine Law Concerning Related Party Transactions

     136   

ITEM 8. Financial Information

     136   

Financial Statements

     136   

Legal Proceedings

     136   

Dividend Policy

     150   

 

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ITEM 9. The Offer and Listing

     150   

Shares and ADSs

     150   

Argentine Securities Market

     153   

ITEM 10. Additional Information

     156   

Capital Stock

     156   

Memorandum and Articles of Association

     157   

Directors

     159   

Foreign Investment Legislation

     160   

Dividends

     160   

Amount Available for Distribution

     161   

Preemptive and Accretion Rights

     161   

Voting of the Underlying Class D Shares

     162   

Certain Provisions Relating to Acquisitions of Shares

     163   

Material Contracts

     164   

Exchange Regulations

     164   

Taxation

     165   

Argentine Tax Considerations

     165   

United States Federal Income Tax Considerations

     166   

Available Information

     169   

ITEM 11. Quantitative and Qualitative Disclosures about Market Risk

     169   

ITEM 12. Description of Securities Other than Equity Securities

     171   

PART II

     172   

ITEM 13. Defaults, Dividend Arrearages and Delinquencies

     172   

ITEM 14. Material Modifications to the Rights of Security Holders and Use of Proceeds

     172   

ITEM 15. Controls and Procedures

     172   

ITEM 16.

     173   

ITEM 16A. Audit Committee Financial Expert

     173   

ITEM 16B. Code of Ethics

     173   

ITEM 16C. Principal Accountant Fees and Services

     174   

ITEM 16D. Exemptions from the Listing Standards for Audit Committees

     174   

ITEM 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers

     175   

ITEM 16F. Change in Registrant’s Certifying Accountant

     175   

ITEM 16G. Corporate Governance

     175   

PART III

     175   

ITEM 17. Financial Statements

     175   

ITEM 18. Financial Statements

     175   

ITEM 19. Exhibits

     176   

SIGNATURES

     177   

 

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Conversion Table

1 ton = 1 metric ton = 1,000 kilograms = 2,204 pounds

1 barrel = 42 U.S. gallons

1 ton 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

References

YPF Sociedad Anónima is a stock corporation organized under the laws of the Republic of Argentina (“Argentina”). As used in this annual report, “YPF,” “the Company,” “we,” “our” and “us” refer to YPF Sociedad Anónima and its controlled companies or, if the context requires, its predecessor companies. “YPF Sociedad Anónima” refers to YPF Sociedad Anónima only. “Repsol” refers to Repsol S.A., its affiliates and consolidated companies. We maintain our financial books and records and publish our financial statements in Argentine pesos. In this annual report, references to “pesos” or “Ps.” are to Argentine pesos, and references to “dollars,” “U.S. dollars” or “U.S.$” are to United States dollars.

Disclosure of Certain Information

In this annual report, references to “Audited Consolidated Financial Statements” are to YPF’s audited consolidated balance sheets as of December 31, 2013, 2012 and 2011, YPF’s audited consolidated statements of comprehensive income for the years ended December 31, 2013, 2012 and 2011, YPF’s audited consolidated statements of cash flows for the years ended December 31, 2013, 2012 and 2011, YPF’s audited consolidated statements of changes in shareholders’ equity for the years ended December 31, 2013, 2012 and 2011, and the related notes thereto.

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

 

    for the subsidiaries that 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, and

 

    for those joint operations whose results were consolidated using the proportional integration method, a pro rata amount of the assets, liabilities and results of operations for such joint operations at the date or for the periods indicated.

For information regarding consolidation, see Notes 1.a and 1.b.5 to the Audited Consolidated Financial Statements.

Certain monetary amounts and other figures included in this annual report have been subject to rounding adjustments. Any discrepancies in any tables between the totals and the sums of the amounts are due to rounding.

Forward-Looking Statements

        This annual report, including any documents incorporated by reference, contains statements that we believe 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 us and our management, including statements with respect to trends affecting our financial condition, financial ratios, results of operations, business, strategy, geographic concentration, reserves, future hydrocarbon production volumes and the Company’s ability to satisfy our long-term sales commitments from future supplies available to the Company, our ability to pay dividends in the future and to service our outstanding debt, dates or periods in which production is scheduled or expected to come onstream, as well as our plans with respect to capital expenditures, business, strategy, geographic concentration, cost savings, investments and dividends payout policies. These statements are not a guarantee of future performance and are subject to material risks, uncertainties, changes and other factors which may be beyond our control or may be difficult to predict. Accordingly, our future financial condition, prices, financial ratios, results of operations, business, strategy, geographic concentration, production volumes, reserves, capital expenditures, cost savings, investments and ability to meet our long-term sales commitments or pay dividends or service our outstanding debt could differ materially from those expressed or implied in any such forward-looking statements. Such factors include, but are not limited to, currency fluctuations, inflation, the price of petroleum products, the ability to realize cost reductions and operating efficiencies without unduly disrupting business operations, replacement of hydrocarbon reserves, environmental, regulatory and legal considerations, including the imposition of further government restrictions on the Company’s business, changes in our business strategy and operations, our ability to find partners or raise funding under our current control, the ability to maintain the Company’s concessions, and general economic and business conditions in Argentina, as well as those factors described in the filings made by YPF and its affiliates with the Securities and Exchange Commission, in particular, those described in “Item 3. Key Information—Risk Factors” below and “Item 5. Operating and Financial Review and Prospects.” 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.

 

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Oil and Gas Terms

Oil and gas reserves definitions used in this annual report are in accordance with Regulations S-X and S-K, as amended by the U.S. Securities and Exchange Commission’s (“SEC”) final rule, Modernization of Oil and Gas Reporting (Release Nos. 33-8995; 34-59192; FR-78; File No. S7-15-08; December 31, 2008) and relevant guidance notes and letters issued by the SEC’s Staff.

The reported reserves contained in this annual report include only our proved reserves and do not include probable reserves or possible reserves.

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

“acreage”: The total area, expressed in acres or km2, over which YPF has interests in exploration or production. Net acreage is YPF’s interest in the relevant exploration or production area.

“basin”: A depression in the crust of the Earth formed by plate tectonic activity in which sediments accumulate. Continued sediment accumulation can cause further depression or subsidence.

“block”: Areas defined by concession contracts or operating contracts signed by YPF.

“concession contracts”: A grant of access for a defined area and time period that transfers certain entitlements to produce hydrocarbons from the host country to an enterprise. The company holding the concession generally has rights and responsibilities for the exploration, development, production and sale of hydrocarbons, and typically, an obligation to make payments at the signing of the concession and once production begins pursuant to applicable laws and regulations.

“crude oil”: Crude oil with respect to YPF’s production and reserves includes condensate, and natural gas liquids (“NGL”).

“field”: One or more reservoirs grouped by or related to the same general geologic structural feature or stratigraphic condition

“formation”: The fundamental unit of lithostratigraphy. A body of rock that is sufficiently distinctive and continuous that it can be mapped.

“gas”: Natural gas.

“hydrocarbons”: Crude oil and natural gas.

“surface conditions”: Represents the pressure and temperature conditions at which volumes of oil, gas, condensate and natural gas liquids are measured for reporting purposes. It is also referred to as standard conditions. For YPF these conditions are 14.7 psi for pressure and 60 degrees Fahrenheit for temperature. All volume units expressed in this report are at surface conditions.

Abbreviations:

 

“bbl”    Barrels.
“bcf”    Billion cubic feet.
“bcm”    Billion cubic meters.
“boe”    Barrels of oil equivalent.
“boe/d”    Barrels of oil equivalent per day.
“cm”    Cubic meters.
“dam 3”    Dekameters cubic (thousand cubic meters).
“GWh”    Gigawatt hours.
“HP”    Horsepower.
“km”    Kilometers.
“km2”    Square kilometers.
“liquids”    Crude oil, condensate and natural gas liquids.
“LNG”    Liquefied natural gas.
“LPG”    Liquefied petroleum gas.
“m”    Thousand.
“m3”    Cubic meter
“mbbl/d”    Thousand barrels per day.
“mcf”    Thousand cubic feet.
“mcm”    Thousand cubic meters.
“mboe/d”    Thousand barrels of oil equivalent per day.
“mm”    Million.
“mmbbl”    Million barrels.

 

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“mmboe”    Million barrels of oil equivalent.
“mmboe/d”    Million barrels of oil equivalent per day.
“mmBtu”    Million British thermal units.
“mmcf”    Million cubic feet.
“mmcf/d”    Million cubic feet per day.
“mmcm/d”    Million cubic meters per day.
“mtn”    Thousand tons.
“MW”    Megawatts.
“psi”    Pound per square inch.
“WTI”    West Texas Intermediate.

 

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PART I

ITEM 1. Identity of Directors, Senior Managers and Advisers

Not applicable.

ITEM 2. Offer Statistics and Expected Timetable

Not applicable.

ITEM 3. Key Information

Selected Financial Data

The following tables present our selected financial data. You should read this information in conjunction with our Audited Consolidated Financial Statements, and the information under “Item 5. Operating and Financial Review and Prospects” included elsewhere in this annual report.

Our Audited Consolidated Financial Statements are prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).

On March 20, 2009, the Argentine Federation of Professional Councils in Economic Sciences (“FACPCE”) approved Technical Resolution No. 26 on the “Adoption of the International Financial Reporting Standards (IFRS) of the International Accounting Standards Board (IASB)”. Such resolution was approved by the Argentine National Securities Commission (“CNV”) through General Resolution No. 562/09 on December 29, 2009 (modified by General Resolution No. 576/10 on July 1, 2010), with respect to certain publicly-traded entities subject to Law No. 26,831. Compliance with such rules was mandatory for YPF for the fiscal year which began on January 1, 2012, with transition date of January 1, 2011.

In this annual report, except as otherwise specified, references to “$,” “U.S.$” and “dollars” are to U.S. dollars, and references to “Ps.” and “pesos” are to Argentine pesos. Solely for the convenience of the reader, peso amounts as of and for the year ended December 31, 2013 have been translated into U.S. dollars at the exchange rate quoted by the Argentine Central Bank (Banco Central de la República Argentina or “Central Bank”) on December 31, 2013 of Ps.6.52 to U.S.$1.00, unless otherwise specified. The exchange rate quoted by the Central Bank on March 25, 2014 was Ps 8.00 to U.S.$1.00. The U.S. dollar equivalent information should not be construed to imply that the peso amounts represent, or could have been or could be converted into U.S. dollars at such rates or any other rate. See “—Exchange Rates.”

 

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The financial data contained in this annual report as of December 31, 2013, 2012 and 2011 and for the years then ended has been derived from our Audited Consolidated Financial Statements included in this annual report. See Note 14 to the Audited Consolidated Financial Statements.

 

           As of and for the year ended December 31,  
     2013     2013     2012     2011  
    

(in millions of

U.S.$, except for

per share and

per ADS data)

   

(in millions of pesos, except

for per share and per ADS data)

 

Consolidated Statement of Comprehensive Income Data(1) :

    

Revenues(2)

     13,825        90,113        67,174        56,211   

Gross profit

     3,305        21,542        16,907        15,068   

Administrative expenses

     (412     (2,686     (2,232     (1,822

Selling expenses

     (1,161     (7,571     (5,662     (5,438

Exploration expenses

     (127     (829     (582     (574

Other income/(expense), net

     108        704        (528     (46

Operating income

     1,712        11,160        7,903        7,188   

Income/(Loss) on long-term investments

     54        353        114        685   

Interest expense

     (588     (3,833     (1,557     (1,045

Other financial income/(expense), net

     1,023        6,668        2,105        758   

Income from sale of long-term investments

     —          —          —          —     

Reversal/(impairment) of other current assets

     —          —          —          —     

Income before income tax

     2,201        14,348        8,565        7,586   

Income tax

     (436     (2,844     (2,720     (2,495

Deferred tax

     (985     (6,425     (1,943     (646

Net income

     779        5,079        3,902        4,445   

Total other Comprehensive income

     1,846        12,031        4,241        1,852   

Total Comprehensive income

     2,625        17,110        8,143        6,297   

Earnings per share and per ADS(4)

     2.00        13.05        9.92        11.30   

Dividends per share and per ADS(4) (in pesos)

     n.a.        0.83        0.77        14.15   

Dividends per share and per ADS(4)(5) (in U.S. dollars)

     n.a.        0.13        0.16        3.39   

Consolidated Balance Sheet Data(1):

    

Cash

     1,644        10,713        4,747        1,112   

Working capital(3)

     262        1,706        (2,582     (7,750

Total assets

     20,803        135,595        79,949        60,990   

Total debt(6)

     4,893        31,890        17,104        12,198   

Shareholders’ equity(7)

     7,401        48,240        31,260        23,420   

Other Consolidated Financial Data:

    

Fixed assets depreciation

     1,754        11,433        8,281        6,499   

Cash used in fixed asset acquisitions

     4,240        27,639        16,403        12,156   

 

(1) The consolidated financial statements reflect the effect of the application of the functional and reporting currency. See Note 1.b.1) to the Audited Consolidated Financial Statements.
(2) Revenues are net to us after payment of a fuel transfer tax and turnover tax. Customs duties on hydrocarbon exports are disclosed in “Taxes, charges and contributions,” as indicated in Note 2.k) to the Audited Consolidated Financial Statements. Royalties with respect to our production are accounted for as a cost of production and are not deducted in determining revenues. See Note 1.b.16) to the Audited Consolidated Financial Statements.
(3) Working Capital consists of Total Current Assets minus Total Current Liabilities as of December 31, 2013, December 31, 2012 and December 31, 2011.
(4) Information has been calculated based on outstanding share capital of 393,312,793 shares. Each ADS represents one Class D share. There were no differences between basic and diluted earnings per share and ADS for any of the years disclosed.
(5) Amounts expressed in U.S. dollars are based on the exchange rate as of the date of payment.
(6) Total loans includes non-current loans of Ps. 23,076 million, Ps.12,100 million and Ps.4,435 million as of December 31, 2013, 2012 and 2011, respectively, and current loans of Ps. 8,814 million, Ps.5,004 million and Ps.7,763 million as of December 31, 2013, 2012 and 2011, respectively. See “Financial Risk Management–Liquidity Risk” in Note 1.d) to the Audited Consolidated Financial Statements.

 

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(7) Our subscribed capital as of December 31, 2013 is represented by 393,312,793 shares of common stock and divided into four classes of shares, with a par value of Ps.10 and one vote per share. These shares are fully subscribed, paid-in and authorized for stock exchange listing. See additionally “Item 6. Directors, Senior Management and Employees—Compensation of members of our Board of Directors and Supervisory Committee”, “Item 16E—Purchases of Equity Securities by the Issuer and Affiliated Purchasers” and Note 1.b.10.iii) to the Audited Consolidated Financial Statements in relation to shares purchased by YPF and assigned as a result of our employee compensation plans.

Exchange Rates

From April 1, 1991 until the end of 2001, the Convertibility Law (Law No. 23,928) established a fixed exchange rate under which the Central Bank was obligated to sell U.S. dollars at one peso per U.S. dollar. On January 6, 2002, the Argentine Congress enacted the Public Emergency and Foreign Exchange System Reform Law (Law No. 25,561, or the “Public Emergency Law”), formally putting an end to the Convertibility Law regime and abandoning over 10 years of U.S. dollar-peso parity. The Public Emergency Law, which has been extended until December 31, 2015 by Law 26,896, grants the National Executive Office the power to set the exchange rate between the peso and foreign currencies and to issue regulations related to the foreign exchange market. Following a brief period during which the Argentine government established a temporary dual exchange rate system pursuant to the Public Emergency Law, the peso has been allowed to float freely against other currencies since February 2002 although the government has the power to intervene by buying and selling foreign currency for its own account, a practice in which it engages on a regular basis. The Argentine peso has recently been subject to devaluation (approximately 23% during January 2014). The Argentine government is analyzing certain measures in response to such devaluation and the impact on the rest of the economy, including inflation. See “Risks Factors—Risks Relating to Argentina—Our business is highly dependent upon economic conditions in Argentina.”

The following table sets forth the annual high, low, average and period-end exchange rates for U.S. dollars for the periods indicated, expressed in nominal pesos per U.S. dollar, based on rates quoted by the Central Bank. The Federal Reserve Bank of New York does not report a noon buying rate for Argentine pesos.

 

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

Year ended December 31,

          

2009

     3.45         3.85         3.75 (1)      3.80   

2010

     3.79         3.99         3.92 (1)      3.98   

2011

     3.97         4.30         4.15 (1)      4.30   

2012

     4.30         4.92         4.58 (1)      4.92   

2013

     4.92         6.52         5.54 (1)      6.52   

Month

          

September 2013

     5.68         5.79         5.74 (1)      5.79   

October 2013

     5.80         5.91         5.85 (1)      5.91   

November 2013

     5.92         6.14         6.01 (1)      6.14   

December 2013

     6.15         6.52         6.32 (1)      6.52   

January 2014

     6.54         8.02         7.10 (1)      8.02   

February 2014

     7.76         8.02         7.86 (1)      7.88   

March 2014 (2)

     7.87         7.97         7.90 (1)      7.97   

Source: Central Bank

 

(1) Represents the average of the exchange rates on the last day of each month during the period.
(2) Through March 21, 2014.

No representation is made that peso amounts have been, could have been or could be converted into U.S. dollars at the foregoing rates on any of the dates indicated.

Exchange Regulations

Prior to December 1989, the Argentine foreign exchange market was subject to exchange controls. From December 1989 until April 1991, Argentina had a freely floating exchange rate for all foreign currency transactions, and the transfer of dividend payments in foreign currency abroad and the repatriation of capital were permitted without prior approval of the Central Bank. From April 1, 1991, when the Convertibility Law became effective, until December 21, 2001, when the Central Bank closed the foreign exchange market, the Argentine peso was freely convertible into U.S. dollars.

 

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On December 3, 2001, the Argentine government imposed a number of monetary and currency exchange control measures through Decree 1570/01, which included restrictions on the free disposition of funds deposited with banks and tight restrictions on transferring funds abroad (including the transfer of funds to pay dividends) without the Central Bank’s prior authorization subject to specific exceptions for transfers related to foreign trade. Since January 2003, the Central Bank has gradually eased these restrictions and expanded the list of transfers of funds abroad that do not require its prior authorization (including the transfer of funds to pay dividends). In June 2003, the Argentine government set restrictions on capital flows into Argentina, which mainly consisted of a prohibition against the transfer abroad of any funds until 180 days after their entry into the country. In June 2005, the government established new regulations on capital flows into Argentina, including increasing the period that certain incoming funds must remain in Argentina to 365 calendar days and requiring that 30% of incoming funds be deposited with a bank in Argentina in a non-assignable, non-interest-bearing account for 365 calendar days. Under the exchange regulations currently in force, restrictions exist in respect of the repatriation of funds or investments by non-Argentine residents. For instance, subject only to limited exceptions, the repatriation by non-Argentine residents of funds received as a result of the sale of the Class D shares in the secondary market is subject to a limit of U.S.$500,000 per person per calendar month. In order to repatriate such funds abroad, non-Argentine residents also are required to demonstrate that the funds used to make the investment in the Class D shares were transferred to Argentina at least 365 days before the proposed repatriation. The transfer abroad of dividend payments is currently authorized by applicable regulations to the extent that such dividend payments are made in connection with audited financial statements and are approved by a shareholders’ meeting.

During 2012, additional foreign exchange regulations were imposed on purchases of foreign currency and transfers of foreign currency abroad. Such regulations include the requirement for financial institutions to inform in advance and obtain approval from the Central Bank with respect to any foreign exchange transaction to be entered into through the foreign exchange market. See “—Risk Factors—Risks Relating to Argentina—We are subject to exchange and capital controls.”

Risk Factors

The risks and uncertainties described below are not the only risks and uncertainties that we face. Additional risks and uncertainties that are unknown to us or that we currently think are immaterial also may impair our business operations or our ability to make payments on the notes and under other existing or future indebtedness.

Risks Relating to Argentina

The Argentine federal government will control the Company according to domestic energy policies in accordance with Law 26,741 (the “Expropriation Law”).

The Argentine federal government controls the Company, and consequently, the federal government is able to determine substantially all matters requiring approval by a majority of our shareholders, including the election of a majority of our directors, and is able to direct our operations. The Expropriation Law has declared achieving self-sufficiency in the supply of hydrocarbons as well as in the exploitation, industrialization, transportation and sale of hydrocarbons, a national public interest and a priority for Argentina. In addition, its stated goal is to guarantee socially equitable economic development, the creation of jobs, the increase of the competitiveness of various economic sectors and the equitable and sustainable growth of the Argentine provinces and regions. In addition, should Argentina be unable to meet its energy requirements, such occurrence could have a material adverse impact on the Argentine economy and negatively impact our results of operations. We cannot assure you that the decisions taken by our controlling shareholders for the purpose of achieving the targets set forth in the Expropriation Law would not differ from your interests as a shareholder.

Our business is largely dependent upon economic conditions in Argentina.

Substantially all of our operations, properties and customers are located in Argentina, and, as a result, our business is to a large extent dependent upon economic conditions prevailing in Argentina. The changes in economic, political and regulatory conditions in Argentina and measures taken by the Argentine government have had and are expected to continue to have a significant impact on us. You should make your own investigation about Argentina and prevailing conditions in that country before making an investment in us.

The Argentine economy has experienced significant volatility in past decades, including numerous periods of low or negative growth and high and variable levels of inflation and devaluation. Since the most recent crisis of 2001 and 2002, Argentina’s gross domestic product, or GDP, grew at an average annual real rate of approximately 8.5% from 2003 to 2008, although the growth rate decelerated to 0.9% in 2009 as a result of the global financial crisis, but recovered in 2010 and 2011, growing at an annual real rate of approximately 9%, according to preliminary official data. In 2012, the Argentine economy experienced a slowdown with GDP increasing at a rate of 1.9% on an annualized basis compared to the preceding year. On March 27, 2014, the Argentine government announced a new method of calculating GDP by reference to 2004 as the base year (as opposed to 1993, which was the base reference year under the prior method of calculating GDP). As a result of the application of this new method, the estimated GDP for 2013 was revised from 4.9% to 3%. No assurances can be given that the rate of growth experienced over past years will be achieved in subsequent years or that the economy will not contract. In addition, the Argentine peso has recently been subject to devaluation (approximately 23% during January 2014). If economic conditions in Argentina were to slow down, or contract, if inflation were to accelerate further, or if the Argentine government’s measures to attract or retain foreign investment and international financing in the future are unsuccessful, such developments could adversely affect Argentina’s economic growth and in turn affect our financial condition and results of operations.

 

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Argentine economic results are dependent on a variety of factors, including (but not limited to) the following:

 

    international demand for Argentina’s principal exports;

 

    international prices for Argentina’s principal commodity exports;

 

    stability and competitiveness of the peso against foreign currencies;

 

    levels of consumer consumption and foreign and domestic investment and financing; and

 

    the rate of inflation.

The Argentine peso has recently been subject to devaluation (approximately 23% during January 2014). The Argentine government is analyzing certain measures in response to such devaluation and the impact on the rest of the economy, including inflation. In addition, Argentina has confronted inflationary pressures. According to inflation data published by the National Statistics Institute (Instituto Nacional de Estadística y Censos, INDEC), from 2008 to 2013, the Argentine consumer price index (“CPI”) increased 7.2%, 7.7%, 10.9%, 9.5% 10.8% and 10.9%, respectively; the wholesale price index increased 8.8%, 10.3%, 14.5%, 12.7% 13.1% and 14.7% , respectively. However, certain private sector analysts usually quoted by the government opposition, based on methodologies being questioned by the Argentine government on the basis of the lack of technical support, believe that actual inflation was significantly higher than that reflected in INDEC reports according to the methodology prevailing for such reports until December 2013. In 2014, the Argentine government established a new consumer price index (“IPCNU”) which more broadly reflects consumer prices by considering price information from the 24 provinces of the country, divided into six regions. According to the IPCNU, inflation for each of January and February 2014 was 3.7% and 3.4%, respectively. Increased rates of inflation in Argentina could increase our cost of operation, and may negatively impact our results of operations and financial condition. There can be no assurance that inflation rates will not be higher in the future.

In addition, Argentina’s economy is vulnerable to adverse developments affecting its principal trading partners. A significant decline in the economic growth of any of Argentina’s major trading partners, such as Brazil, China or the United States, could have a material adverse impact on Argentina’s balance of trade and adversely affect Argentina’s economic growth and may consequently adversely affect our financial condition and results of operations. Furthermore, a significant depreciation of the currencies of our trading partners or trade competitors may adversely affect the competitiveness of Argentina and consequently adversely affect Argentina’s economic and our financial condition and results of operations.

Furthermore, in 2005, Argentina successfully restructured a substantial portion of its bond indebtedness and settled all of its debt with the IMF. In June 2010, Argentina completed the renegotiation of approximately 67% of the defaulted bonds that were not swapped in 2005. As a result of the 2005 and 2010 debt swaps, approximately 91% of the bond indebtedness on which Argentina had defaulted in 2002 was restructured. Certain bondholders did not participate in the restructuring and instead sued Argentina for payment. In late October 2012, the United States Court of Appeals for the Second Circuit rejected an appeal by Argentina concerning payments allegedly due on bonds that had not been the subject of the swaps in 2005 and 2010. On November 21, 2012, the United States District Court for the Southern District of New York ordered Argentina to make a deposit of U.S.$1,330 million for payment to the holdout bondholders. Argentina appealed the District Court’s November 21 order to the Second Circuit Court of Appeals, which granted Argentina’s request for a stay of the order. On March 19, 2013, Argentina submitted to the Second Circuit a proposed payment plan for holdout bondholders. That proposal was rejected by the plaintiff holdout bondholders on April 19, 2013. On August 30, 2013, the Second Circuit Court of Appeals affirmed the District Court’s November 21, 2012 order, but stayed its decision pending an appeal to the Supreme Court of the United States.

On September 3, 2013, the District Court granted plaintiff holdout bondholders’ requests for discovery from Argentina and certain financial institutions concerning, among other things, Argentina’s assets and the relationship between Argentina and YPF. In January 2014, the United States Supreme Court accepted an appeal by Argentina concerning the permissible scope of discovery into its assets. Litigation initiated by holdout bondholders has resulted, and may result, in material judgments against Argentina and could result in attachments of or injunctions relating to assets of or deemed owned by Argentina. Such attachments or injunctions could have a material adverse effect on the country’s economy and also affect our ability to access international financing or repay our obligations.

For additional information related to the evolution of the Argentine economy see “Item 5 – Operating and Financial Review and Prospects—Macroeconomic Conditions.”

 

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Certain risks are inherent in any investment in a Company operating in an emerging market such as Argentina.

Argentina is an emerging market economy, and investing in emerging markets generally carries risks. These risks include political, social and economic instability that may affect Argentina’s economic results which can stem from many factors, including the following:

 

    high interest rates;

 

    abrupt changes in currency values;

 

    high levels of inflation;

 

    exchange controls;

 

    wage and price controls;

 

    regulations to import equipment and other necessities relevant for operations;

 

    changes in governmental economic or tax policies; and

 

    political and social tensions.

Any of these factors, as well as volatility in the capital markets, may adversely affect our financial condition and results of operations or the liquidity, trading markets and value of our securities.

The Argentine economy has been adversely affected by economic developments in other markets.

Financial and securities markets in Argentina, and also the Argentine economy, are influenced by economic and market conditions in other markets worldwide. Considering the recent international turmoil, Argentina’s economy remains vulnerable to external shocks, including those relating to or similar to the global economic crisis that began in 2008 and the recent uncertainties surrounding European sovereign debt. For example, the challenges faced by the European Union to stabilize some of its member economies, such as Greece, Ireland, Italy, Portugal and Spain, have had international implications affecting the stability of global financial markets, which has hindered economies worldwide. Although economic conditions vary from country to country, investors’ perceptions of events occurring in one country may substantially affect capital flows into and investments in securities from issuers in other countries, including Argentina.

Consequently, there can be no assurance that the Argentine financial system and securities markets will not continue to be adversely affected by events in developed countries’ economies or events in other emerging markets, which could in turn, adversely affect the Argentine economy and, as a consequence, the Company’s results of operations and financial condition.

The implementation of new export duties, other taxes and import regulations could adversely affect our results.

Since 2002, new duties have been implemented on exports, and have been progressively increased over the years. Resolution 394/2007 of the Ministry of Economy and Production, published on November 16, 2007, amended the export duties on crude oil and other crude derivative products imposed in previous years. In addition, the Resolution No. 1/2013 from the Ministry of Economy, published on January 3, 2013, modified the reference and floor prices. The regime provides that when the WTI international price exceeds the reference price, which is fixed at U.S.$80/barrel, the producer shall be allowed to collect at U.S.$70/barrel, with the remainder being withheld by the Argentine government as an export tax. If the WTI international price is under the reference price but over U.S.$45/barrel, a 45% withholding rate will apply. If such price is under U.S.$45/barrel, the applicable export tax is to be determined by the Argentine government within a term of 90 business days. The withholding rate determined as indicated above also currently applies to diesel fuel, gasoline and other crude derivative products. In addition, the calculation procedure described above also applies to other petroleum products and lubricants based upon different withholding rates, reference prices and prices allowed to producers. See “Item 4. Information on the Company—Regulatory Framework and Relationship with the Argentine Government—Market Regulation.” With respect to natural gas products, Resolution No. 127/2008 of the Ministry of Economy and Production increased export duties applicable to natural gas exports from 45% to 100%, mandating a valuation basis for the calculation of the duty as the highest price established in any contract of any Argentine importer for the import of gas. Resolution No. 127/2008 provides with respect to LPG products (including butane, propane and blends thereof) that if the international price of the relevant LPG product, as notified daily by the Argentine Secretariat of Energy, is under the reference price established for such product in the Resolution (U.S.$338/m3 for propane, U.S.$393/m3 for butane and U.S.$363/m3 for blends of the two), the applicable export duty for such product will be 45%. If the international price exceeds the reference price, the producer shall be allowed to collect the maximum amount established by the Resolution for the relevant product (U.S.$233/m3 for propane, U.S.$271/m3 for butane and U.S.$250/m3 for blends of the two), with the remainder being withheld by the Argentine government as an export tax. The imposition of these export taxes has adversely affected our results of operations.

 

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As a result of the aforementioned export tax increases, we may be and, in certain cases, have already been forced to seek the renegotiation of export contracts which had previously been authorized by the Argentine government. We cannot provide assurances that we will be able to renegotiate such contracts on terms acceptable to us.

In addition, in 2012, the Argentine government adopted an import procedure pursuant to which local authorities must pre-approve any import of products and services to Argentina as a precondition to allow importers access to the foreign exchange market for the payment of such imported products and services.

We cannot assure you that these taxes and import regulations will not continue or be increased in the future or that other new taxes or import regulations will not be imposed.

We may be exposed to fluctuations in foreign exchange rates.

Our results of operations are exposed to currency fluctuation and any devaluation of the peso against the U.S. dollar and other hard currencies may adversely affect our business and results of operations. The value of the peso has fluctuated significantly in the past and may do so in the future. In addition, the Argentine peso has recently been subject to devaluation (approximately 23% during January 2014). (See “Item 5 – Operating and Financial Review and Prospects—Macroeconomic Conditions” for additional information). The main effects of a devaluation of the Argentine Peso on our net income are those related to the accounting of deferred income tax related mainly to fixed assets, which we expect would have a negative effect; current income tax, which we expect would have a positive effect; increased depreciation and amortization resulting from the remeasurement in pesos of our fixed and intangible assets; and exchange rate differences as a result of our exposure to the peso, which we expect would have a positive effect due to the fact that our functional currency is the U.S. dollar.

We are unable to predict whether, and to what extent, the value of the peso may further depreciate or appreciate against the U.S. dollar and how any such fluctuations would affect our business.

Variations in interest rates and exchange rate on our current and/or future financing arrangements may result in significant increases in our borrowing costs.

We are permitted to borrow funds to finance the purchase of assets, incur capital expenditures, repay other obligations and finance working capital. As of December 31, 2013 a significant part of our total debt is sensitive to changes in interest rates (See “Item 11. Quantitative and Qualitative Disclosures about Market Risk Interest rate exposure”). Consequently, variations in interest rates could result in significant changes in the amount required to be expected to cover to debt service obligations and in our interest expense thus affecting our results and financial condition.

In addition, interest and principal amounts payable pursuant to debt obligations denominated in or indexed to U.S. dollars are subject to variations in the Argentine/U.S. currency exchange rate that could result in a significant increase in the amount of the interest and principal payments in respect of such debt obligations.

We are subject to exchange and capital controls.

In the past, Argentina imposed exchange controls and transfer restrictions substantially limiting the ability of companies to retain foreign currency or make payments abroad. Beginning in 2011, additional foreign exchange restrictions have been imposed which restrict purchases of foreign currency and transfers of foreign currency abroad. Such restrictions include the requirement for financial institutions to inform in advance and obtain approval from the Argentine Central Bank with respect to any foreign exchange transaction to be entered into through the foreign exchange market with the exception of payments related to foreign debt previously liquidated in the domestic market. Since 2011, oil and gas companies (including YPF), among other entities, were required to repatriate 100% of their foreign currency export receivables. See “Item 4. Information on the Company—Regulatory Framework and Relationship with the Argentine Government—Repatriation of Foreign Currency”.

There can be no assurances regarding future modifications to exchange and capital controls. Exchange and capital controls could adversely affect our financial condition or results of operations and our ability to meet our foreign currency obligations and execute our financing plans.

Our access to international capital markets and the market price of our shares are influenced by the perception of risk in Argentina and other emerging economies.

International investors consider Argentina to be an emerging market. Economic and market conditions in other emerging market countries, especially those in Latin America, influence the market for securities issued by Argentine companies. Volatility in securities markets in Latin America and in other emerging market countries may have a negative impact on the trading value of our securities and on our ability and the terms on which we are able to access international capital markets.

 

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Moreover, recent regulatory and policy developments in Argentina, including the enactment of the Expropriation Law, have led to considerable volatility in the market price of our shares and ADSs. We cannot assure that the perception of risk in Argentina and other emerging markets may not have a material adverse effect on our ability to raise capital and on the trading values of our securities. As a result of the foregoing, we cannot assure you that factors previously mentioned may not affect our financial condition and/or results of operations (See “Item 4. Information on the Company—History and Development of YPF.”)

Risks Relating to the Argentine Oil and Gas Business and Our Business

Our domestic operations are subject to extensive regulation.

The oil and gas industry is subject to government regulation and control. As a result, our business is to a large extent dependent upon regulatory and political conditions prevailing in Argentina and our results of operations may be adversely affected by regulatory and political changes in Argentina. Therefore, we face risks and challenges relating to government regulation and control of the energy sector, including those set forth below and elsewhere in these risk factors:

 

    limitations on our ability to pass higher domestic taxes, increases in production costs, or increases in international prices of crude oil and other hydrocarbon fuels and exchange rate fluctuations through to domestic prices, or to increase local prices (See “Limitations on local pricing in Argentina may adversely affect our results of operations” below);

 

    higher taxes on exports of hydrocarbons;

 

    restrictions on hydrocarbon export volumes driven mainly by the requirement to satisfy domestic demand;

 

    in connection with the Argentine government’s policy to provide absolute priority to domestic demand, regulatory orders to supply natural gas and other hydrocarbon products to the domestic retail market in excess of previously contracted amounts;

 

    legislation and regulatory initiatives relating to hydraulic stimulation and other drilling activities for non-conventional oil and gas hydrocarbons which could increase our cost of doing business or cause delays and adversely affect our operations;

 

    restrictions on imports of products which could affect our ability to meet our delivery commitments or growth plans, as the case may be; and

 

    the implementation or imposition of stricter quality requirements for petroleum products in Argentina.

The Argentine government has made certain changes in regulations and policies governing the energy sector to give absolute priority to domestic supply at stable prices in order to sustain economic recovery. As a result of the above-mentioned changes, for example, on days during which a gas shortage occurs, exports of natural gas (which are also affected by other government curtailment orders) and the provision of gas supplies to industries, electricity generation plants and service stations selling compressed natural gas are interrupted for priority to be given to residential consumers at lower prices. More recently, the Expropriation Law has declared achieving self-sufficiency in the supply of hydrocarbons as well as in the exploitation, industrialization, transportation and sale of hydrocarbons, a national public interest and a priority for Argentina. In addition, its stated goal is to guarantee socially equitable economic development, the creation of jobs, the increase of the competitiveness of various economic sectors and the equitable and sustainable growth of the Argentine provinces and regions. See “Item 4. Information on the Company—Regulatory Framework and Relationship with the Argentine Government—The Expropriation Law”, and “—Risks Relating to Argentina—The Argentine federal government will control the Company according to domestic energy policies in accordance with the Expropriation Law.” Moreover, we cannot assure you that changes in applicable laws and regulations, or adverse judicial or administrative interpretations of such laws and regulations, will not adversely affect our results of operations. See “Item 4. Information on the Company—Regulatory Framework and Relationship with the Argentine Government.”

In January 2007, Law No. 26,197 was enacted, which, in accordance with Article 124 of the National Constitution, provided that Argentine provinces shall be the owners of the hydrocarbon reservoirs located within their territories. Pursuant to the law, the Argentine Congress is charged with enacting laws and regulations aimed at developing mineral resources within Argentina, while the provincial governments are responsible for enforcing these laws and administering hydrocarbon fields that fall within the territories of their respective provinces. Certain provincial governments, however, have construed the provisions of Law No. 26,197 and Article 124 to empower the provinces to enact their own regulations concerning exploration and production of oil and gas within their territories. There can be no assurance that regulations or taxes (including royalties) enacted or administered by the provinces will not conflict with federal law, and such taxes or regulations may adversely affect our operations and financial condition.

 

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Limitations on local pricing in Argentina may adversely affect our results of operations.

Due to regulatory, economic and government policy factors, our domestic gasoline, diesel and other fuel prices have frequently lagged substantially behind prevailing international and regional market prices for such products, and our ability to increase prices has been limited. Likewise, the prices at which we sell natural gas in Argentina (particularly to the residential sector) are subject to government regulations and currently are substantially below regional market prices for natural gas. The prices that we are able to obtain for our hydrocarbon products affect, among others, the viability of investments in new exploration, development and refining, and as a result the timing and amount of our projected capital expenditures for such purposes. We budget capital expenditures by taking into account, among other things, market prices for our hydrocarbon products. For additional information on domestic pricing for our products, see “Item 4. Information on the Company—Regulatory Framework and Relationship with the Argentine Government—Market Regulation”. On April 10, 2013, Resolution 35/2013 of the Argentine Secretariat of Domestic Commerce determined a price cap for fuel at all service stations for a period of six months (subsequently extended until November 24, 2013), which shall not exceed the highest outstanding price as of April 9, 2013 in each of the regions identified in the Annex of the Resolution. We cannot assure you that we will be able to increase the domestic prices of our products, and limitations on our ability to do so would adversely affect our financial condition and results of operations. Similarly, we cannot assure you that hydrocarbon prices in Argentina will match the increases or decreases in hydrocarbon prices at the international or regional levels.

In addition, in July 2012, pursuant to the Expropriation Law, the Argentine government created the “Regulation of the Hydrocarbons Sovereignty Regime in the Argentine Republic” and established a planning and coordination commission for the sector (the “Hydrocarbons Commission”). The Hydrocarbons Commission consists of representatives of the federal government, and its objective is to address certain market asymmetries in the oil and gas sector. The goals of the Hydrocarbons Commission are mainly to guarantee adequate investment by oil and gas companies to:

 

    improve the level of oil and gas reserves,

 

    expand oil refining capabilities, and

 

    maintain an adequate supply of fuel at reasonable prices.

For the purpose of granting reasonable commercial prices, the Hydrocarbons Commission will determine the criteria that shall govern the operations in the domestic market. The Hydrocarbons Commission has the power to publish reference prices for oil and gas, which will be adjusted to cover the production costs attributable to the activity and to reach a reasonable margin of profit, monitor oil and gas prices charged by private companies and supervise and ensure investment in the oil sector. Each company within the sector must be registered in the Registro Nacional de Inversiones Hidrocarburíferas (National Hydrocarbons Investments Registry) and must submit an annual investment plan for approval by the Hydrocarbons Commission. Non-compliance with this requirement may result in several sanctions, including termination of the authorization to exploit hydrocarbon reserves and operate within the sector. For more information, please see “See “Item 4. Information on the Company—Regulatory Framework and Relationship with the Argentine Government—Market Regulation —Regulation of the Hydrocarbons Sovereignty Regime in the Argentine Republic—Decree No. 1,277/2012.”

We are subject to direct and indirect export restrictions, which have affected our results of operations and caused us to declare force majeure under certain of our export contracts.

The Argentine Hydrocarbons Law (Law No. 17,319) allows for hydrocarbon exports as long as they are not required for the domestic market and are sold at reasonable prices. In the case of natural gas, Law 24,076 and related regulations require that the needs of the domestic market be taken into account when authorizing long-term natural gas exports.

During the last several years, the Argentine authorities have adopted a number of measures that have resulted in restrictions on exports of natural gas from Argentina. Due to the foregoing, we have been obliged to sell a part of our natural gas production previously destined for the export market in the local Argentine market and have not been able to meet our contractual gas export commitments in whole or, in some cases, in part, leading to disputes with our export clients and forcing us to declare force majeure under our export sales agreements. We believe that the measures mentioned above constitute force majeure events that relieve us from any contingent liability for the failure to comply with our contractual obligations, although no assurance can be given that this position will prevail.

See “Item 4. Information on the Company—Exploration and Production—Delivery commitments-Natural gas supply contracts,” “Item 4. Information on the Company—Exploration and Production—The Argentine natural gas market,” and “Item 8. Financial Information—Legal Proceedings.”

Crude oil exports, as well as the export of most of our hydrocarbon products, currently require prior authorization from the Argentine Secretariat of Energy (pursuant to the regime established under Resolution S.E. No. 1679/04 as amended and supplemented by other regulation). Oil companies seeking to export crude oil or LPG must first demonstrate that the local demand for such product is satisfied or that an offer to sell the product to local purchasers has been made and rejected. Oil refineries seeking to export diesel fuel must also first demonstrate that the local demand of diesel fuel is duly satisfied. Because domestic diesel fuel production does not currently satisfy Argentine domestic consumption needs, we have been prevented since 2005 from selling diesel fuel production in the export market, and are obliged to sell in the local market at prevailing domestic prices.

 

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We are unable to predict how long these export restrictions will be in place, or whether any further measures will be adopted that adversely affect our ability to export gas, crude oil and diesel fuel or other products and, accordingly, our results of operations.

Oil and gas prices could affect our business.

We budget capital expenditures related to exploration, development, refining and distribution activities by taking into account, among other things, market prices for our hydrocarbon products. In the event that current domestic prices for certain products do not match cost increases (including those related to the increase in the value of the U.S. dollar against the Argentine peso) in accordance with higher and more complex investments, mainly as a result of the development of nonconventional resources, and also with evolution of the economy, our ability to improve our hydrocarbon recovery rates, find new reserves and carry out certain of our other capital expenditure plans are likely to be adversely affected, which in turn would have an adverse effect on our results of operations.

Our reserves and production are likely to decline.

Most of our oil and gas producing fields in Argentina are mature and, as a result, our reserves and production are likely to decline as reserves are depleted. Our production declined by approximately 8.4% in 2011 and 0.6% in 2012, on a boe/d basis. As a result of increased development and exploration activity in 2013, during 2013 our production increased by approximately 1.7%, on a boe/d basis.

We face certain challenges in order to replace our proved reserves with other categories of hydrocarbons. However, the continuous comprehensive technical review of our oil and gas fields allows us to identify opportunities to rejuvenate mature fields and optimize new fields developments in Argentine basins with the aim of achieving results similar to those achieved by mature fields in other regions of the world (which have achieved substantially higher recovery factors with the application of new technology). Additionally, we have been completing the renewal of most of our concessions, allowing us to develop certain strategic projects related to waterflooding, enhanced oil recovery and unconventional resources, which represent an important opportunity not only for the Company but also for Argentina. We expect that unconventional development will require higher investment in future years, principally in connection with the Vaca Muerta formation. These investments are expected to yield substantial economies of scale and to significantly increase recovery rates from this resource play. Other resource plays, unconventional prospects, exist in Argentina and have positioned the country amongst the most attractive in terms of worldwide unconventional resource potential. Nevertheless, the financial viability of these investments and reserve recovery efforts will generally depend on the prevailing economic and regulatory conditions in Argentina, as well as the market prices of hydrocarbon products, and are also subject to material risks inherent to the oil and gas industry and may prove unsuccessful. See “—Our business plan includes future drilling activities for non-conventional oil and gas reserves, such as shale gas extraction, and if we are unable to successfully acquire and use the necessary new technologies and other support as well as obtain financing and venture partners, our business may be adversely affected.”

Our oil and natural gas reserves are estimates.

Our oil and gas proved reserves are estimated using geological and engineering data to determine with reasonable certainty whether the crude oil or natural gas in known reservoirs is recoverable under existing economic and operating conditions. The accuracy of proved reserve estimates depends on a number of factors, assumptions and variables, some of which are beyond our control. Factors susceptible to our control include drilling, testing and production after the date of the estimates, which may require substantial revisions to reserves estimates; the quality of available geological, technical and economic data used by us and our interpretation thereof; the production performance of our reservoirs and our recovery rates, both of which depend in significant part on available technologies as well as our ability to implement such technologies and the relevant know-how; the selection of third parties with which we enter into business; and the accuracy of our estimates of initial hydrocarbons in place, which may prove to be incorrect or require substantial revisions. Factors mainly beyond our control include changes in prevailing oil and natural gas prices, which could have an effect on the quantities of our proved reserves (since the estimates of reserves are calculated under existing economic conditions when such estimates are made); changes in the prevailing tax rules, other government regulations and contractual conditions after the date estimates are made (which could make reserves no longer economically viable to exploit); and certain actions of third parties, including the operators of fields in which we have an interest.

As a result of the foregoing, measures of reserves are not precise and are subject to revision. Any downward revision in our estimated quantities of proved reserves could adversely impact our financial results by leading to increased depreciation, depletion and amortization charges and/or impairment charges, which would reduce earnings and shareholders’ equity.

Oil and gas activities are subject to significant economic, environmental and operational risks.

Oil and gas exploration and production activities are subject to particular economic and industry-specific operational risks, some of which are beyond our control, such as production, equipment and transportation risks, as well as natural hazards and other

 

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uncertainties, including those relating to the physical characteristics of onshore and offshore oil or natural gas fields. Our operations may be curtailed, delayed or cancelled due to bad weather conditions, mechanical difficulties, shortages or delays in the delivery of equipment, compliance with governmental requirements, fire, explosions, blow-outs, pipe failure, abnormally pressured formations, and environmental hazards, such as oil spills, gas leaks, ruptures or discharges of toxic gases. In addition we operate in politically sensitive areas where native population has interests that from time to time may conflict with our production objectives. If these risks materialize, we may suffer substantial operational losses and disruptions to our operations and harm to our reputation. Drilling may be unprofitable, not only with respect to dry wells, but also with respect to wells that are productive but do not produce sufficient revenues to return a profit after drilling, operating and other costs are taken into account.

Our business plan includes future drilling activities for non-conventional oil and gas reserves, such as shale oil and gas extraction, and if we are unable to successfully acquire and use the necessary new technologies and other support as well as obtain financing and venture partners, our business may be adversely affected.

Our ability to execute and carry out our strategic business plan depends upon our ability to obtain financing at a reasonable cost and on reasonable terms. We have identified drilling locations and prospects for future drilling opportunities of unconventional oil and gas reserves, such as the shale oil and gas in the Vaca Muerta formation. These drilling locations and prospects represent a part of our future drilling plans. Our ability to drill and develop these locations depends on a number of factors, including seasonal conditions, regulatory approvals, negotiation of agreements with third parties, commodity prices, costs, access to and availability of equipment, services and personnel and drilling results. In addition, as we do not have extensive experience in drilling and exploiting unconventional oil and gas reserves, the drilling and exploitation of such unconventional oil and gas reserves depends on our ability to acquire the necessary technology and hire personnel and other support needed for extraction or obtain financing and venture partners to develop such activities. Furthermore, in order to implement our business plan, including the development of our oil and natural gas exploration activities and the development of refining capacity sufficient to process increasing production volumes, we will need to raise significant amounts of debt capital in the financial and capital markets. We cannot guarantee that we will be able to obtain the necessary financing or obtain financing in the international or local financial markets at reasonable cost and on reasonable terms to implement our new business plan or that we would be able to successfully develop our oil and natural gas reserves. Because of these uncertainties, we cannot give any assurance as to the timing of these activities or that they will ultimately result in the realization of proved reserves or meet our expectations for success, which could adversely affect our production levels, financial condition and results of operations.

We may not have sufficient insurance to cover all the operating hazards that we are subject to.

As discussed under “—Oil and gas activities are subject to significant economic, environmental and operational risks” and “—We may incur significant costs and liabilities related to environmental, health and safety matters,” our exploration and production operations are subject to extensive economic, operational, regulatory and legal risks. We maintain insurance covering us against certain risks inherent in the oil and gas industry in line with industry practice, including loss of or damage to property and equipment, control-of well incidents, loss of production or income incidents, removal of debris, sudden and accidental seepage pollution, contamination and clean up and third-party liability claims, including personal injury and loss of life, among other business risks. However, our insurance coverage is subject to deductibles and limits that in certain cases may be materially exceeded by our liabilities. In addition, certain of our insurance policies contain exclusions that could leave us with limited coverage in certain events. See “Item 4. Information on the Company—Insurance.” In addition, we may not be able to maintain adequate insurance at rates or on terms that we consider reasonable or acceptable or be able to obtain insurance against certain risks that materialize in the future. If we experience an incident against which we are not insured, or the costs of which materially exceed our coverage, it could have a material adverse effect on our business, financial condition and results of operations.

Argentine oil and gas production concessions and exploration permits are subject to certain conditions and may be cancelled or not renewed.

The Hydrocarbons Law provides for oil and gas concessions to remain in effect for 25 years as from the date of their award, and further provides for the concession term to be extended for up to 10 additional years, subject to terms and conditions approved by the grantor at the time of the extension. The authority to extend the terms of current and new permits, concessions and contracts has been vested in the governments of the provinces in which the relevant area is located (and the federal government in respect of offshore areas beyond 12 nautical miles). In order to be eligible for the extension, any concessionaire and permit holder must have complied with its obligations under the Hydrocarbons Law and the terms of the particular concession or permit, including evidence of payment of taxes and royalties, the supply of the necessary technology, equipment and labor force and compliance with various environmental, investment and development obligations. Under the Hydrocarbons Law, non-compliance with these obligations and standards may also result in the imposition of fines and in the case of material breaches, following the expiration of applicable cure periods, the revocation of the concession or permit. The expiration of part of our concessions which represent approximately 1.9% of our proved reserves as of December 31, 2013 occurs in 2017. In addition, our concessions in certain provinces in Argentina have been extended as of the date of this annual report (see “Item 4. Information on the Company—Regulatory Framework and Relationship with the Argentine Government Exploration and Production—Extension of Exploitation Concessions in the province of Neuquén,” “—

 

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Extension of Exploitation Concessions in the province of Mendoza,” “—Extension of Exploitation Concessions in the province of Santa Cruz,” “—Negotiation of Extension of Concessions in the province of Tierra del Fuego,” and “—Extension of Concessions in the province of Chubut”). We cannot provide assurances that concessions will be extended or that additional investment, royalty payment or other requirements will not be imposed on us in order to obtain extensions as of the date of expiration of them. The termination of, or failure to obtain the extension of, a concession or permit, or its revocation, could have a material adverse effect on our business and results of operations.

Our acquisition of exploratory acreage and crude oil and natural gas reserves is subject to heavy competition.

We face intense competition in bidding for crude oil and natural gas production areas, which are typically auctioned by governmental authorities, especially those areas with the most attractive crude oil and natural gas reserves. Some provinces of Argentina, including La Pampa, Neuquén and Chubut, have created provincial government-owned companies to develop activities in the oil and gas industry. As a result, the conditions under which we are able to access new exploratory or productive areas could be adversely affected. In addition, fewer offerings of exploratory acreages available to be bid upon could affect our future results.

We may incur significant costs and liabilities related to environmental, health and safety matters.

Our operations, like those of other companies in the oil and gas industry, are subject to a wide range of environmental, health and safety laws and regulations in the countries in which we operate. These laws and regulations have a substantial impact on our operations and those of our subsidiaries, and could result in material adverse effects on our financial position and results of operation. In addition, YPF Holdings, a 100% subsidiary of YPF, has certain environmental liabilities . See “Item 8. Financial Information—Legal Proceedings —YPF Holdings.” A number of events related to environmental, health and safety matters, including changes in applicable laws and regulations, adverse judicial or administrative interpretations of such laws and regulations, changes in enforcement policy, the occurrence of new litigation or development of pending litigation, and the development of information concerning these matters, could result in new or increased liabilities, capital expenditures, reserves, losses and other impacts that could have a material adverse effect on our financial condition and results of operations. See “Item 8. Financial Information—Legal Proceedings,” “Item 4. Information on the Company—Regulatory Framework and Relationship with the Argentine Government—Argentine Environmental Regulations” and “Item 4. Information on the Company—Regulatory Framework and Relationship with the Argentine Government—U.S. Environmental Regulations.”

In particular, remediation alternatives for Passaic River contamination have been undergoing investigation and analysis by the Environmental Protection Agency (the “EPA”) of the United States and other parties for many years. Tierra, a subsidiary of YPF Holdings has been working on behalf of Occidental on various studies and conducting certain remediation activities as discussed further below. In June 2007, the EPA released a draft Focused Feasibility Study (the “FFS”) that outlines several alternatives for remedial action in the lower eight miles of the Passaic River. These alternatives ranged from no action (which would result in comparatively low cost) to extensive dredging and capping (which, according to the draft FFS, the EPA estimated could cost from U.S.$0.9 billion to U.S.$2.3 billion), and are all described by the EPA as involving proven technologies that could be carried out in the near term, without extensive research. Tierra, in conjunction with the other members of the Cooperating Parties Group (as defined below), submitted comments on the draft FFS to the EPA, as did a number of other interested parties. Additionally, on September 18, 2012, the EPA described the new alternatives it is considering in the revised FFS, which is reportedly now expected to be released to the public soon. The EPA stated that the FFS will set forth four alternatives which could cost from U.S.$8.6 million to U.S.$3.4 billion. Based on the information available to us as of the date of this annual report, considering the potential final proposal, the results of the studies and discoveries to be produced, the several potential responsible parties involved in the matter, and the consequent potential allocation of removal costs, and also considering the opinion of external legal advisors, it is not possible to reasonably estimate a loss or range of losses on these outstanding matters on this time. Therefore, no reserve has been accrued for this litigation by YPF Holdings Inc. Depending on the final proposal released and approved by the EPA regarding the FFS, and the potential assignment of responsibility to YPF Holdings for such remediation, our financial condition and result of operations could negatively be affected. See “Item 8. Financial Information—Legal Proceedings—YPF Holdings.”

Environmental, health and safety regulation and jurisprudence in Argentina is developing at a rapid pace and no assurance can be provided that such developments will not increase our cost of doing business and liabilities, including with respect to drilling and exploitation of our unconventional oil and gas reserves. In addition, due to concern over the risk of climate change, a number of countries have adopted, or are considering the adoption of, new regulatory requirements to reduce greenhouse gas emissions, such as carbon taxes, increased efficiency standards, or the adoption of cap and trade regimes. If adopted in Argentina, these requirements could make our products more expensive as well as shift hydrocarbon demand toward relatively lower-carbon sources such as renewable energies.

We face risk relating to certain legal proceedings.

As described under “Item 8. Financial Information—Legal Proceedings,” we are party to a number of labor, commercial, civil, tax, criminal, environmental and administrative proceedings that, either alone or in combination with other proceedings, could, if resolved in whole or in part adversely to us, result in the imposition of material costs, fines, judgments or other losses. While we

 

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believe that we have provisioned such risks appropriately based on the opinions and advice of our external legal advisors and in accordance with applicable accounting rules, certain loss contingencies, particularly those relating to environmental matters, are subject to change as new information develops and it is possible that losses resulting from such risks, if proceedings are decided in whole or in part adversely to us, could significantly exceed any accruals we have provided.

In addition, we may be subject to undisclosed liabilities related to labor, commercial, civil, tax, criminal or environmental contingencies incurred by businesses we acquire as part of our growth strategy, that we may not be able to identify or that may not be adequately indemnified under our acquisition agreements with the sellers of such businesses, in which case our business, financial condition and results of operation may negatively and adversely affected.

Additionally, following the enactment of the Expropriation Law, the Spanish company Repsol, which had a significant portion of its shares subject to expropriation, commenced legal proceedings against the Argentine government before New York and the International Center for Settlement of Investment Disputes (ICSID) arbitral tribunal. Additionally, Repsol has filed other claims against us in Argentina, New York and Madrid courts. Repsol has also made public its intention to contest the validity of agreements that we may enter into with third parties related to the exploitation and exploration of unconventional oil reserves in the Vaca Muerta formation. On February 25, 2014, the Board of Directors of Repsol approved the text agreed to by the Argentine Ministry of Economy and Finance and Repsol’s management to reach an “Amicable Settlement and Compromise of Expropriation” whereby Repsol would agree to accept a payment of U.S.$ 5 billion in Argentine sovereign bonds as compensation for the expropriation of 51% of the share capital of YPF owned, directly or indirectly, by Repsol. As of the date of this annual report, such agreement remains subject to the ratification of Repsol’s General Shareholders’ Meeting and the Argentine Congress. This agreement, which is public, is subject to certain conditions, and investors should carefully read it in order to make their own assessment. In addition, on February 27, 2014, YPF and Repsol executed an arrangement (the “Arrangement”) whereby, mainly, the parties reciprocally agreed to withdraw, subject to certain exclusions, all present and future actions and/or claims based on causes occurring prior to the Arrangement derived from the declaration of public interest and subjection to expropriation of YPF shares owned by Repsol pursuant to the Expropriation Law, the intervention, temporary takeover of public utility-declared shares and management of YPF. Likewise, the parties have agreed to withdraw reciprocal actions and claims with respect to third parties and/or pursued by them, and to grant a series of mutual indemnities subject to certain conditions. The Arrangement will become fully effective on the day following to the date on which Repsol notifies YPF that the Agreement signed between Repsol and the Argentine Republic becomes effective. If such effectiveness does not occur on or prior to May 7, 2014, or at a later date as the parties may agree in writing, the Arrangement shall not be enforced and shall become void, and the parties shall retain all of the rights preexisting at the date of their signature, and the Arrangement shall not create any liability for either party. Thus, we cannot give any assurance that the withdrawals contemplated by the Arrangement will occur, and accordingly, we can give no assurance that actions taken by Repsol will not disrupt our business efforts, including any exploitation and exploration agreements we may seek to enter into, or that Repsol will not continue to litigate the issues related to the expropriation of its shares.

Our business depends to a significant extent on our production and refining facilities and logistics network.

Our oil and natural gas field facilities, refineries and logistics network are our principal production facilities and distribution network on which a significant portion of our revenues depends. Although we insure our properties on terms we consider prudent and have adopted and maintain safety measures, any significant damage to, accident or other production stoppage at our facilities or network could materially and adversely affect our production capabilities, financial condition and results of operations.

On April 2, 2013 our facilities in the La Plata refinery were hit by a severe and unprecedented storm, recording over 400 mm of rainfall (which was the maximum ever recorded in the area). The heavy rainfall disrupted refinery systems and caused a fire that affected the Coke A and Topping C units in the refinery. This incident temporarily affected the crude processing capacity of the refinery, which had to be stopped entirely. Seven days after the event, the processing capacity was restored to about 100 mbbl/d through the commissioning of two distillation units (Topping IV and Topping D). By the end of May 2013, the Topping C unit resumed operations at full nominal capacity. The Coke A unit has been shut down permanently since the storm, affecting the volume of crude processed in the refinery, due to a reduction in conversion capacity. The storm resulted in a decrease in the volume of crude oil processed. YPF has an insurance policy that provides coverage for the loss of income and property damage due to incidents like the storm that affected the La Plata refinery. See note 11.b to the Audited Consolidated Financial Statements for information regarding the amount recognized in our result of operations in connection with our insurance coverage.

In addition, on March 21, 2014, a fire occurred at the Cerro Divisadero crude oil treatment plant, located 20 kilometers from the town of Bardas Blancas in the province of Mendoza. The Cerro Divisadero plant, which has 6 tanks, 4 of which are for processing and 2 are for dispatch of treated crude oil, concentrates the production of 10 fields in the Malargue area, which constitutes a daily production of approximately 9,200 barrels of oil and represents 3.8% of the oil production of YPF. As of the date of this annual report, the fire has been completely extinguished and maintenance works have commenced to reinitiate operations of the surrounding facilities, which had been preventatively shut down due to the risk of being affected, and to work on reestablishing production. The technical personnel of the company are currently defining the plan for the total resumption of activities in the coming days. In addition we are in the process of gathering the necessary information to make a claim under our existing insurance coverage.

 

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We could be subject to organized labor action.

Our operations have been affected by organized work disruptions and stoppages in the past and we cannot assure you that we will not experience them in the future, which could adversely affect our business and revenues. Labor demands are commonplace in Argentina’s energy sector and unionized workers have blocked access to and damaged our plants in the recent past. Our operations were affected occasionally by labor strikes in recent years. See “Item 5. Operating and Financing Review and Prospects—Factors Affecting Our Operations—Macroeconomic Conditions.”

We may not be able to pay, maintain or increase dividends.

On July 17, 2012 our Shareholder’s meeting approved a dividend of Ps.303 million (Ps.0.77 per share or ADS) which was paid during November 2012. In 2013, our Board of Directors in its meeting held on March 11, 2013 approved a proposal to the Shareholders of a Ps.326 million dividend to be paid during 2013 (Ps.0.83 per share or ADS). Such proposal was approved at the Shareholder’s meeting which was held on April 30, 2013 and was paid during August 2013. Notwithstanding the foregoing, our ability to pay, maintain or increase dividends is based on many factors, including but not limited to our net income, anticipated levels of capital expenditures and expected levels of growth. A change in any such factor could affect our ability to pay, maintain or increase dividends, and the exact amount of any dividend paid may vary from year to year.

Risks Relating to Our Class D Shares and ADSs

The market price for our shares and ADSs may be subject to significant volatility

The market price of our ordinary shares and ADSs may fluctuate significantly due to a number of factors, including, among others, our actual or anticipated results of operations and financial condition; speculation over the impact of the Argentine government as our controlling shareholder on our business and operations, investor perceptions of investments relating to Argentina and political and regulatory developments affecting our industry or the Company. In addition, recent regulatory and policy developments in Argentina, including the passage of the Expropriation Law, have led to considerable volatility in the market price of our shares and ADSs. For example, the price of our ADSs closed at U.S.$54.58 on January 5, 2011, and fell to a low of U.S.$9.57 on November 16, 2012. In 2013, the price recovered to a high closing price of U.S.$34.17 on December 23, but subsequently fell to U.S.$21.85 on February 3, 2014. See “Item 9. The Offer and Listing.” We cannot assure you that concerns about factors that could affect the market price of our ordinary shares as previously mentioned may have a material adverse effect on the trading values of our securities.

 

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Certain strategic transactions require the approval of the holder of our Class A shares or may entail a cash tender offer for all of our outstanding capital stock.

Under our by-laws, the approval of the Argentine government, the sole holder of our Class A shares, is required to undertake certain strategic transactions, including a merger, an acquisition that results in the purchaser holding 15% or more of our capital stock or an acquisition that results in the purchaser holding a majority of our capital stock, requiring consequently the approval of the National State (the holder of our Class A shares) for such decisions.

In addition, under our by-laws, an acquisition that results in the purchaser holding 15% or more of our capital stock would require such purchaser to make a public cash tender offer for all of our outstanding shares and convertible securities, which could discourage certain investors from acquiring significant stakes in our capital stock. See “Item 10. Additional Information—Certain Provisions Relating to Acquisitions of Shares.”

Restrictions on the movement of capital out of Argentina may impair your ability to receive dividends and distributions on, and the proceeds of any sale of, the Class D shares underlying the ADSs.

The government is empowered, for reasons of public emergency, as defined in Article 1 of the Emergency Law (Law No. 25,561), to establish the system that will determine the exchange rate between the peso and foreign currency and to impose exchange regulations. Although the transfer of funds abroad in order to pay dividends currently does not require Central Bank approval, restrictions on the movement of capital to and from Argentina may, if imposed, impair or prevent the conversion of dividends, distributions, or the proceeds from any sale of Class D shares, as the case may be, from pesos into U.S. dollars and the remittance of the U.S. dollars abroad. The Argentine government has recently tightened U.S. dollar exchange regulations.

Under the terms of our deposit agreement with the depositary for the ADSs, the depositary will convert any cash dividend or other cash distribution we pay on the shares underlying the ADSs into U.S. dollars, if it can do so on a reasonable basis and can transfer the U.S. dollars to the United States. If this conversion is not possible for any reason, including regulations of the type described in the preceding paragraph, the deposit agreement allows the depositary to distribute the foreign currency only to those ADR holders to whom it is possible to do so. If the exchange rate fluctuates significantly during a time when the depositary cannot convert the foreign currency, you may lose some or all of the value of the dividend distribution.

Under Argentine law, shareholder rights may be different from other jurisdictions.

Our corporate affairs are governed by our by-laws and by Argentine corporate law, which differ from the legal principles that would apply if we were incorporated in a jurisdiction in the United States or in other jurisdictions outside Argentina. In addition, rules governing the Argentine securities markets are different and may be subject to different enforcement in Argentina than in other jurisdictions.

Actual or anticipated sales of a substantial number of Class D shares could decrease the market prices of our Class D shares and the ADSs.

Repsol owns ADSs representing approximately 11.86% of our capital stock (See “Item 7. Major Shareholders and Related Party Transactions”). Sales of a substantial number of Class D shares or ADSs by Repsol or any other present or future significant shareholder, could decrease the trading price of our Class D shares and the ADSs.

You may be unable to exercise preemptive, accretion or other rights with respect to the Class D shares underlying your ADSs.

You may not be able to exercise the preemptive or accretion rights relating to the shares underlying your ADSs (see “Item 10. Additional Information—Preemptive and Accretion Rights”) unless a registration statement under the U.S. Securities Act of 1933 (the “Securities Act”) is effective with respect to those rights or an exemption from the registration requirements of the Securities Act is available. We are not obligated to file a registration statement with respect to the shares relating to these preemptive rights, and we cannot assure you that we will file any such registration statement. Unless we file a registration statement or an exemption from registration is available, you may receive only the net proceeds from the sale of your preemptive rights by the depositary or, if the preemptive rights cannot be sold, they will be allowed to lapse. As a result, U.S. holders of Class D shares or ADSs may suffer dilution of their interest in our company upon future capital increases.

In addition, under the Argentine Corporations Law, foreign companies that own shares in an Argentine corporation are required to register with the Superintendency of Corporations (Inspección General de Justicia, or “IGJ”) in order to exercise certain shareholder rights, including voting rights. If you own our Class D shares directly (rather than in the form of ADSs) and you are a non-Argentine company and you fail to register with IGJ, your ability to exercise your rights as a holder of our Class D shares may be limited.

 

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You may be unable to exercise voting rights with respect to the Class D shares underlying your ADSs at our shareholders’ meetings.

The depositary will be treated by us for all purposes as the shareholder with respect to the shares underlying your ADSs. As a holder of ADRs representing the ADSs being held by the depositary in your name, you will not have direct shareholder rights and may exercise voting rights with respect to the Class D shares represented by the ADSs only in accordance with the deposit agreement relating to the ADSs. There are no provisions under Argentine law or under our by-laws that limit the exercise by ADS holders of their voting rights through the depositary with respect to the underlying Class D shares. However, there are practical limitations on the ability of ADS holders to exercise their voting rights due to the additional procedural steps involved in communicating with these holders. For example, holders of our shares will receive notice of shareholders’ meetings through publication of a notice in an official gazette in Argentina, an Argentine newspaper of general circulation and the bulletin of the Buenos Aires Stock Exchange, and will be able to exercise their voting rights by either attending the meeting in person or voting by proxy. ADS holders, by comparison, will not receive notice directly from us. Instead, in accordance with the deposit agreement, we will provide the notice to the depositary. If we ask it to do so, the depositary will mail to holders of ADSs the notice of the meeting and a statement as to the manner in which instructions may be given by holders. To exercise their voting rights, ADS holders must then instruct the depositary as to voting the Class D shares represented by their ADSs. Due to these procedural steps involving the depositary, the process for exercising voting rights may take longer for ADS holders than for holders of Class D shares, and Class D shares represented by ADSs may not be voted as you desire. Class D shares represented by ADSs for which the depositary fails to receive timely voting instructions may, if requested by us, be voted as we instruct at the corresponding meeting.

Shareholders outside of Argentina may face additional investment risk from currency exchange rate fluctuations in connection with their holding of our Class D shares or the ADSs.

We are an Argentine company and any future payments of dividends on our Class D shares will be denominated in pesos. The peso has historically and recently fluctuated significantly against many major world currencies, including the U.S. dollar. A depreciation of the peso would likely adversely affect the U.S. dollar or other currency equivalent of any dividends paid on our Class D shares and could result in a decline in the value of our Class D shares and the ADSs as measured in U.S. dollars.

ITEM 4. Information on the Company

History and Development of YPF

Overview

YPF is a corporation (sociedad anónima), incorporated under the laws of Argentina for an unlimited term. Our address is Macacha Güemes 515, C1106BKK Ciudad Autónoma de Buenos Aires, Argentina and our telephone number is (011-54-11) 5441-2000. Our legal name is YPF Sociedad Anónima and we conduct our business under the commercial name “YPF.”

We are Argentina’s leading energy company, operating a fully integrated oil and gas chain with leading market positions across the domestic upstream and downstream segments. Our upstream operations consist of the exploration, development and production of crude oil, natural gas and LPG. Our downstream operations include the refining, marketing, transportation and distribution of oil and a wide range of petroleum products, petroleum derivatives, petrochemicals, LPG and bio-fuels. Additionally, we are active in the gas separation and natural gas distribution sectors both directly and through our investments in several affiliated companies. In 2013, we had consolidated revenues of Ps.90,113 million (U.S.$13,825 million) and consolidated net income of Ps.5,079 million (U.S.$779 million). Due to decreased export volumes, the portion of our revenues derived from exports has decreased steadily in recent years. Exports accounted for 13.3%, 11.5% and 14.2%, of our consolidated net sales revenues in 2013, 2012 and 2011, respectively.

Until November 1992, most of our predecessors were state-owned companies with operations dating back to the 1920s. In November 1992, the Argentine government enacted the Privatization Law (Law No. 24,145), which established the procedures for our privatization. In accordance with the Privatization Law, in July 1993, we completed a worldwide offering of 160 million Class D shares that had previously been owned by the Argentine government. As a result of that offering and other transactions, the Argentine government’s ownership interest in our capital stock was reduced from 100% to approximately 20% by the end of 1993.

In 1999, Repsol acquired control of YPF and remained in control until the passage of the Expropriation Law. Repsol is an integrated oil and gas company headquartered in Spain with global operations. Repsol YPF owned approximately 99% of our capital stock from 2000 until 2008, when the Petersen Group purchased, in different stages, shares representing 15.46% of our capital stock (the “Petersen Transaction”). In addition, Repsol granted certain affiliates of Petersen Energía S.A. (“Petersen Energía”) an option to purchase up to an additional 10% of our outstanding capital stock, which was exercised in May 2011.

On May 3, 2012, the Argentine Congress passed the Expropriation Law. Among other matters, the Expropriation Law provided for the expropriation of 51% of the share capital of YPF represented by an identical stake of Class D shares owned, directly or indirectly, by Repsol YPF and its controlled or controlling entities. The shares subject to expropriation, which have been declared of public interest, will be assigned as follows: 51% to the federal government and 49% to the governments of the provinces that compose

 

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the National Organization of Hydrocarbon Producing States. To ensure compliance with its objectives, the Expropriation Law provides that the National Executive Office, by itself or through an appointed public entity, shall exercise all the political rights associated with the shares subject to expropriation until the transfer of political and economic rights to the provinces that compose the National Organization of Hydrocarbon Producing States is completed. See “Item 3. Key Information—Risk Factors—Risks Relating to Argentina— The Argentine federal government will control the Company according to domestic energy policies in accordance with the Expropriation Law,” “Risk Factors—Risks Relating to the Argentine Oil and Gas Business and Our Business—We face risk relating to certain legal proceedings,” “—Regulatory Framework and Relationship with the Argentine Government—The Expropriation Law” and “Item 7. Major Shareholders and Related Party Transactions.”

In addition to the activities previously mentioned, on March 12, 2014, we acquired 100% of the stake of Apache Overseas lnc. and Apache International Finance II S.a.r.l. (together with their affiliates, “Apache”) in certain foreign companies that control Argentine companies that are the owners of assets located in Argentina, including 28 concessions (23 operated and 5 non-operated) in Neuquina Basin (in the provinces of Neuquén and Rio Negro), 7 concessions in Tierra del Fuego, and a significant conventional resource base. Pursuant to this transaction, YPF acquired control of all of the assets of the Apache Corporation in Argentina. The price paid for the transaction includes U.S.$786 million in cash plus the assumption of approximately U.S$31 million of bank debt relating to the companies acquired. The primary assets included in this transaction, located in the provinces of Neuquén, Tierra del Fuego and Río Negro, produce a total of approximately 46,800 boe/d, and have an important infrastructure of pipelines and facilities, employing around 350 employees. In addition, certain assets have potential for exploration and development in the Vaca Muerta formation. YPF also entered into a transfer of assets agreement with Pluspetrol S.A. (“Pluspetrol”) whereby it transferred, in exchange for U.S.$217 million, a stake in certain assets related to those acquired from Apache located in the Province of Neuquén, with the objective of jointly exploring and developing the Vaca Muerta formation.

The financial data contained in this annual report as of December 31, 2013, 2012 and 2011 and for the years then ended has been derived from our Audited Consolidated Financial Statements included in this annual report. See Note 14 to the Audited Consolidated Financial Statements.

Upstream Operations

 

    As of December 31, 2013, we held interests in more than 90 oil and gas fields in Argentina. According to the Argentine Secretariat of Energy, in 2013 these assets accounted for approximately 44% of the country’s total production of crude oil, excluding natural gas liquids, and approximately 36% of its total natural gas production, including natural gas liquids, in 2013, according to information provided by the Argentine Secretariat of Energy.

 

    We had proved reserves, as estimated as of December 31, 2013, of approximately 628 mmbbl of oil, including condensates and natural gas liquids, and approximately 2,558 bcf of gas, representing aggregate reserves of approximately 1,083 mmboe as of such date, compared to approximately 590 mmbbl of oil, including condensates and natural gas liquids, and approximately 2,186 bcf of gas, representing aggregate reserves of approximately 979 mmboe as of December 31, 2012.

 

    In 2013, we produced approximately 102 mmbbl of oil (approximately 279 mbbl/d), including condensates and natural gas liquids, and approximately 437 bcf of gas (approximately 1,197 mmcf/d), representing a total production of approximately 180 mmboe (approximately 493 mboe/d), compared to approximately 101 mmbbl of oil (275 mbbl/d), including condensates and natural gas liquids, and approximately 432 bcf of gas (1,179 mmcf/d) in 2012.

Downstream Operations

 

    We are Argentina’s leading refiner with operations conducted at three wholly-owned refineries with combined annual refining capacity of approximately 116 mmbbl (319.5 mbbl/d) (See additionally “—Downstream—Refining division.”) We also own a 50% equity interest in Refinería del Norte, S.A. (“Refinor”), an entity jointly controlled with and operated by Petrobras Energía S.A., which has a refining capacity of 26.1 mbbl/d.

 

    Our retail distribution network for automotive petroleum products as of December 31, 2013 consisted of 1,542 YPF-branded service stations, of which we own 111 directly and through our 100% subsidiary Operadora de Estaciones de Servicios S.A. (“OPESSA”), and we estimate we held approximately 34.1% of all gasoline service stations in Argentina.

 

    We are one of the leading petrochemical producers in Argentina and in the Southern Cone of Latin America, with operations conducted through our Ensenada industrial complex (“CIE”) and Plaza Huincul site. In addition, Profertil S.A. (“Profertil”), a company that we jointly control with Agrium Holdco Spain S.L. (“Agrium”), is one of the leading producers of urea in the Southern Cone.

The following chart illustrates our organizational structure, including our principal subsidiaries, as of the date of this annual report.

 

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LOGO

In addition, see Note 11.c “—Investment Project Agreements” to the Audited Consolidated Financial Statements for a description of the transaction we entered into with Chevron.

 

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The map below illustrates the location of our productive basins, refineries, storage facilities and crude oil and multi-product pipeline networks as of December 31, 2013.

 

LOGO

For a description of our principal capital expenditures and divestitures, see “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Capital investments, expenditures and divestitures.”

The Argentine Market

Argentina is the second largest producer of natural gas and the fourth largest producer of crude oil in Central and South America, based on 2012 production, according to the 2013 edition of the BP Statistical Review of World Energy, published in June 2013.

 

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In response to the economic crisis of 2001 and 2002, the Argentine government, pursuant to the Public Emergency Law (Law No. 25,561), established export taxes on certain hydrocarbon products. In subsequent years, in order to satisfy growing domestic demand and abate inflationary pressures, this policy was supplemented by constraints on domestic prices, temporary export restrictions and subsidies on imports of natural gas and diesel fuel. As a result, until 2008, local prices for oil and natural gas products had remained significantly below those prevalent in neighboring countries and international commodity exchanges.

After declining during the economic crisis of 2001 and 2002, Argentina’s GDP grew at an average annual real rate of approximately 8.5% from 2003 to 2008, although the growth rate decelerated to 0.9% in 2009 as a result of the global financial crisis. In 2010 and 2011, Argentina’s GDP grew at an annual real rate of approximately 9.0%. In 2012 Argentina’s GDP experienced a slowdown, with GDP increasing at a rate of 1.9% on an annualized basis compared to the preceding year. On March 27, 2014, the Argentine government announced a new method of calculating GDP by reference to 2004 as the base year (as opposed to 1993, which was the base reference year under the prior method of calculating GDP). As a result of the application of this new method, the estimated GDP for 2013 was revised from 4.9% to 3%. Driven by this economic expansion and stable domestic prices, energy demand has increased significantly during the same period, outpacing energy supply (which in the case of oil declined). Argentine natural gas consumption grew at average annual rate of approximately 5.0% during the period 2003-2011, according to the BP Statistical Review and the Argentine Secretariat of Energy. As a result of this increasing demand and actions taken by the Argentine regulatory authorities to support domestic supply, exported volumes of hydrocarbon products, especially natural gas, diesel fuel and gasoline, declined steadily over this period. At the same time, Argentina has increased hydrocarbon imports, becoming a net importer of certain products, such as diesel fuel, and increased imports of gas (including NGL). In 2003, Argentina’s net exports of diesel fuel amounted to approximately 1,349 mcm, while in 2013 its net imports of diesel fuel amounted to approximately 2,427 mcm, according to preliminary information provided by the Argentine Secretariat of Energy. Significant investments in the energy sector are being carried out, and additional investments are expected to be required in order to support continued economic growth, as the industry is currently operating near capacity.

Demand for diesel fuel in Argentina exceeds domestic production. In addition, the import prices of refined products have been in general substantially higher than the average domestic sales prices of such products, rendering the import and resale of such products less profitable. As a result, from time to time, service stations experience temporary shortages and are required to suspend or curtail diesel fuel sales. On May 3, 2012, the Expropriation Law was passed by Congress. The Expropriation Law declared achieving self-sufficiency in the supply of hydrocarbons, as well as in the exploitation, industrialization, transportation and sale of hydrocarbons, a national public interest and a priority for Argentina. In addition, its stated goal is to guarantee socially equitable economic development, the creation of jobs, the increase of the competitiveness of various economic sectors and the equitable and sustainable growth of the Argentine provinces and regions. See “—Regulatory Framework and Relationship with the Argentine Government—The Expropriation Law.”

History of YPF

Beginning in the 1920s and until 1990, both the upstream and downstream segments of the Argentine oil and gas industry were effectively monopolies of the Argentine government. During this period, we and our predecessors were owned by the state, which controlled the exploration and production of oil and natural gas, as well as the refining of crude oil and marketing of refined petroleum products. In August 1989, Argentina enacted laws aimed at the deregulation of the economy and the privatization of Argentina’s state-owned companies, including us. Following the enactment of these laws, a series of presidential decrees were promulgated, which required, among other things, us to sell majority interests in our production rights to certain major producing areas and to undertake an internal management and operational restructuring program.

In November 1992, Law No. 24,145 (referred to as the Privatization Law), which established the procedures by which we were to be privatized, was enacted. In accordance with the Privatization Law, in July 1993, we completed a worldwide offering of 160 million Class D shares that had previously been owned by the Argentine government.

As a result of that offering and other transactions, the Argentine government’s ownership percentage in our capital stock was reduced from 100% to approximately 20% by the end of 1993.

In January 1999, Repsol YPF acquired 52,914,700 Class A shares in block (14.99% of our shares) which were converted to Class D shares. Additionally, on April 30, 1999, Repsol YPF announced a tender offer to purchase all outstanding Class A, B, C and D shares (the “Offer”). Pursuant to the Offer, in June 1999, Repsol YPF acquired an additional 82.47% of our outstanding capital stock. Repsol YPF acquired additional stakes in us from minority shareholders and other transactions in 1999 and 2000.

 

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On February 21, 2008, Petersen Energía (“PEISA”) purchased 58,603,606 of our ADSs, representing 14.9% of our capital stock, from Repsol YPF for U.S.$2,235 million. In addition, Repsol YPF granted certain affiliates of Petersen Energía options to purchase up to an additional 10.1% of our outstanding capital stock within four years. On May 20, 2008, PEISA exercised an option to purchase shares representing 0.1% of our capital stock. Additionally, PEISA launched a tender offer to purchase all of the shares of YPF that were not already owned by them at a price of U.S.$49.45 per share or ADS. Repsol YPF, pursuant to its first option agreement with Petersen Energía, had stated that it would not tender YPF shares to PEISA. A total of 1,816,879 shares (including Class D shares and ADSs), representing approximately 0.462% of our total shares outstanding, were tendered. On May 3, 2011, PEISA exercised an option to acquire from Repsol YPF shares or ADSs representing 10.0% of our capital stock and on May 4, 2011, Repsol YPF acknowledged and accepted such exercise. See “—Regulatory Framework and Relationship with the Argentine Government—The Expropriation Law” and “Item 7. Major Shareholders and Related Party Transactions,” for a detail of our current major shareholders.

On May 3, 2012, the Argentine Congress passed the Expropriation Law. Among other matters, the Expropriation Law provided for the expropriation of 51% of the share capital of YPF represented by an identical stake of Class D shares owned, directly or indirectly, by Repsol YPF and its controlled or controlling entities. The shares subject to expropriation, which have been declared of public interest, will be assigned as follows: 51% to the federal government and 49% to the governments of the provinces that compose the National Organization of Hydrocarbon Producing States. See “Item 3. Key Information—Risk Factors—Risks Relating to Argentina— The Argentine federal government will control the Company according to domestic energy policies in accordance with the Expropriation Law.” As of the date of this annual report, the transfer of the shares subject expropriation between National Executive Office and the provinces that compose the National Organization of Hydrocarbon Producing States was still pending. According to Article 8 of the Expropriation Law, the distribution of the shares among the provinces that accept their transfer must be conducted in an equitable manner, considering their respective levels of hydrocarbon production and proved reserves. To ensure compliance with its objectives, the Expropriation Law provides that the National Executive Office, by itself or through an appointed public entity, shall exercise all the political rights associated with the shares subject to expropriation until the transfer of political and economic rights to the provinces that compose the National Organization of Hydrocarbon Producing States is completed. In addition, in accordance with Article 9 of the Expropriation Law, each of the Argentine provinces to which shares subject to expropriation are allocated must enter into a shareholder’s agreement with the federal government which will provide for the unified exercise of its rights as a shareholder. See “—Regulatory Framework and Relationship with the Argentine Government—The Expropriation Law,” “Item 7. Major Shareholders and Related Party Transactions.” Additionally, see “Risk Factors—Risks Relating to the Argentine Oil and Gas Business and Our Business—We face risk relating to certain legal proceedings” for a description of the Agreement between Repsol and the Argentine Republic relating to compensation for the expropriation of 51% of the share capital of YPF owned, directly or indirectly, by Repsol.

Furthermore, on April 16, 2012, the Company was notified, through a notarial certification, of Decree No. 530/12 of the National Executive Office , which provides for the Intervention of YPF for a period of thirty days (which was then extended to our next Shareholders meeting to be held on June 4, 2012 at which the composition of our Board of Directors was determined), with the aim of securing the continuity of its business and the preservation of its assets and capital, securing the provision of fuel and the satisfaction of the country’s needs, and guaranteeing that the goals of the Expropriation Law are met. See “—Regulatory Framework and Relationship with the Argentine Government—The Expropriation Law.” In accordance with Article 3 of Decree No. 530/2012, the powers conferred by YPF’s by-laws on the Board and/or the President of the Company have been temporarily granted to the Intervenor. On May 7, 2012, through Decree No. 676/2012 of the National Executive Office, Mr. Miguel Matías Galuccio was appointed General Manager of the Company during the Intervention. At our general shareholders’ meeting, on June 4, 2012, our shareholders appointed the new members of our Board of Directors. See “Item 6. Directors, Senior Management and Employees—Management of the Company.”

On August 30, 2012, we approved and announced the Strategic Plan 2013-2017 establishing the basis of our development for the years to come. Such plan intends to reaffirm our commitment to creating a new model of the Company in Argentina which aligns our objectives, seeking profitable and sustainable growth that generates shareholder value, with those of the country, thereby positioning YPF as an industry-leading company aiming at the reversal of the national energy imbalance and the achievement of hydrocarbon self-sufficiency in the long term.

To achieve the goals set forth above, we intend to focus on (i) the development of unconventional resources, which we see as a unique opportunity because a) the expectation related to the existence of large volumes of unconventional resources in Argentina according to estimations of leading reports on global energy resources, b) we currently possess a relevant participation in terms of exploration and exploitation rights on the acreage in which such resources could be located, and c) we believe we can integrate a portfolio of projects with high production potential; (ii) the re-launch of conventional and unconventional exploration initiatives in existing wells and expansion to new wells, including offshore; (iii) an increase in capital and operating expenditures in mature areas with expected higher return and efficiency potential (through investment in improvements, increased use of new perforation machinery and well intervention); (iv) a return to active production of natural gas to accompany our oil production; and (v) an increase in production of refined products through an enhancement of the refining capacity (including improving and increasing our installed capacity and upgrading and converting our refineries). The previously mentioned initiatives have required and will continue to require organized and planned management of mining, logistic, human and financing resources within the existing regulatory framework, with a long-term perspective.

 

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The investment plan related to our growth needs to be accompanied by an appropriate financial plan, whereby we intend to reinvest earnings, search for strategic partners and raise debt financing at levels we consider prudent for companies in our industry. Consequently, the financial viability of these investments and hydrocarbon recovery efforts will generally depend, among other factors, on the prevailing economic and regulatory conditions in Argentina, the ability to obtain financing in satisfactory amounts at competitive costs, as well as the market prices of hydrocarbon products.

Business Organization

We currently conduct our business according to the following organization:

 

    Upstream, which consists of our “Exploration and Production” segment;

 

    Downstream, which consists of our “Refining and Marketing”, “Natural Gas Distribution and Electricity Generation” and “Chemicals” segments; and

 

    Corporate and other, which consists of our “Corporate and Other” segment.

The Exploration and Production segment’s sales to third parties in Argentina and abroad include sales of natural gas and services fees (primarily for the transportation, storage and treatment of hydrocarbons and products). In addition, crude oil produced by us in Argentina, or received from third parties in Argentina pursuant to service contracts, is transferred from Exploration and Production to Refining and Marketing at transfer prices established by us, which generally seek to approximate Argentine market prices.

We have recently reorganized our reporting structure by grouping the “Chemical” and “Refining and Marketing” segments into a new “Downstream” segment. We made this change primarily because of the common strategy shared by the former “Chemical” and “Refining and Marketing” segments, in light of the synergies involved in their activities to maximize the volume and quality of fuel offered to the market. Accordingly, the Company has adjusted comparative information for the years 2012 and 2011 to reflect this reorganization.

The Downstream segment purchases crude oil from the Exploration and Production segment and from third parties. Downstream activities include crude oil refining and transportation, as well as the marketing and transportation of refined fuels, lubricants, LPG, natural gas, pretrochemical products and other refined petroleum products in the domestic wholesale and retail markets and the export markets.

In addition, our activities related to power generation, which are not material for us, which we have developed through our controlled company YPF Energía Electrica S.A., and our natural gas distribution activities, which we have developed through Metrogas S.A., are also included in Downstream activities.

Additionally, we record certain assets, liabilities and costs under the Corporate and Other segment, including corporate administration costs and assets, environmental matters related to YPF Holdings, Inc (“YPF Holdings”) (see Note 3 to our Audited Consolidated Financial Statements) and certain construction activities, mainly related to the oil and gas industry, through our subsidiary A-Evangelista S.A. and its subsidiaries.

Substantially all of our operations, properties and customers are located in Argentina. However, we carry out exploration activities in the United States, among other foreign jurisdictions, and hold an interest in a producing field in the United States and in two exploratory areas in Uruguay and Chile (see “—Exploration and Production—Principal properties—International properties”). Additionally, we market lubricants and specialties in Brazil and Chile and carry out some construction activities related to the oil and gas industry in Uruguay, Bolivia, Brazil and Peru, through our 100% owned company A-Evangelista S.A. and its subsidiaries.

 

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The following table sets forth revenues and operating income for each of our lines of business for the years ended December 31, 2013, 2012 and 2011:

 

     For the Year Ended December 31,  
     2013     2012     2011  
     (in millions of pesos)  

Revenues(1)

      

Exploration and production(2)

      

Revenues

     3,851        1,135        269   

Revenue from intersegment sales (3)

     38,846        30,179        23,401   
  

 

 

   

 

 

   

 

 

 

Total exploration and production

     42,697        31,314        23,670   
  

 

 

   

 

 

   

 

 

 

Downstream

      

Revenues

     85,624        65,047        54.636   

Revenue from intersegment sales

     1,147        1,069        848   
  

 

 

   

 

 

   

 

 

 

Total refining and marketing

     86,771        66,116        55,484   
  

 

 

   

 

 

   

 

 

 

Corporate and other

      

Revenues

     638        992        1,306   

Revenue from intersegment sales

     2,285        1,243        651   
  

 

 

   

 

 

   

 

 

 

Total Corporate and other

     2,923        2,235        1,957   
  

 

 

   

 

 

   

 

 

 

Less inter-segment sales and fees

     (42,278     (32,491     (24,900
  

 

 

   

 

 

   

 

 

 

Total revenues

     90,113        67,174        56,211   
  

 

 

   

 

 

   

 

 

 

Operating income (Loss)

      

Exploration and production

     6,324        5,730        4,067   

Downstream

     6,721        4,095        5,466   

Corporate and other

     (1,522     (2,492     (1,714

Consolidation adjustments

     (363     570        (631
  

 

 

   

 

 

   

 

 

 

Total operating income

     11,160        7,903        7,188   
  

 

 

   

 

 

   

 

 

 

 

(1) Revenues are net to us after payment of a fuel transfer tax and turnover tax. Custom duties on exports are included in Selling expenses. Royalty payments required to be made to a third party, whether payable in cash or in kind, which are a financial obligation, or are substantially equivalent to a production or similar tax, are accounted for as a cost of production and are not deducted in determining revenues. See “Item 4. Information on the Company-Exploration and Production-Oil and gas production, production prices and production costs” and Note 2 (f) to the Audited Consolidated Financial Statements.
(2) Includes exploration costs in Argentina, Guyana and the United States and production operations in Argentina and the United States.
(3) Intersegment revenues of crude oil to Refining and Marketing are recorded at transfer prices that reflect our estimates of Argentine market prices.

Exploration and Production Overview

Our project portfolio includes more than 1,400 projects to develop proved, probable and possible reserves, in addition to contingent and prospective resources related to future developments and exploration activity. Our business growth objectives, whereby we seek to maximize the productivity and profitability of our project portfolio, are based on the following key concepts: the rejuvenation of mature fields, an ongoing focus on gas development and the intensive development of unconventional reservoirs. See additionally “Item 3. Key Information—Risk Factors.”

The projects selected to be pursued and their schedules for completion are periodically determined by a portfolio optimization process, in accordance with our strategic guidelines.

Increased investments in Argentina have enabled us to maintain a high level of activity in projects that have contributed to significant increases in the production and value of our fields. In 2013, our oil production in Argentina increased by 2.19% and our gas production in Argentina increased by 1.45%, in each case compared to our production in 2012. Moreover, our oil and gas production in Argentina from areas we operated in December 2013 increased by 6.31% and 17.63%, respectively, compared to our production in December 2012. This increase reflects the intensive work we do in the fields which we operate both conventional and unconventional hydrocarbons.

 

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Meeting the challenge of the mature oil and gas fields

Most of our oil and gas producing fields in Argentina are mature, which requires us to assume strong commitments to overcome their decline.

We have significantly increased our activity and resources in mature areas that present profitable opportunities for increases in the recovery factor by employing techniques including well infill and extension of secondary recovery and tertiary recovery testing. We are fully dedicated to identifying new opportunities in both infill potential and improved sweep efficiency in our mature fields. These efforts are guided by subsurface modeling conducted by in-house multidisciplinary teams. Furthermore, we place a strong emphasis on surveillance and conformance activities to improve current mature water injection projects. Tertiary recovery is being pursued with polymer and surfactant flooding in mature reservoirs in both the Golfo de San Jorge and Neuquén basins.

Continuous comprehensive technical reviews of our oil and gas fields allow us to identify opportunities to rejuvenate mature fields and optimize new field developments in Argentine basins in order to achieve similar recovery factors that mature fields in other regions of the world have already reached with the application of new technologies.

We have managed, through the extension of most of our concessions with relatively favorable terms and conditions, to continue with the development of strategic waterflooding and improved oil recovery projects, improving our perspectives of production and reserves.

Nevertheless, the financial viability of these investments and reserve recovery efforts will generally depend on prevailing economic and regulatory conditions in Argentina, as well as the market prices of hydrocarbon products. See additionally “Item 3. Key Information—Risk Factors.”

In addition, we recently finalized certain agreement related to the acquisition of properties that are part of our core business:

 

    On January 31, 2014, we acquired Petrobras Argentina S.A.’s 38.45% participation in the concession contract UTE Puesto Hernández executed between both companies for the exploitation of the Puesto Hernández area (the “Area”). The Area is an exploitation concession located in the Provinces of Neuquén and Mendoza. YPF is the holder of the concession until 2027. YPF will own 100% of the participation in the Puesto Hernández area, becoming the operator of the concession. Puesto Hernández currently produces over 10,000 barrels a day of light crude oil (Medanito quality). The transaction was completed for the amount of U.S.$40.7 million. By becoming the operator of the Area, we expect we will be able to accelerate our investment plans to optimize the Area’s production potential until 2027.

 

    On March 12, 2014, we acquired 100% of the stake of Apache Overseas lnc. and Apache International Finance II S.a.r.l. (together with their affiliates, “Apache”) in certain foreign companies that control Argentine companies that are the owners of assets located in Argentina, including 28 concessions (23 operated and 5 non-operated) in Neuquina Basin (in the provinces of Neuquén and Rio Negro), 7 concessions in Tierra del Fuego, and a significant conventional resource base. Pursuant to this transaction, YPF acquired control of all of the assets of the Apache Corporation in Argentina. The price paid for the transaction includes U.S.$ 786 million in cash plus the assumption of approximately U.S$31 million of bank debt relating to the companies acquired. The primary assets included in this transaction, located in the provinces of Neuquén, Tierra del Fuego and Río Negro, produce a total of approximately 46,800 boe/d, and have an important infrastructure of pipelines and facilities, employing around 350 employees. In addition, certain assets have potential for exploration and development in the Vaca Muerta formation.

YPF also entered into a transfer of assets agreement with Pluspetrol S.A. (“Pluspetrol”) whereby it transferred, in exchange for U.S.$217 million, a stake in certain assets related to those acquired from Apache located in the Province of Neuquén, with the objective of jointly exploring and developing the Vaca Muerta formation. At March 12, 2014 YPF has made the payment of the transaction giving terminating the operation.

 

    On February 7, 2014, YPF acquired Potasio Rio Colorado S.A.’s 50% interest in the joint operation contract “Segment 5 Loma La Lata—Sierra Barrosa” (known as the “Lajas” formation) signed by YPF and Potasio Rio Coloroado S.A. for the exploitation of the Lajas formation concession area (the “Area”). The Area is an exploitation concession, located in the Province of Neuquén. YPF is the holder of the concession, which expires in 2027. Exploitation of the Area was conducted under the aforementioned joint operation contract. The terms of the joint operation contract provided that it would expire upon the earlier of the expiration of the concession or the early termination of any agreement or contract that granted the right to continue exploiting the area. As a result of the termination of the joint operation contract, YPF will own 100% interest in the Area. The consideration for the transaction was U.S.$ 25 million.

 

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Staying the Path of Unconventional Resources

We have committed significant technical resources and experience to tap the potential of our unconventional hydrocarbon assets. Through the more than 100 unconventional wells drilled this year (most of which were drilled in Loma Campana concession, which we jointly control with Chevron as detailed below), we clearly showed leadership in this area and expressed our commitment to the objective of growing our production and reserves through the development of unconventional resources.

During 2013, we launched the first shale oil cluster development in Loma Campana field, in association with Chevron, and the first shale gas pilot program in El Orejano field, in association with Dow Chemical, while continuing to delineate the potential of the Vaca Muerta formation in the Neuquina Basin. The map below describes each of these projects.

Vaca Muerta Formation

 

LOGO

(1) “Loma Campana”: On July 16, 2013, YPF and Chevron signed an investment project agreement with the objective of the joint exploitation of unconventional hydrocarbons in the province of Neuquén. The agreement contemplated an outlay of U.S.$1,240 million by Chevron for a first phase of work to develop about 20 km2 (“pilot project”) (4942 acres) of the 395 km2 (97.607 acres) corresponding to the area dedicated to the project. This first pilot project includes the drilling of more than 100 wells. Together with what has already been invested by YPF in the area, this new investment will result in a total investment of 1500 million dollars in the pilot project. In a second stage, after completion of the pilot project, both companies expect to continue with the development of the area, sharing investments 50% each. For additional information see “Note 11.c –Investment Project Agreements” to the Audited Consolidated Financial Statements.

(2) “El Orejano” Area: On September 23, 2013, YPF and Dow Europe Holding B.V. and PBB Polisur SA signed an agreement that includes a disbursement by both parties up to U.S.$188 million dollars that will be directed towards the joint development of an unconventional gas pilot project in the province of Neuquén. Of the U.S.$188 million to be disbursed, Dow will provide up to U.S.$120 million through a convertible financing in their participation in the project. The agreement contemplates a first phase of work during which 16 wells will be drilled.

 

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The agreements with Chevron and Dow Chemical constitute significant steps towards the development of our vast unconventional resources, but the corresponding areas still represent only a fraction of our unconventional acreage.

The development of unconventional resources in the Vaca Muerta formation will demand a significant capital investment. As we rapidly progress on our learning curve, we expect to continue yielding substantial savings due to economies of scale and increasing well productivity through better subsurface understanding of this resource play.

Nevertheless, the financial viability of these investments and reserve recovery efforts will depend on the prevailing economic and regulatory conditions, as well as the market prices of hydrocarbons in Argentina. See additionally “Item 3. Key Information—Risk Factors.”

Main properties

Our production is concentrated in Argentina and our domestic operations are subject to numerous risks (See “Item 3. Key Information—Risk Factors.”).

The following table sets forth information with regard to our developed and undeveloped acreage by geographic area as of December 31, 2013:

 

     As of December 31, 2013  
     Developed(1)      Undeveloped(2)  
     Gross(3)      Net(4)      Gross(3)      Net(4)  
     (thousands of acres)  

South America

     1,508         1,002         53,960         33,155   

Argentina

     1,508         1,002         44,967         25,743   

Rest of South America(5)

     —           —           8,993         7,412   

North America(6)

     17         2.6         138         74.8   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1,525         1,004.6         54,098         33,229.80   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Developed acreage is spaced or assignable to productive wells.
(2) Undeveloped acreage encompasses those leased acres on which wells have not been drilled or completed to a point that would permit the production of economic quantities of oil or gas regardless of whether such acreage contains proved reserves.
(3) A “gross acre” is an acre in which we own a working interest.
(4) “Net” acreage equals gross acreage after deducting third party interests.
(5) Relates to Uruguay, Colombia, Paraguay, and Chile. In the case of Paraguay, YPF non-developed surface totaled of 3,825 thousand acres as of December 31, 2013, and is connected to an exploration permit granted to YPF through Resolution 1703 of the Ministry of Public Works and Communications of Paraguay. The permit expired on September 16, 2012 and a request for a 1 year extension was presented before the Ministry of Public Works and Communications. As of the date of this annual report, the extension request is pending. In the case of Uruguay, YPF’s undeveloped acreage includes mining areas and a permit for exploratory drilling. This permit relates to an area of 2,397 thousand acres and was awarded entirely to YPF in March 2012. Related to Colombia, YPF has requested approval from the application authority (“ANH”), for the farm-out of its total working interest in COR 12 and COR 33 blocks. YPF and its partners informed ANH the decision to relinquish COR 14 block.
(6) Relates only to the United States’ Gulf of Mexico.

As of December 31, 2013, none of our exploratory undeveloped acreage was subject to exploration permits that will expire in 2014 in accordance with Law 17,319. However, as a result of the expiration in 2014 of the first, second or third exploration terms of certain of our exploration permits, we would be required to relinquish a fixed portion of the acreage related to each such expiring permit, as set forth in Law 17,319, as long as exploitable quantities of oil or gas are not discovered in such areas (in which case we may seek to obtain a declaration of their commercial viability from the relevant authorities, and the related areas would then be subject to exploitation concessions). If no such discoveries are made in 2014, we would be required to relinquish approximately 12 thousand square kilometers of exploratory undeveloped acreage (approximately 16% of our 78 thousand square kilometers of net exploratory undeveloped acreage as of December 31, 2013) during 2014. We are entitled to decide, according to our best interest, which portions of each of the exploration permits to keep, within the required relinquishment percentage. Therefore, the areas to be relinquished consist usually of acreage where drilling has not been successful and that are considered non-core lease acreage.

Except as described above, we do not have any material undeveloped acreage related to our production concessions expiring in the near term.

Argentine Exploration Permits and Exploitation Concessions

Argentina is the second largest gas and fourth largest oil producing nation in Central and South America according to the 2013 edition of the BP Statistical Review of World Energy, published in June 2013. Oil has historically accounted for the majority of the country’s hydrocarbon production and consumption, although the relative share of natural gas has increased rapidly in recent years. As of the date of this annual report, a total of 24 sedimentary basins were re-evaluated in the country, in line with the Plan

 

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Exploratorio Argentina (the “Argentine Exploratory Plan”). The total surface of the continent represents approximately 408 million acres and the total offshore surface includes 194 million acres on the South Atlantic shelf within the 200 meter-deep line. Of the total 602 million acres of the sedimentary basins, a significant part still needs to be evaluated through exploratory and study drilling.

The following table shows our gross and net interests in productive oil and gas wells in Argentina by basin, as of December 31, 2013:

 

     Wells(1)(2)  
     Oil      Gas  

Basin

   Gross      Net      Gross      Net  

Onshore

     11,836         10,917         902         617   

Neuquina

     3,928         3,341         759         541   

Golfo San Jorge

     6,949         6,811         45         43   

Cuyana

     816         720         —           —     

Noroeste

     19         7         47         18   

Austral

     124         37         51         15   

Offshore

     —           —           19         10   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     11,836         10,917         921         627   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) In addition to productive oil and gas wells located in Argentina, we have interests in oil wells located in the United States (7 gross wells and approximately 1 net well, as of December 31, 2013).
(2) A “gross well” is a well in which we own a working interest. A “net well” is deemed to exist when the sum of fractional ownership working interests in gross wells equals one. The number of net wells is the sum of the fractional working interests owned in gross wells expressed as whole numbers and fractions of whole numbers. Gross and net wells include one oil well and three gas wells with multiple completions.

As of December 31, 2013, we held 142 exploration permits and production concessions in Argentina. We directly operate 100 of them, including 42 exploration permits and 58 production concessions.

 

    Exploration permits. As of December 31, 2013, we held 52 exploration permits in Argentina, 48 of which were onshore exploration permits and 4 of which were offshore exploration permits. We had 100% ownership of three onshore permits, and our participating interests in the remainder varied between 45% and 90%. We had 100% ownership of one offshore permit, and our participating interests in the remainder varied between 30% and 35%.

 

    Production concessions. As of December 31, 2013, we had 90 production concessions in Argentina. We had a 100% ownership interest in 50 production concessions, and our participating interests in the remaining 40 production concessions varied between 12.2% and 98%.

In addition, we have 23 crude oil treatment plants and 5 pumping plants where oil is processed and stored; the purpose of these plants is to receive and treat oil from different fields prior to shipment to our refineries and/or commercialization to third parties, as applicable. See “Risk Factors—Risks Relating to the Argentine Oil and Gas Business and Our Business— Our business depends to a significant extent on our production and refining facilities and logistics network.”

The table below provides certain information with respect to our net working interests in our principal oil and gas fields in Argentina at December 31, 2013, most of which are mature:

 

           Production 2013      Proved Reserves as of
December 31, 2013
               
Areas (1)    Interest
%
    Oil (2)
(mmbbl)
    

Gas

(mmcf)

     Oil (2)
(mmbbl)
     Gas
(mmcf)
    

BOE

(mmboe)

     Basin /Location      Development
Stage of the area
 

Loma La Lata Central

     100     7,520         95,907         40,909         732,405         171,347         Neuquina         Mature Field   

Magallanes (3)

     88     884         14,165         16,462         298,732         69,664         Austral         Mature Field   

Los Perales

     100     5,625         12,730         56,071         64,483         67,555         Golfo San Jorge         Mature Field   

Aguada Toledo - Sierra Barrosa

     100     2,218         30,716         14,000         220,502         53,270         Neuquina         Mature Field   

Seco León

     100     4,244         4,185         43,976         22,544         47,991         Golfo San Jorge         Mature Field   

El Portón

     100     2,710         24,546         17,183         132,908         40,853         Neuquina         Mature Field   

Chihuido Sierra Negra

     100     5,160         1,437         33,780         8,751         35,339         Neuquina         Mature Field   

San Roque

     34     2,118         29,433         8,812         130,601         32,071         Neuquina         Mature Field   

Barranca Baya

     100     4,862         1,020         30,043         5,528         31,027         Golfo San Jorge         Mature Field   

Manantiales Behr

     100     6,911         5,029         27,055         15,247         29,770         Golfo San Jorge         Mature Field   

Puesto Hernández (4)

     89     2,384         0         26,792         0         26,792         Neuquina         Mature Field   

Acambuco

     23     274         11,421         1,997         124,403         24,152         Noroeste         Mature Field   

Loma La Lata Norte (5)

     75     3,558         13,618         9,686         72,692         22,632         Neuquina         Mature/New Field   

Vizcacheras

     100     3,056         300         21,428         2,398         21,855         Cuyana         Mature Field   

Chihuido La Salina

     100     3,890         29,952         10,684         62,089         21,742         Neuquina         Mature Field   

Lomas del Cuy

     100     2,477         1,351         19,133         9,077         20,749         Golfo San Jorge         Mature Field   

El Trébol

     100     2,086         467         19,606         2,788         20,102         Golfo San Jorge         Mature Field   

Rincón del Mangrullo

     100     4         296         5,795         73,960         18,967         Neuquina         New Field   

CNQ 7A

     50     4,591         1,408         17,423         682         17,544         Neuquina         Mature Field   

La Ventana Central (6)

     91     1,339         174         16,669         2,544         17,122         Cuyana         Mature Field   

Tierra del Fuego

     30     587         11,709         3,133         76,916         16,831         Austral         Mature Field   

Aguada Pichana

     27     1,509         26,952         4,263         70,380         16,798         Neuquina         Mature Field   

Desfiladero Bayo

     100     2,537         187         16,572         1,127         16,773         Neuquina         Mature Field   

Aguaragüe

     53     282         7,552         2,467         79,703         16,661         Noroeste         Mature Field   

Cañadón Yatel

     100     1,662         8,163         7,909         41,272         15,259         Golfo San Jorge         Mature Field   

 

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(1) Exploitation areas.
(2) Includes Condensate and Natural Gas Liquids.
(3) Working Interest is 50% until 2016, and 100% from 2017 until the expiration of the concession.
(4) As of December 31, 2013, working interest is 62% until 2016, and 100% from 2017 until the expiration of the concession. See additionally “—Meeting the challenge of the mature oil and gas fields.”
(5) Working Interest is 100% in the Sierras Blancas Formation (Mature Field) and 50% in the Vaca Muerta and Quintuco Formations (New Field).
(6) Working Interest is 69.6% for crude oil and 60% for gas liquids and gas until 2016, and 100% from 2017 until the expiration of the concession.

Approximately 84% of our proved oil reserves in Argentina are concentrated in the Neuquina (44%) and Golfo San Jorge (40%) basins, and approximately 92% of our proved gas reserves in Argentina are concentrated in the Neuquina (66%), Austral (15%) and Noroeste (11%) basins.

Joint ventures and contractual arrangements in Argentina

As of December 31, 2013, we participated in 43 exploration and 25 production joint ventures and contractual arrangements (24 of which were not operated by us) in Argentina. Our interests in these joint ventures and contractual arrangements ranged from 12.2% to 98%, and our obligations to share exploration and development costs varied under these agreements. In addition, under the terms of some of these joint ventures, we have agreed to indemnify our joint venture partners in the event that our rights with respect to such areas are restricted or affected in such a way that the purpose of the joint venture cannot be achieved. For a list of the main exploration and production joint ventures in which we participated as of December 31, 2013, see Note 6 to the Audited Consolidated Financial Statements. We are also a party to a number of other contractual arrangements that arose through the renegotiation of service contracts and risk contracts and their conversion in exploitation concessions and exploration permits, respectively.

Oil and Gas Reserves

Proved oil and gas reserves are those quantities of oil and gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible (from a given date forward, from known reservoirs, and under existing economic conditions, operating methods and government regulations) prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within reasonable time. In some cases, substantial investments in new wells and related facilities may be required to recover proved reserves.

 

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Information on net proved reserves as of December 31, 2013, 2012 and 2011 was calculated in accordance with the SEC rules and FASB’s ASC 932, as amended. Accordingly, crude oil prices used to determine reserves were calculated at the beginning of each month, for crude oils of different quality produced by the Company. The Company considered the realized prices for crude oil in the domestic market taking into account the effect of exports taxes as in effect as of each of the corresponding years (until 2016, in accordance with Law No. 26,732). For the years beyond the mentioned periods, the Company considered the unweighted average price of the first-day-of-the-month for each month within the twelve-month period ended December 31, 2013, 2012 and 2011, respectively, which refers to the WTI prices adjusted by each different quality produced by the Company. Additionally, since there are no benchmark market natural gas prices available in Argentina, the Company used average realized gas prices during the year to determine its gas reserves.

Net reserves are defined as that portion of the gross reserves attributable to the interest of YPF after deducting interests owned by third parties. In determining net reserves, the Company excludes from its reported reserves royalties due to others, whether payable in cash or in kind, where the royalty owner has a direct interest in the underlying production and is able to make lifting and sales arrangements independently. By contrast, to the extent that royalty payments required to be made to a third party, whether payable in cash or in kind, are a financial obligation, or are substantially equivalent to a production or severance tax, the related reserves are not excluded from the reported reserves despite the fact that such payments are referred to as “royalties” under local rules. The same methodology is followed in reporting our production amounts.

Gas reserves exclude the gaseous equivalent of liquids expected to be removed from the gas on concessions and leases, at field facilities and at gas processing plants. These liquids are included in net proved reserves of crude oil and natural gas liquids.

Technology used in establishing proved reserves additions

YPF’s estimated proved reserves as of December 31, 2013, are based on estimates generated through the integration of available and appropriate data, utilizing well-established technologies that have been demonstrated in the field to yield repeatable and consistent results. Data used in these integrated assessments include information obtained directly from the subsurface via wellbore, such as well logs, reservoir core samples, fluid samples, static and dynamic pressure information, production test data, and surveillance and performance information. The data utilized also include subsurface information obtained through indirect measurements, including high quality 2-D and 3-D seismic data, calibrated with available well control. Where applicable, surface geological information was also utilized. The tools used to interpret and integrate all these data included both proprietary and commercial software for reservoir modeling, simulation and data analysis. In some circumstances, where appropriate analog reservoir models are available, reservoir parameters from these analog models were used to increase the reliability of our reserves estimates.

For further information on the estimation process of our proved reserves, see “—Internal controls on reserves and reserves audits.”

Net Proved Developed and Undeveloped Reserves as of December 31, 2013

The following table sets forth our estimated net proved developed and undeveloped reserves of crude oil and natural gas at December 31, 2013.

 

Proved Developed Reserves

   Oil (1)      Natural Gas      Total (2)  
     (mmbbl)      (bcf)      (mmboe)  

Consolidated Entities

        

South America

        

Argentina

     476         1,935         821   

North America

        

United States

     1         3         1   

Total Consolidated Entities (6)

     477         1,938         822   

Equity-Accounted Entities (10)

        

South America

        

Argentina

     —           —           —     

North America

        

United States

     —           —           —     

Total Equity-Accounted Entities

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total Proved Developed Reserves (7)

     477         1,938         822   
  

 

 

    

 

 

    

 

 

 

 

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Proved Undeveloped Reserves

   Oil (1)      Natural Gas      Total (2)  
     (mmbbl)      (bcf)      (mmboe)  

Consolidated Entities

        

South America

        

Argentina

     151         620         261   

North America

        

United States

     —           —           —     

Total Consolidated Entities (8)

     151         620         261   

Equity-Accounted Entities (10)

        

South America

        

Argentina

     —           —           —     

North America

        

United States

     —           —           —     

Total Equity-Accounted Entities

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total Proved Undeveloped Reserves (9)

     151         620         261   
  

 

 

    

 

 

    

 

 

 

Total Proved Reserves (2)(3)

   Oil (1)      Natural Gas      Total (2)  
     (mmbbl)      (bcf)      (mmboe)  

Consolidated Entities

        

Developed Reserves

     477         1,938         822   

Undeveloped Reserves

     151         620         261   

Total Consolidated Entities (4)

     628         2,558         1,083   

Equity-accounted entities (10)

        

Developed Reserves

     —           —           —     

Undeveloped Reserves

     —           —           —     

Total Equity-Accounted Entities

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total Proved Reserves (5)

     628         2,558         1,083   
  

 

 

    

 

 

    

 

 

 

 

* Not material (less than 1)
(1) Includes crude oil, condensate and natural gas liquids.
(2) Volumes of natural gas in the table above and elsewhere in this annual report have been converted to boe at 5.615 mcf per barrel.
(3) Proved oil reserves of consolidated entities include an estimated approximately 93 mmbbl of crude oil, condensate and natural gas liquids in respect of royalty payments which, as described above, are a financial obligation, or are substantially equivalent to a production or similar tax. Proved reserves of natural gas of consolidated entities include an estimated approximately 285 bcf of natural gas in respect of such payments. Equity-accounted entities’ reserves in respect of royalty payments which are a financial obligation, or are substantially equivalent to a production or similar tax, are not material.
(4) Includes natural gas liquids of 76, 70 and 74 as of December 31 2013, 2012 and 2011 for Consolidated Entities.
(5) Includes natural gas liquids of 76, 70 and 74 as of December 31 2013, 2012 and 2011 for Consolidated and Equity-accounted Entities.
(6) Includes natural gas liquids of 55, 56 and 58 as of December 31 2013, 2012 and 2011 for Consolidated Entities.
(7) Includes natural gas liquids of 55, 56 and 58 as of December 31 2013, 2012 and 2011 for Consolidated and Equity-accounted Entities.
(8) Includes natural gas liquids of 21, 13 and 14 as of December 31 2013, 2012 and 2011 for Consolidated Entities.
(9) Includes natural gas liquids of 21, 13 and 14 as of December 31 2013, 2012 and 2011 for Consolidated and Equity-accounted Entities.
(10) As of December 31, 2013 we have no Equity Accounted Entities with reserves. See Note 13 to the Audited Consolidated Financial Statements – Business Combination – YPF Energía Eléctrica S.A.

Changes in our estimated proved reserves during 2013

 

a) Revisions of previous estimates

During 2013, the Company’s proved reserves were revised upwards by 106 million barrels (“mmbbl”) of crude oil, condensate, and natural gas liquids, and 564 billion cubic feet (“bcf”) of natural gas.

 

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The main revisions to proved reserves have been due to the following:

 

    The term of concession contracts was extended for several operated and non-operated fields located in Chubut Province. Because of this, approximately 43 mmbbl of proved oil reserves and 15 bcf of proved gas reserves were added in the Manantiales Behr, El Trebol, Escalante, Zona Central - Bella Vista, Cañadón Perdido, El Tordillo, La Tapera and Sarmiento fields.

 

    In the Magallanes field, approximately 36 mmboe (9 mmbbl of oil and 150 bcf of gas) of proved developed reserves were added as a result of better than expected production and revised expected production until the expiration of the concession contract.

 

    A total of 8 mmbbl of liquids and 84 bcf of gas proved developed reserves were added in Loma La Lata Central (southern part of Loma La Lata field), mainly because of new projects, revision of existing projects, and a higher than forecasted production performance.

 

    In the Golfo San Jorge Basin, Los Perales and Seco León fields, 12 mmboe of proved developed reserves (10.6 mmbbl of oil and 8.2 bcf of gas) were added because of an improved production performance.

 

    A total of 9 mmbbl of liquids and 122 bcf of gas proved reserves were added in the El Porton, Chihuido de la Salina, Chihuido de la Salina Sur and Filo Morado fields in relation with production response, workovers activity and project revision in accordance with updated field response.

 

    In the Rincón del Mangrullo field approximately 6 mmbbl of liquids proved reserves, and 74 bcf of mainly proved undeveloped gas reserves were added because of additional drilling activity planned for 2014.

 

    The Chihuido de la Sierra Negra field added approximately 7 mmbbl of oil and 3 bcf of gas proved developed reserves due to better than expected production performance.

 

    Production rates did not behave as expected in the Aguada Pichana, Puesto Hernández, Aguada Toledo - Sierra Barrosa and Barrancas fields. Proved developed reserves were reduced 8.8 mmboe based on this new information.

 

    New wells drilled during 2013 in several operated areas did not perform as expected. Because of this, proved reserves were reduced in 6 mmbbl of liquids and 4 bcf of gas mainly in the Barranca Baya, Loma La Lata Norte, Loma Campana, Cerro Fortunoso, and Vizcacheras fields.

 

b) Extensions and discoveries

Wells drilled in unproved reserve areas added approximately 61 mmboe of proved reserves (179 bcf of natural gas and 29 mmbbl of oil).

 

    A total of approximately 27.5 mmboe of proved reserves were added as a result of wells drilled and scheduled to be drilled during 2014 in the Aguada Toledo - Sierra Barrosa Field. The main contributions came from the Lajas Tight Gas formation (15.9 mmboe), and the Lotena formation (7.9 mmboe).

 

    Unconventional proved developed oil reserves for a total of 10.6 mmboe were added as a consequence of 57 new wells drilled in unproved reserve and resource areas of the Loma La Lata Norte (Loma La Lata fields), in the Vaca Muerta Formation.

 

    In the Loma Campana Field, unconventional proved developed oil reserves for a total of 4.0 mmboe were added related to 22 new wells drilled in unproved reserves and resources areas.

 

    In the Golfo San Jorge Basin, extensions drilled in the Seco León Field (25 new wells) allowed the addition of approximately 2.8 mmboe of proved reserves, mainly oil.

 

    Also in the Golfo San Jorge Basin, 37 new extension wells drilled in the Barranca Baya Field added 2.6 mmboe of mainly oil reserves.

 

c) Improved recovery

A total of approximately 11.5 mmboe of proved oil reserves have been added due to positive production response, new production and injection wells, and from workovers, performed as part of the improved recovery projects, including:

 

    In the Neuquina Basin, Aguada Toledo - Sierra Barrosa field, approximately 6.3 mmboe of oil reserves were added as a result of new scheduled secondary recovery projects, extension projects, and new wells drilled in the area.

 

    In the San Jorge Basin, Manantiales Behr and El Trebol fields, 3.4 mmboe of secondary recovery reserves were added as a result of recovery factor improvements based on new drilling and project optimization.

 

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    In the Neuquina Basin in Cerro Fortunoso field, proved undeveloped reserves were reduced by approximately 3.7 mmboe because of observed changes in the behavior of a secondary recovery pilot project.

 

d) Sales and acquisitions

 

    The acquisition of a 23% working interest in the Aguarague and San Antonio Sur Fields of the Noroeste Basin resulted in the addition of approximately 8.9 mmboe of proved reserves. YPF’s working interest in this field is currently 53%.

 

    The execution of a contract for a joint venture project for the development and operation of the Loma Campana and Loma La Lata Norte (North of Loma La Lata) fields, resulted in an 8.8 mmboe reduction in proved reserves of Vaca Muerta and Quintuco formations. As part of this agreement, YPF’s working interest in these fields changed from 100% to 50%.

 

    Approximately 6.5 mmboe were transferred to Consolidated Entities as a result of YPF Energía Eléctrica’s working interest in the Ramos Field. These rights were previously owned by Pluspetrol Energy and are thus disclosed under Equity-accounted Entities reserves.

Changes in our proved undeveloped reserves during 2013

YPF had estimated a volume of net proved undeveloped reserves of 261 mmboe at December 31, 2013, which represented approximately 24% of the 1083 mmboe total reported proved reserves as of such date. This compares to estimated net proved undeveloped reserves of 203 mmboe as of December 31, 2012 (approximately 21% of the 979 mmboe total reported proved reserves as of such date).

The 28% total net increase in net proved undeveloped reserves in 2013 is mainly attributable to:

 

    New project studies and extensions of gas and oil development projects, which added approximately 83 mmboe of proved undeveloped reserves. The main contributions came from the Aguada Toledo–Sierra Barrosa (Lajas Tight Gas and Lotena formations), Rincón del Mangrullo, Loma La Lata Central (Sierras Blancas formation), and Piedras Negras fields.

 

    Successful development activities related to proved undeveloped reserves projects, which allowed a transfer of approximately 41 mmboe to proved developed reserves.

 

    Negotiation of the extension of exploitation concessions in the province of Chubut (See “Item 4. Information on the Company—Regulatory Framework and Relationship with the Argentine Government Exploration and Production) that resulted in an 8 mmboe addition of proved undeveloped reserves, mainly from scheduled proved undeveloped projects and which will not require additional investment.

 

    New improved recovery projects, adding approximately 8 mmboe of proved undeveloped secondary recovery reserves.

YPF’s total capital expenditure to advance the development of reserves was approximately U.S.$3,631 million during 2013, of which U.S.$628 million was allocated to projects related to proved undeveloped reserves.

As of December 31, 2013 we estimate our proved undeveloped reserves related to gas wells and to primary and secondary oil recovery projects, which account for approximately 84% of our proved undeveloped reserves, will be developed within five years from their initial booking date.

Low pressure gas compression projects in Loma La Lata, which account for the remaining approximately 16% of our proved undeveloped reserves as of December 31, 2013, continue their scheduled development. We estimate that the first stage of these projects will be developed within five years from their initial booking. We estimate that the last compression stage, which accounts for approximately 6% of our proved undeveloped reserves as of December 31, 2013 (representing approximately 2% of our proved reserves as of such date), will be developed within approximately 7 years from its booking date according to expected compression needs based on current (and consequently expected) reservoir behavior.

Internal controls on reserves and reserves audits

All of our oil and gas reserves held in consolidated companies have been estimated by our petroleum engineers. In order to meet the high standard of “reasonable certainty,” reserves estimates are stated taking into consideration additional guidance as to reservoir economic producibility requirements, acceptable proved area extensions, drive mechanisms and improved recovery methods, marketability under existing economic and operating conditions and project maturity.

 

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Where applicable, the volumetric method is used to determine the original quantities of petroleum in place. Estimates are made by using various types of logs, core analysis and other available data. Formation tops, gross thickness, and representative values for net pay thickness, porosity and interstitial fluid saturations are used to prepare structural maps to delineate each reservoir and isopachous maps to determine reservoir volume. Where adequate data is available and where circumstances are justified, material-balance and other engineering methods are used to estimate the original hydrocarbon in place.

Estimates of ultimate recovery are obtained by applying recovery factors to the original quantities of petroleum in place. These factors are based on the drive mechanisms inherent in the reservoir, analysis of the fluid and rock properties, the structural position of the reservoir and its production history. In some instances, comparisons are made with similar production reservoirs in the areas where more complete data is available.

Where adequate data is available and where circumstances are justified, material-balance and other engineering methods are used to estimate ultimate recovery. In these instances, reservoir performance parameters such as cumulative production, production rate, reservoir pressure, gas to oil ratio behavior and water production are considered in estimating ultimate recovery.

In certain cases where the above methods could not be used, proved reserves are estimated by analogy to similar reservoirs where more complete data are available.

To control the quality of reserves booking, a process has been established that is integrated into the internal control system of YPF. This process to manage reserves booking is centrally controlled and has the following components:

 

  (a) The Reserves Control Direction (RCD) is separate and independent from the Exploration and Production segment. RCD’s activity is overseen by YPF’s Audit Committee, which is also responsible for supervising the procedures and systems used in the recording of and internal control over the Company’s hydrocarbon reserves. The primary objectives of the RCD are to ensure that YPF’s proved reserves estimates and disclosure are in compliance with the rules of the SEC, the Financial Accounting Standards Board (FASB), and the Sarbanes-Oxley Act, and to review annual changes in reserves estimates and the reporting of YPF’s proved reserves. The RCD is responsible for preparing the information to be publicly disclosed concerning YPF’s reported proved reserves of crude oil, condensate, natural gas liquids, and natural gas. In addition, the RCD is also responsible for providing training to personnel involved in the reserves estimation and reporting process within YPF. The RCD is managed by and staffed with individuals that have an average of more than 20 years of technical experience in the petroleum industry, including in the classification and categorization of reserves under the SEC guidelines. The RCD staff includes several individuals who hold advanced degrees in either engineering or geology, as well as individuals who hold bachelor’s degrees in various technical studies. Several members of the RCD are registered with or affiliated to the relevant professional bodies in their fields of expertise.

 

  (b) The Reserves Control Director, head of the RCD since January 2013, who is responsible for overseeing the preparation of the reserves estimates and reserves audits conducted by third party engineers. The current director has over 17 years of experience in geology and geophysics, reserves estimates, project development, finance and general accounting regulation. Over the past six years, he has been Regional Director responsible for the operation and development of YPF’s operated fields at Cuyana and North of Neuquina Basins, in western Argentina. He holds a degree in geology from Universidad Nacional de Tucumán, and postgraduate courses at IAE Universidad Austral. Consistent with our internal control system requirements, the Reserves Control Director’s compensation is not affected by changes in reported reserves.

 

  (c) A quarterly internal review by the RCD of changes in proved reserves submitted by the Exploration and Production business unit and associated with properties where technical, operational or commercial issues have arisen.

 

  (d) The Quality Reserve Coordinator (QRC), who is a professional assigned at each Exploration and Production business unit of YPF to ensure that there are effective controls in the proved reserves estimation and approval process of the estimates of YPF and the timely reporting of the related financial impact of proved reserves changes. Our QRCs are responsible for reviewing proved reserves estimates. The qualification of each QRC is made on a case-by-case basis with reference to the recognition and respect of such QRC’s peers. YPF would normally consider a QRC to be qualified if such person (i) has a minimum of 10 years of practical experience in petroleum engineering or petroleum production geology, with at least five years of such experience in charge of the estimate and evaluation of reserves information, and (ii) has either (A) obtained, from a college or university of recognized stature, a bachelor’s or advanced degree in petroleum engineering, geology or other related discipline of engineering or physical science, or (B) received, and is maintaining in good standing, a registered or certified professional engineer’s license or a registered or certified professional geologist’s license, or the equivalent thereof, from an appropriate governmental authority or professional organization.

 

  (e) A formal review through technical review committees to ensure that both technical and commercial criteria are met prior to the commitment of capital to projects.

 

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  (f) Our Internal Audit Team, which examines the effectiveness of YPF’s financial controls, designed to ensure the reliability of reporting and safeguarding of all the assets and examining YPF’s compliance with the law, regulations and internal standards.

 

  (g) All volumes booked are submitted to a third party reserves audit on a periodic basis. The properties selected for a third party reserves audit in any given year are selected on the following basis:

 

  i. all properties on a three year cycle, and

 

  ii. recently acquired properties not submitted to a third party reserves audit in the previous cycle and properties with respect to which there is new information which could materially affect prior reserves estimates.

For those areas submitted to third party reserves audit, YPF’s proved reserves figures have to be within 7% or 10 mmboe of the third party reserves audit figures for YPF to declare that the volumes have been ratified by a third party reserves audit. In the event that the difference is greater than the tolerance, YPF will re-estimate its proved reserves to achieve this tolerance level or should disclose the third party figures.

In 2013, IHS Global Canada Inc. audited areas non operated and operated by YPF in the Neuquina, Golfo San Jorge and Cuyana basins and DeGolyer and MacNaughton audited non operated areas in the United States. These audits were performed as of September 30, 2013, with the exception of Manantiales Behr, Restinga Alí, Río Mayo, Sarmiento, and Zona Central-Bella Vista which was audited as of December 31, 2013. Audited fields as of September 30, 2013 contain in aggregate, according to our estimates, 281.2 mmboe proved reserves (102.2 mmboe of which were proved undeveloped reserves) as of such date, which represented approximately 25.5% of our proved reserves and 38.6% of our proved undeveloped reserves as of September 30, 2013. In addition, the Manantiales Behr, Restinga Alí, Río Mayo, Sarmiento, and Zona Central-Bella Vista Fields, which were audited as of December 31, 2013, contain in aggregate, according to our estimates, 37.6 mmboe proved reserves (3.9 mmboe of which were proved undeveloped reserves) as of such date, which represented approximately 3.5% of our proved reserves and 1.5% of our proved undeveloped reserves as of December 31, 2013. A copy of the related reserves audit reports are filed as Exhibits to this annual report.

We are required, in accordance with Resolution S.E. No. 324/06 of the Argentine Secretariat of Energy, to annually file by March 31 details of our estimates of our oil and gas reserves and resources with the Argentine Secretariat of Energy, as defined in that resolution and certified by an external auditor. The aforementioned certification and external audit only have the meaning established by Resolution S.E. No. 324/06, and are not to be interpreted as a certification or external audit of oil and gas reserves under SEC rules. We last filed such a report for the year ended December 31, 2013. Estimates of our oil and gas reserves filed with the Argentine Secretariat of Energy are materially higher than the estimates of our proved oil and gas reserves contained in this annual report mainly because: (i) information filed with the Argentine Secretariat of Energy includes all properties of which we are operators, irrespective of the level of our ownership interests in such properties; (ii) information filed with the Argentine Secretariat of Energy includes other categories of reserves and resources different to proved reserves that are not included in this annual report, which contains estimates of proved reserves consistent with the SEC’s guidance; and (iii) the definition of proved reserves under Resolution S.E. No. 324/06 is different from the definition of “proved oil and gas reserves” established in Rule 4-10(a) of Regulation S-X. Accordingly, all proved oil and gas reserve estimates included in this annual report reflect only proved oil and gas reserves consistent with the rules and disclosure requirements of the SEC.

Oil and gas production, production prices and production costs

The following table shows our oil (including crude oil, condensate and natural gas liquids) and gas production on an as sold and daily basis for the years indicated. In determining net production, we exclude royalties due to others, whether payable in cash or in kind, where the royalty owner has a direct interest in such production and is able to make lifting and sales arrangements independently. By contrast, to the extent that royalty payments required to be made to a third party, whether payable in cash or in kind, are a financial obligation, or are substantially equivalent to a production or severance tax, they are not excluded from our net production amounts despite the fact that such payments are referred to as “royalties” under local rules. This is the case for our production in Argentina, where royalty expense is accounted for as a production cost.

 

Oil production (1)(2)

   2013      2012      2011  
     (mbbl/d)  

Consolidated Entities

        

South America

        

Argentina

     279         274         272   

North America

        

United States

     1         1         1   
  

 

 

    

 

 

    

 

 

 

Total Consolidated Entities

     280         275         273   

Equity-Accounted Entities

        

South America

        

Argentina

     1         1         1   
  

 

 

    

 

 

    

 

 

 

Total Equity-Accounted Entities

     1         1         1   
  

 

 

    

 

 

    

 

 

 

Total Oil Production (3)

     281         276         274   
  

 

 

    

 

 

    

 

 

 

 

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Natural gas production (2)

   2013      2012      2011  
     (mmcf/d)  

Consolidated Entities

        

South America

        

Argentina

     1,018         1,001         1,049   

North America

        

United States

     2         2         3   
  

 

 

    

 

 

    

 

 

 

Total Consolidated Entities

     1,020         1,003         1,052   

Equity-Accounted Entities

        

South America

        

Argentina

     14         26         38   
  

 

 

    

 

 

    

 

 

 

Total Equity-Accounted Entities

     14         26         38   
  

 

 

    

 

 

    

 

 

 

Total Natural Gas Production (4)(5)

     1,034         1,029         1,090   
  

 

 

    

 

 

    

 

 

 

Oil equivalent production (2)(6)

   2013      2012      2011  
     (mboe/d)  

Consolidated Entities

        

Oil

     280         275         273   

Natural gas

     182         179         187   

Equity-Accounted Entities

        

Oil

     1         1         —     

Natural gas

     2         5         7   
  

 

 

    

 

 

    

 

 

 

Total Oil Equivalent Production

     465         459         467   
  

 

 

    

 

 

    

 

 

 

 

* Not material (less than 1)
(1) Includes crude oil, condensate and natural gas liquids.
(2) Loma La Lata Central and Loma La Lata Norte (southern and northern parts of Loma La Lata Field) in Argentina contain approximately 18% of our total proved reserves expressed on an oil equivalent barrel basis. Oil production in these fields was 11, 15 and 15 mmbbl for the years ended December 31, 2013, 2012 and 2011 respectively. Natural gas production in the Loma La Lata field was 110, 159 and 182 bcf for the years ended December 31, 2013, 2012 and 2011 respectively.
(3) Oil production for the years 2013, 2012 and 2011 includes an estimated approximately 15, 13 and 12 mmbbl, respectively, of crude oil, condensate and natural gas liquids in respect of royalty payments which are a financial obligation, or are substantially equivalent to a production or similar tax. Equity-accounted entities’ production of crude oil, condensate and natural gas liquids in respect of royalty payment which are a financial obligation, or are substantially equivalent to a production or similar tax, is not material.
(4) Natural gas production for the years 2013, 2012 and 2011 includes an estimated approximately 47, 48 and 48 bcf, respectively, of natural gas in respect of royalty payments which are a financial obligation, or are substantially equivalent to a production or similar tax. Equity-accounted entities production of natural gas in respect of royalty payments which are a financial obligation, or are substantially equivalent to a production or similar tax, is not material.
(5) Does not include volumes consumed or flared in operation and inventory changes (whereas sale volumes shown in the reserves table included in “Supplemental Information on Oil and Gas Exploration and Production Activities—Oil and Gas Reserves” include such amounts).
(6) Volumes of natural gas been converted to an oil equivalent basis at 5.615 mcf per barrel.

The composition of the crude oil produced by us in Argentina varies by geographic area. Almost all crude oil produced by us in Argentina has very low or no sulfur content. We sell substantially all the crude oil we produce in Argentina to our Refining and Marketing business segment. Most of the natural gas produced by us is of pipeline quality. All of our gas fields produce commercial quantities of condensate, and substantially all of our oil fields produce associated gas.

 

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The following table sets forth the average production costs and average sales price by geographic area for 2013, 2012, and 2011:

 

Production costs and sales price

   Total      Argentina      United
States
 
     (Ps./boe)  

Year ended December 31, 2013

        

Lifting costs

     88.02         88.02         88.52   

Local taxes and similar payments(1)

     5.55         5.58         —     

Transportation and other costs

     19.89         19.88         21.96   
  

 

 

    

 

 

    

 

 

 

Average production costs

     113.46         113.48         110.48   
  

 

 

    

 

 

    

 

 

 

Average oil sales price

     393.62         392.77         541.74   

Average natural gas sales price

     72.39         72.37         108.12   

Year ended December 31, 2012

        

Lifting costs

     66.22         65.89         65.09   

Local taxes and similar payments(1)

     3.24         3.26         —     

Transportation and other costs

     19.50         19.51         17.54   
  

 

 

    

 

 

    

 

 

 

Average production costs

     88.97         88.66         82.63   
  

 

 

    

 

 

    

 

 

 

Average oil sales price

     288.71         317.11         466.75   

Average natural gas sales price

     54.78         60.33         92.12   

Year ended December 31, 2011

        

Lifting costs

     48.24         48.24         48.93   

Local taxes and similar payments(1)

     2.03         2.04         —     

Transportation and other costs

     15.25         15.23         18.07   
  

 

 

    

 

 

    

 

 

 

Average production costs

     65.52         65.51         67   
  

 

 

    

 

 

    

 

 

 

Average oil sales price

     245.86         244.69         412.19   

Average natural gas sales price

     55.24         55.21         111.74   

 

(1) Does not include ad valorem and severance taxes, including the effect of royalty payments which are a financial obligation or are substantially equivalent to such taxes, in an amount of approximately Ps.32.77 per boe, Ps.25.10 per boe and Ps.19.50 per boe per boe for the years ended December 31, 2013, 2012 and 2011, respectively.

Drilling activity in Argentina

The following table shows the number of wells drilled by us or consortiums in which we had a working interest in Argentina during the periods indicated.

 

Wells Drilled in Argentina(1)

   For the Year Ended December 31,  
     2013      2012      2011  

Gross wells drilled(2)

        

Exploratory

        

Productive

     38         33         18   

Oil

     30         27         17   

Gas

     8         6         1   

Dry

     3         5         4   
  

 

 

    

 

 

    

 

 

 

Total

     41         38         22   
  

 

 

    

 

 

    

 

 

 

Development

        

Productive

     728         468         553   

Oil

     664         455         529   

Gas

     64         13         24   

Dry

     2         2         8   
  

 

 

    

 

 

    

 

 

 

Total

     730         470         561   
  

 

 

    

 

 

    

 

 

 

Net wells drilled(3)

        

Exploratory

        

Productive

     29         24         15   

Oil

     25         21         14   

Gas

     4         3         1   

Dry

     3         4         2   
  

 

 

    

 

 

    

 

 

 

Total

     32         28         17   
  

 

 

    

 

 

    

 

 

 

Development

        

Productive

     679         441         494   

Oil

     624         430         485   

Gas

     55         11         9   

Dry

     2         1         8   
  

 

 

    

 

 

    

 

 

 

Total

     681         442         502   
  

 

 

    

 

 

    

 

 

 

 

(1) “Gross” wells include all wells in which we have an interest. In addition to wells drilled in Argentina, we participated in the drilling of the following “gross” wells in North America: one exploratory well which was abandoned due to technical reasons in 2011; and nine development wells during the last four years, seven of which were productive. In 2012, we completed a side-track of an off-shore development well not in production for technical reasons and a successful workover of an off-shore development well.

 

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(2) “Gross” wells include all wells in which we have an interest.
(3) “Net” wells equals gross wells after deducting third-party interests. In addition to wells drilled in Argentina, “net” wells drilled in North America round to one well.

Exploration & Production Activity in Argentina

During 2013, our main exploratory and development activities in Argentina have had the following principal focus:

 

1. Operated Areas - Exploratory Activities

During 2013, our main exploratory activities in Argentina were principally focused on:

1.1.    Onshore:

 

    Unconventional oil and gas:

We continued with the regional exploration of the Vaca Muerta formation, oriented towards the characterization of productivity of the shale oil, wet gas and dry gas in different areas of the basin.

 

    Shale oil:

Neuquina Basin. Exploration continued along the shale oil strip, in an attempt to define intermediate control points of productivity, all while complying with the contractual commitments of the exploratory JOAs (“Joint Operation Agreements”) of the 2nd and 3rd bidding rounds in the province of Neuquén.

Positive results were obtained in La Amarga Chica.x-4, La Caverna.x-4 and La Caverna.e-6 (Bandurria block) and Meseta Buena Esperanza.x-2002 (operated by Apache Corporation) wells. These results, together with the positive results of the Narambuena.x-8, San Roque.xp-1008 and San Roque.xp-1010 (operated by Total S.A.) wells confirmed the productivity of the Vaca Muerta formation at various points of the basin.

Golfo San Jorge Basin. During 2013, the El Trebol xp-914 well was drilled to initiate exploration of the Neocomian play, the most western area of the Golfo San Jorge basin. The exploration of the Neocomian play is expected to be completed during 2014.

 

    Shale gas:

Neuquina Basin. During 2013, we continued with the regional definition in the shale gas strip area. Positive results were obtained in the following wells: Cerro Arena.x-5, Las Tacanas.x-1, Pampa de las Yeguas I.x-1 (operated by us) and Aguada Pichana.e-1007, Pampa de las Yeguas II.x-1 (operated by Total S.A.). Data integration is in progress to define sweet spot distribution.

 

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    Tight gas:

Neuquina Basin. Exploration of the Basin Center Gas System play started with the Lajas Este.x-1 well and is expected to yield results in the first half of 2014.

 

    Conventional oil and gas:

 

    Productive basins

Chachahuén Block: The evaluation of this block’s potential is ongoing. In 2013, 5 wells were drilled targeting reservoirs related to the Neuquen and Malargue groups (a unit that consists of more than one formation). Additionally, the Chachahuén Sur.xp-44 well was drilled, with positive results in the Rayoso and Mulichinco formations.

Based on the results obtained since 2011, the Chachahuen Sur Exploitation block was defined, and was approved by the authorities of the Province of Mendoza in late 2013. We have designed a development plan for this block.

Llancanello R Block: The exploration of this heavy oil field in the south of the Llancanelo block started with drilling three study wells (targeting reservoirs related to the Neuquen group), where positive results were achieved.

Puesto Cortadera Block: Two exploration wells targeting gas reservoirs related to the Rayoso, Los Molles and Precuyano formations, were drilled. Positive results were achieved in the Los Molles formation and negative results were achieved in the Rayoso and Precuyano formations.

Other blocks in the Neuquina Basin: Additionally, during 2013 four exploratory wells were drilled with positive results:

 

    Cerro Hamaca, La Ollada.x-1 positive in Rayoso formation (oil)

 

    EL Manzano, Mirador del Valle.x-1 positive in Neuquen group (oil)

 

    Loma de la Mina, Los Pajaritos.x-1 positive in Huitrin formation (oil)

 

    Octógono Fiscal, Campamento.xp-491 positive in Los Molles formation (oil)

Golfo San Jorge basin: We restarted exploration activity targeting conventional oil and gas reservoirs in the Golfo San Jorge basin by drilling the nine wells described below:

 

    Chubut province: In the Restinga Ali and Manantiales Behr blocks, 5 exploratory wells were drilled to evaluate gas from the Salamanca formation. As of December 31, 2013, positive results were achieved in the Grimbeek Este.x-2 well, while the remaining wells were pending completion.

 

    Santa Cruz province: In the C° Piedra-C°Guadal Norte, Barranca Yankowsky and Los Monos blocks, four exploratory wells were drilled to evaluate oil and gas from the Bajo Barreal and Castillo formations, with the following results:

 

    Estancia Zabala.x-5 (C° Piedra-C°Guadal Norte block) positive,

 

    Barranca Yankowsky Oeste.x-3 negative,

 

    Puesto Osorio.x-2 (Los Monos) and C° Piedra Oriental.x-1 (C° Piedra-C° Guadal Norte) were pending completion as of December 31, 2013.

 

    Shallow gas workovers: In order to investigate several conventional shallow gas reservoirs, fifteen workovers were conducted (12 in the Golfo San Jorge basin and 3 in the Neuquina basin). The encouraging results obtained from these workovers allowed us to define development plans for some of the corresponding shallow gas reservoirs.

 

    Bordering areas:

Los Tordillos Oeste Block: Starting with the analysis of the 3D seismic data obtained during the last quarter of 2010, the location of two exploratory wells was established in the Los Tordillos Oeste block, (located in the province of Mendoza), in association with Sinopec Argentina (formerly Occidental Exploration and Production Inc.), with YPF and Sinopec Argentina each holding a 50% working interest in the project. During 2013, the environmental resolution authorizing the drilling of both wells was obtained. The wells are expected to be drilled during 2014.

Gan Gan (CCA-1) block: In early 2013, Wintershall Energía (holder of a 25% working interest in the project) informed us (as holder of a 75% working interest in, and operator of, the project) that Wintershall Energia intended to withdraw from the JV. We informed the Chubut province authorities of our intention to proceed with activities in the second exploratory period. The main goal is to define the remaining potential by finishing field studies and modeling.

 

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CGSJ V/A block: We (as holder of a 75% working interest in the project) and Wintershall Energía (as holder of a 25% working interest in the project) informed the Chubut province authorities of our decision to relinquish the block due the lack of exploration potential.

Bolsón del Oeste block: Inside the Bolsón del Oeste block (in the province of La Rioja), entirely operated by us, the Guandacol es-1 well was drilled in order to evaluate the sediment column from the Tertiary and Paleozoic ages. Although the well was drilled to a final depth of 3700 meters, the well’s objective could not be achieved. We decided not to continue with the third exploratory period and, as a result, the block was relinquished to the province.

1.2. Offshore:

 

    Shallow Waters. The evaluation of the E2 block continues (currently operated by ENAP Sipetrol, with a working interest of 33%, and in which we and Energía Argentina S.A. (“ENARSA”) each also hold a 33% working interest), in search of new exploration opportunities. We, along with our partners, are currently conducting the regional studies necessary to support new exploration opportunities. Also, YPF is evaluating the remaining area of the Austral basin.

 

    Deep Waters. We are currently participating in three blocks:

 

    CAA-46. The last exploration period in respect of this block expired in April 2013. We are evaluating alternatives to propose to Secretaria de Energía (“SEN”) to continue exploring the area.

 

    E-1. We hold a 35% working interest in this Colorado basin block, while ENARSA, Petrobras Argentina and Petrouruguay have 35%, 25% and 5% working interests, respectively. To complete the evaluation of the block a new 2D seismic survey was scheduled for 2014.

 

    E3. We hold a 30% working interest in this Colorado basin block, while ENARSA and Petrobras Argentina each holds a 35% working interest. During 2013, geological and geophysical studies were carried out in order to define the location of a 2D seismic survey. The seismic acquisition is expected to be conducted in 2014.

 

2. Operated Areas - Development activities

During 2013 our main development activities in Argentina were principally focused on:

2.1. Neuquén - Río Negro:

During 2013, our development activities were focused on gas development in addition to oil development, including a massive development plan for tight sand gas from the Lajas formation.

In the Octógono field, an oil development project on basement formation was executed by drilling 14 exploitation wells. Although the Octógono field is the oldest field in the Neuquina basin, this oil development project increased the oil production of the field over 10 times compared to the field’s production before the implementation of the project, to 270 m3/d of oil.

As part of our strategy to maximize oil production, we continued working on secondary recovery efforts for the Aguada Toledo – Sierra Barrosa field, with the addition of 39 wells and 3 water injectors. Additionally, we built new facilities and renovated old ones in order to increase the injection and product evacuation capacity of the Aguada Toledo – Sierra Barrosa field. By the end of 2014, we expect to double the daily volume of water injection. Finally, there have been advancements with respect to Aguada Toledo – Sierra Barrosa field in the plan for the development of tight gas from the Lajas formation. As of December 31, 2013, 17 wells were put into production with 9 additional wells pending completion. The advancements in the plan for development of tight gas from the Lajas formation resulted in over 2 Mm3/d of natural gas production in December 2013.

 

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Neuquen YPF Concession

 

1 AGUADA DE CASTRO; 2 AGUADA PICHANA;3 APON I (LA BANDA I); 4 APON II (LA BANDA II); 5 BAJADA DE AÑELO; 6 BAJO DEL TORO; 7 BANDURRIA; 8 BUTA RANQUIL I; 9 BUTA RANQUIL II; 10 CERRO ARENA; 11 CERRO AVISPA; 12 CERRO BANDERA; 13 CERRO HAMACA; 14 CERRO LAS MINAS; 15 CERRO PARTIDO; 16 CHAPUA ESTE; 17 CHASQUIVIL;18 CHIHUIDO DE LA SALINA SUR; 19 CHIHUIDO DE LA SIERRA NEGRA; 20 CORRALERA; 21 DON RUIZ; 22 EL OREJANO; 23 EL PORTON; 24 FILO MORADO; 25 LA AMARGA CHICA; 26 LA RIBERA I; 27LA RIBERA II; 28 LAS MANADAS (CALANDRIA MORA): 29 LAS TACANAS; 30 LINDERO ATRAVESADO; 31 LOMA AMARILLA; 32 LOMA CAMPANA; 33 LOMA DEL MOJON; 34 LOMA DEL MOLLE; 35 LOMA LA LATA - SIERRA BARROSA; 36 LOS CANDELEROS; 37 MATA MORA; 38 MESETA BUENA ESPERANZA; 39 OCTOGONO; 40 PAMPA DE LAS YEGUAS I; 41 PAMPA DE LAS YEGUAS II; 42 PASO DE LAS BARDAS NORTE; 43 PORTEZUELO MINAS; 44 PUESTO CORTADERA (PIEDRA CHENQUE); 45 PUESTO HERNANDEZ; 46 RINCON DEL MANGRULLO; 47 RIO BARRANCAS; 48 SALINAS DEL HUITRIN; 49 SAN ROQUE; 50 SANTO DOMINGO I; 51 SANTO DOMINGO II; 52 SEÑAL CERRO BAYO; 53 SEÑAL PICADA - PUNTA BARDA; 54 VOLCAN AUCA MAHUIDA.    LOGO

The Lajas tight gas project was originally a joint venture (referred to herein by its Spanish-language acronym as a “UTE”) between us and Potasio Rio Colorado. Potasio Rio Colorado subsequently announced its withdrawal from the UTE, which triggered our right to continue the project at our own risk. See “Item 4. Information on the Company— Exploration and Production Overview— Meeting the challenge of the mature oil and gas fields.” In order to continue with analysis of the power of tight gas from the Lajas formation in other areas, wells were drilled in the El Triángulo and El Cordón fields during 2013. We are in process of evaluating the productivity of these fields.

In the Loma de la Lata field, which is our largest gas producing field, we have made improvements to our facilities to continue with the low pressure operation project. In addition, compression at the Loma de la Lata field was increased by adding 138 new compressors. Moreover, a plunger lift installation program was implemented to improve the field’s production. During 2013, infill wells were drilled and completed according to expected results, continuing with the development of the Sierras Blancas formation. Additionally, in order to continue with the development of other productive formations of the field, a well to the Lotena formation was drilled and is pending completion.

 

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During 2013, the activities related to enhanced oil recovery projects continued in the Chihuido de la Sierra Negra field. An integrated reservoir study and laboratory test were completed during 2013 and a single well chemical tracer test is scheduled to be performed during first quarter 2014. This test will be defined by one workover and the drilling of eight wells (four producers and four injectors). Also, we plan to evaluate new opportunities in this field by drilling three appraisal wells to the west of the main field along with a workover plan to the west and to deeper horizons.

Continuing with the appraisal of the Centenario formation in the Volcan Auca Mahuida field, three new wells were completed during 2013, with an average oil production of 270 bpd per well. In 2014, we expect that eight new wells will be drilled and seven workover operations will be undertaken.

The discovery of the Cerro Hamaca Noroeste field in late 2012 resulted in a drilling campaign of four appraisal wells and two exploitation wells during the second half of 2013. The new field is located in the Cerro Hamaca block and is operated by us, with a 100% working interest in the project. Monthly oil production of the block increased by 47%, up to 786 bopd in January 2014 compared to September 2013. Nine new exploitation wells have been planned for 2014. Water injection is scheduled to begin in 2015.

In Piedras Negras, a gas field located in the province of Neuquén, we drilled one new well in order to supply gas to the existing power station located in Señal Picada. In addition, a new power station is scheduled to be installed in Piedras Negras during the first quarter of 2014. This new plant would enable us to supply Señal Picada and Punta Barda fields with electricity, without having to purchase power on the open market. During 2014, we plan to continue our efforts to delineate the gas accumulation in the Piedras Negras field.

Rio Negro YPF Concession

 

LOGO

During 2013, we continued with the optimization of existing waterflooding projects in the Señal Picada field, located in the province of Río Negro. Sixteen new wells were drilled and workovers in existing wells were also performed. We also increased water injection in the Señal Picada field by renovating certain of our facilities. We also started an infill project in the Punta Barda field with nine wells drilled and eleven workovers in 2013. This project resulted in a 28% increase in monthly oil production in December 2013 compared to September 2013.

 

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2.2. Mendoza Norte:

During 2013, we worked to improve the waterflooding project in the Barrancas area of the Conglomerado Rojo Inferior formation by drilling nine new wells (6 producers and 3 injectors), reconditioning 17 existing wells, undertaking 17 workovers and launching a nano spheres injection pilot project. The nano spheres injection technique consists of injecting polyacrylamide in order to improve the area of sweep toward the producing wells, thereby increasing the oil recovery factor.

In the Vizcacheras field, 20 new development wells were drilled targeting the Papagayos and Barrancas formations. The workover activity (18 wells) was focused on primary recovery from the Papagayos formation.

In the Llancanelo field, three wells were drilled, which facilitated our collection of updated production information, and enabled us to evaluate and analyze the field’s production based on updated static and dynamic models.

In the Valle de Rio Grande field, three wells were drilled and five workovers were performed, principally targeting the Vaca Muerta formation.

 

Mendoza Norte YPF Concession   LOGO

2.3. Mendoza Sur:

During 2013, we drilled one well and two workovers were performed in the lower Troncoso member of the Huitrin formation in the Chihuido de la Salina South field, while one horizontal well was drilled in the Chihuido de la Salina South Central field.

 

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In the Filo Morado oil field, workover activities were focused on four repairs. Additionally, an advanced well was drilled to investigate the potential of the Vaca Muerta and Agrio fractured reservoirs.

In the Ruca Carmelo field, two development wells were drilled in the Troncoso formation of the Rincon de Correa field. Additionally, we gathered data to evaluate the potential for oil in the Mulichinco formation.

In the Porton field, 11 workovers were completed, incorporating the production of the lower Troncoso formation and expanding productivity by means of new pricks and stimulation of horizontal wells using coil tubing equipment.

In the Desfiladero Bayo field, three infill wells were drilled in the Rayoso, Troncoso bottom and Agrio formations to keep the field in compliance with the level of injection required by our plan of development. In addition, 36 workovers were completed to that end.

Twenty six new development wells were drilled in the Chachahuen South field in the Rayoso formation, and three advanced wells were drilled with positive results in the North and East portions of the field.

We continued with the development of the North block in the Cañadon Amarillo field, with two new wells drilled, and conducted twelve workovers.

 

Mendoza Sur YPF Concession   LOGO

 

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2.4. Chubut

In the Manantiales Behr concession, our main projects included the La Carolina, El Alba and Grimbeek fields. During 2013, sixty five wells were drilled, with good results. Additionally, seventy five workovers were completed with very positive results. Furthermore, operations at the Myburg V water treatment plant were started up in early 2013.

The polymer injection pilot project at the Grimbeek field started with a standard waterflooding and is currently in an advanced stage. We expect to initiate polymer injection when secondary oil recovery is stabilized, which we expect to occur during the first half of 2014. We expect to continue to develop the entire Manantiales Behr area by expanding our waterflooding efforts and using enhanced oil recovery methods.

Chubut YPF Concession

 

LOGO

We also experienced growth in the production of our other hydrocarbon assets in the province of Chubut. Oil production from the El Trébol – Escalante area increased by approximately 10% during 2013 compared to 2012 due to waterflooding optimization and discovery of certain small sweet spots on deeper structures. Oil production from the Zona Central – Cañadón Perdido concession increased by nearly 30% during 2013 compared to 2012, primarily as a result of the positive results of the Bella Vista Sur primary project. Additionally, our concession of the Restinga Alí block was reactivated with very promising development prospects.

 

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Overall, our oil production from the province of Chubut grew to historic levels, with an almost 7% increase in oil production in 2013 compared to 2012.

Recently, our board of Directors approved the “Agreement for the Implementation of a Commitment of Activity and Investment in Hydrocarbon Areas in the Province of Chubut” with the Province of Chubut (the “Extension Agreement”) with the objective of extending the original term of the exploitation concessions identified below, starting from the expiration of their original granted terms.

The Extension Agreement signed by YPF and the Province of Chubut establishes, among others, the following terms:

 

    Concessions included: Restinga Alí, Sarmiento, Campamento Central – Cañadón Perdido, Manantiales Behr and El Trébol – Escalante.

 

    Extension of the concessions: The exploitation concessions that would have expired in 2017 (Campamiento Central – Cañadón Perdido y El Trébol – Escalante), 2015 (Restinga Alí) and 2016 (Manantiales Behr) are extended by a term of 30 years.

By signing the Extension Agreement YPF assumed, among others, the following commitments: (i) pay an Extension Bond of U.S.$30 million; (ii) pay to the Province of Chubut the Compensation Bond for the Sustainable Development of Hydrocarbons in accordance with the provisions of Arts. 16 and 69 to 73 of Law XVII – 102 of the Province of Chubut, equivalent to 3% of the wellhead value defined in accordance with the provisions of articles 59 and 62 of Law 17.319 and the complementary rules; (iii) comply with a minimum investment commitment in the concessions covered by the Extension Agreement during period of 2018 to 2027, inclusive; (iv) maintain a minimum number of drilling and work-over rigs contracted and active during the period of 2014 to 2018, inclusive; and (v) make contributions to the municipality of Comodoro Rivadavia for projects developed within the area.

ENAP Sipetrol S.A., in its capacity as co-owner of the Campamento Central – Cañadón Perdido exploitation concession (it owns 50% of the concession) signed the Extension Agreement in order to ratify and agree to assume its portion of the commitments in such exploitation concession.

2.5. Santa Cruz

During 2013, nineteen integrated development projects across five major development areas were implemented in the province of Santa Cruz (Las Heras, El Guadal, Los Perales, Pico Truncado and Cañadon Seco), comprising a total portfolio of twenty six projects. The principal integrated projects include the following reserve areas: Cañadón Escondida, Cerro Grande, Cerro Piedra, Seco León y Los Perales, where 246 wells (241 oil wells and five injectors) were drilled and we conducted workovers of 377 wells and associated facilities.

The main objectives of these integrated projects are:

 

    The comprehensive development of the areas through the drilling of new wells.

 

    Acquiring the necessary information with electrical logs, rotated plugs and well testing.

 

    Increasing the recovery factor with new enhanced oil recovery projects.

 

    Increasing the vertical and areal sweep efficiency.

 

    Extending horizontal and vertical limits with new appraisal and exploration wells.

 

    The provision of development support through the appropriate surface facilities.

 

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Santa Cruz YPF Concession

 

LOGO

During 2014, we expect to continue with these projects and to increase our portfolio of primary and secondary recovery projects.

 

3. Non-operated areas

In June 2013, we acquired the 23% working interest previously held by Mobil Argentina S.A. in the Aguaragüe joint venture. As a result of such acquisition, we currently hold a 53% working interest in the joint venture.

In the CNQ 7A block, operated by Petro Andina Resources Argentina SA and in which we hold a 50% working interest, activity during 2013 principally consisted of drilling in edge zones by completing the design development. In addition, we have made significant progress with a polymer injection pilot project, and expect alkalines-surfactants-polymers project testing to begin in 2014.

In the Rio Negro Norte - La Yesera concession, operated by Chevron and in which we hold a 35% working interest, a well in the Western Latigo formation was drilled and put into production in October 2013 with a production of 110 m3/d (approximately 692 boe/d) of oil and a reduction of 10% in usage of water. The drilling of this new well enabled us to reevaluate our model for this reservoir, and we have developed new drilling targets for this concession for 2014.

In the Aguada Pichana - San Roque concession, operated by Total S.A. and in which we hold a 27.27% working interest, five tight natural gas wells were drilled during 2013. The positive results of this project enabled us to target new tight gas sands in the middle of the Mulichinco formation.

In Aguada Pichana, we began drilling the pilot project of 12 shale gas wells so as to evaluate the productive potential of shale gas in the Vaca Muerta formation. In Aguada San Roque, two wells were drilled also to evaluate the productive potential of shale oil in the Vaca Muerta formation.

In the Lindero Atravesado concession, operated by Pan American Energy LLC and in which we hold a 37.5% working interest, thirty nine wells were drilled and are currently in production. This is a tight gas reservoir project targeting the Lajas formation. The project also includes building the corresponding field facilities.

 

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In December 2013, we signed an agreement with the Executive office of the province of Tierra del Fuego in order to extend our concessions in that province, in the CA-7 Los Chorrillos areas, operated by Petrolera Lago Fuego (Apache Corporation) and in which we hold a 30% working interest. The final agreement has been approved by the respective parties and is pending the approval of the provincial legislature. See “—Regulatory Framework and Relationship with the Argentine Government—Negotiation of Extension of Concessions in the province of Tierra del Fuego.”

Properties and E&P Activities in rest of the world

 

  1. United States.

During 2013, Maxus relinquished a total of 20 blocks, including 3 to the U.S. federal government and 17 to Murphy Oil.

As of December 31, 2013, we had mineral rights in 27 blocks in the United States territorial waters in the Gulf of Mexico, comprised of 24 exploratory blocks, with a net surface area of 557 square kilometers, and three development blocks, with a net surface area of 69.93 square kilometers. Our U.S. subsidiaries’ net proved reserves in these properties as of December 31, 2013 were 1.165 mmboe. Our U.S. subsidiaries’ net hydrocarbon production in these properties for 2013 was 0.593 mmboe.

The Neptune Field is located approximately 120 miles from the Louisiana coast within the deepwater region of the Central Gulf of Mexico. The unitized field area comprises Atwater Valley Blocks 574, 575 and 618. Our indirect subsidiary, Maxus U.S. Exploration Company, has a 15% working interest in the field. The other joint venture participants are BHP Billiton (35%), Marathon Oil Corp. (30%) and Woodside Petroleum Ltd (20%). BHP Billiton is the operator of the Neptune Field and the associated production facilities. The Neptune reserves are being produced using a standalone, tension leg platform located in Green Canyon Block 613 within 4,230 feet of water. Production began on July 8, 2008. The platform supports seven sub-sea development wells which are tied back to the TLP via a subsea gathering system.

In addition, YPF Holdings has entered into various operating agreements and capital commitments associated with the exploration and development of its oil and gas properties. Such contractual, financial and/or performance commitments are not material. Our operations in the United States, through YPF Holdings, are subject to certain environmental claims. See “—Environmental Matters—YPF Holdings—Operations in the United States.”

 

  2. Chile

We were selected to operate in two exploratory blocks of the Magallanes basin: (i) San Sebastián, which we will operate and in which we will hold a 40% working interest along with Wintershall (which will hold a 10% working interest) and ENAP (which will hold a 50% working interest); and (ii) Marazzi/Lago Mercedes, which we will operate and in which we will hold a 50% working interest along with ENAP (which will hold a 50% working interest).

Total commitments with respect to the awarded exploration blocks during the first exploratory period include the acquisition of 672 km2 of 3D seismic data and the drilling of 8 exploratory wells. During December 2013, seismic acquisition began in the San Sebastian block.

 

  3. Colombia.

Blocks COR12, COR14 and COR33 are located in the Cordillera Oriental basin, which we operate pursuant to authorization by the Colombian National Hydrocarbons Agency (Agencia Nacional de Hidrocarburos, or “ANH”). Our working interest in these blocks ranges from 55% to 60%. The net acreage relating to our working interest in the blocks is 890 km2. We have requested approval from the ANH to farm out our working interest in the COR 12 and COR 33 blocks. Also during 2013, we and our partners informed the ANH of our decision to relinquish the COR 14 block.

 

  4. Paraguay.

In September 2011, we were awarded 100% of the Manduvira exploration permit. The area covers a surface of 15,475 km2 and is located in the eastern area of Paraguay, within the scope of the Chacoparaná basin. Our main goal in this project is to explore non-conventional resources. In September 2012, the one-year exploration period established by the Manduvira exploration permit expired. We requested a one-year extension of the exploration period from the Ministry of Public Works and Communications in order to finalize our initial exploration. In late 2013, the one-year extension was approved

 

  5. Peru.

The process for completing the award of the rights to explore in Blocks 180, 182, 184 y 176 was never completed by Perupetro (the enforcement authority for this bid) and the parties to the consortium formed for such purpose decided to relinquish their rights to continue participating in the process. Said relinquishment was communicated and accepted by Perupetro during 2013.

 

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  6. Uruguay

 

  6.1 Deep Water Offshore– Punta del Este basin:

 

    Area 3: We (40% working interest) act as operator, in partnership with Petrobras Uruguay (40% working interest) and Galp (20% working interest). Exploration is in the first geological and geophysical evaluation stage. The main leads were defined. In the last quarter of 2013, 2000 km2 of 3D seismic data acquisition was performed.

 

    Area 4: We (40% working interest) and Petrobras Uruguay (40% working interest), act as operator, together with Galp (20% working interest). Exploration is in the first geological and geophysical evaluation stage.

 

  6.2 Onshore:

In March 2012, the Arapey exploration permit was awarded in its entirety to us. The block has a surface area of 9,700 km2. Our main goal in this project is to explore unconventional resources. During 2012, 1,600 km2 of 2D seismic data was re-processed, in addition to field visits and geochemical, biostratography and sedimentology studies. Currently, a seismic interpretation study is being conducted and a gravimetry and magnetometry model is being built.

Additional information on our present activities

The following table shows the number of wells in the process of being drilled as of December 31, 2013.

 

     As of December 31, 2013  
Number of wells in the process of being drilled    Gross      Net  

Argentina

     80         78   

Rest of South America

     —          —    

North America

     0         0   

Total

     80         78   
  

 

 

    

 

 

 

Delivery commitments

We are committed to providing fixed and determinable quantities of crude oil and natural gas in the near future under a variety of contractual arrangements.

With respect to crude oil, we sell substantially all of our Argentine production to our Refining and Marketing business segment to satisfy our refining requirements. As of December 31, 2013, we were not contractually committed to deliver material quantities of crude oil in the future.

As of December 31, 2013, we were contractually committed to deliver 24.711 mmcm (or 873 bcf) of natural gas in the future, without considering export interruptible supply contracts, of which approximately 13.762, mmcm (or 486 bcf) will have to be delivered in the period from 2014 through 2016. According to our estimates as of December 31, 2013, our contractual delivery commitments for the next three years could be met with our own production and, if necessary, with purchases from third parties.

However, since 2004 the Argentine government has established regulations for both the export and internal natural gas markets which have affected Argentine producers’ ability to export natural gas. Consequently, since 2004 we have been forced in many instances to partially or fully suspend natural gas export deliveries that are contemplated by our contracts with export customers. Charges to income totaling Ps. 174 million, Ps. 212 million and Ps. 88 million have been recorded in 2013, 2012 and 2011, respectively, in connection with our contractual commitments in the natural gas export market.

Among the regulations adopted by the Argentine government, on June 14, 2007, the Argentine Secretariat of Energy passed Resolution No. 599/07, according to which we were compelled to enter into an agreement with the Argentine government regarding the supply of natural gas to the domestic market during the period 2007 through 2011 (the “Agreement 2007-2011”). On January 5, 2012, the Official Gazette published Resolution S.E. No. 172, which temporarily extends the rules and criteria established by Resolution No. 599/07 until new legislation is passed replacing such rules and criteria. On February 17, 2012, we filed a motion for reconsideration of Resolution S.E. No. 172 with the Argentine Secretariat of Energy.

As a consequence of such agreement, YPF has not entered into any contractual commitment to supply natural gas to distribution companies. The purpose of the Agreement 2007-2011 is to guarantee the supply of natural gas to the domestic market at the demand levels registered in 2006, plus the growth in demand by residential and small commercial customers. See “—Regulatory Framework and Relationship with the Argentine Government—Market Regulation” and “Item 3. Key Information—Risk Factors—Risks Relating to Argentina— We are subject to direct and indirect export restrictions, which have affected our results of operations and caused us to declare force majeure under certain of our export contracts.” According to our estimates as of December 31, 2013, supply requirements under the Agreement 2007-2011 (which we were compelled to enter into and which was approved by a resolution

 

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that has been challenged by us) could be met with our own production and, if necessary, with purchases from third parties. Additionally, on October 4, 2010, the National Gas Regulatory Authority (“ENARGAS”) issued Resolution No. 1410/2010, which approves the “Procedimiento para Solicitudes, Confirmaciones y Control de Gas” setting new rules for natural gas dispatch applicable to all participants in the gas industry and imposing new and more severe priority demand gas restrictions on producers. See “—Regulatory Framework and Relationship with the Argentine Government—Market Regulation.”

We have appealed the validity of the aforementioned regulations and have invoked the occurrence of a force majeure event (government action) under our export natural gas purchase and sale agreements, although certain counterparties to such agreements have rejected our position. See “Item 8. Financial Information—Legal Proceedings—Argentina-Accrued, probable contingencies—Alleged defaults under natural gas supply contracts.”

In addition, on May 3, 2012, the Expropriation Law was passed by Congress. The Expropriation Law declared achieving self-sufficiency in the supply of hydrocarbons, as well as in the exploitation, industrialization, transportation and sale of hydrocarbons, a national public interest and a priority for Argentina. In addition, its stated goal is to guarantee socially equitable economic development, the creation of jobs, the increase of the competitiveness of various economic sectors and the equitable and sustainable growth of the Argentine provinces and regions. After the takeover of the Company by the new shareholders in accordance with the Expropriation Law, on August 30, 2012, we approved and announced the Strategic Plan 2013-2017 establishing the basis of our development for the years to come. Such plan intends to reaffirm our commitment to creating a new model for the Company in Argentina which aligns our objectives, seeking profitable and sustainable growth that generates shareholder value, with those of the country, thereby positioning YPF as an industry-leading company aiming at the reversal of the national energy imbalance and the achievement of hydrocarbon self-sufficiency in the long term.

To achieve the goals set forth above, we intend to focus on (i) the development of unconventional resources, which we see as a unique opportunity because a) the expectation related to the existence of large volumes of unconventional resources in Argentina according to estimates of leading reports on global energy resources, b) we currently possess a relevant participation in terms of exploration and exploitation rights on the acreage in which such resources could be located, and c) we believe we can integrate a portfolio of projects with high production potential; (ii) the re-launch of conventional and unconventional exploration initiatives in existing wells and expansion to new wells, including offshore; (iii) an increase in capital and operating expenditures in mature areas with expected higher return and efficiency potential (through investment in improvements, increased use of new perforation machinery and well intervention); (iv) a return to active production of natural gas to accompany our oil production; and (v) an increase in production of refined products through an enhancement of the refining capacity (including improving and increasing our installed capacity and upgrading and converting our refineries). The previously mentioned initiatives have required and will continue to require organized and planned management of mining, logistic, human and financing resources within the existing regulatory framework, with a long-term perspective.

The investment plan related to our growth needs to be accompanied by an appropriate financial plan, whereby we intend to reinvest earnings, search for strategic partners and acquire debt financing at levels we consider prudent for companies in our industry. Consequently, the financial viability of these investments and hydrocarbon recovery efforts will generally depend, among other factors, on the prevailing economic and regulatory conditions in Argentina, the ability to obtain financing in satisfactory amounts at competitive costs, as well as the market prices of hydrocarbon products.

Natural gas supply contracts

The Argentine government has established regulations for both the export and internal natural gas markets which have affected Argentine producers’ ability to export natural gas under their contracts. YPF’s principal supply contracts are briefly described below.

We were committed to supply a daily quantity of 125 mmcf/d (or 4 mmcm/d) to the Methanex plant in Cabo Negro, Punta Arenas, in Chile (under three agreements which expire between 2017 and 2025). Pursuant to instructions from the Argentine government, deliveries were interrupted from 2007. In connection with these contracts, the Company has renegotiated them and has agreed to make investments, and export gas to temporarily import certain final products, subject to approval by the relevant government authorities, which have been recently obtained. As of the date of this annual report, the Company is fulfilling the agreed commitments mentioned above. To the extent that the Company does not comply with such agreements, we could be subject to significant claims, subject to the defenses that the Company might have.

We currently have several supply contracts with Chilean electricity producers (through the Gas Andes pipeline linking Mendoza, Argentina to Santiago, Chile, which has a transportation capacity of 353 mmcf/d (or 10 mmcf/d) (designed capacity with compression plants)), including:

 

    a 15-year contract (signed in 1998) to provide 63 mmcf/d (or 1.78 mmcm/d) to the San Isidro Electricity Company (Endesa) in Quillota, Chile (all of this plant’s natural gas needs);

 

    a 15-year contract (signed in 1999) to supply 20% of the natural gas requirements of the electricity company, Colbun (approximately 11 mmcf/d or 0.3 mmcm/d); and

 

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    a 15-year contract (signed in 2003) to supply 35 mmcf/d (or 1 mmcm/d) to Gas Valpo, a distributor of natural gas in Chile.

The contracts with Colbun and Gas Valpo have been modified and became interruptible supply contracts.

We also have a 21-year contract (entered into in 1999) to deliver 93 mmcf/d (or 2.63 mmcm/d) of natural gas to a Chilean distribution company (Innergy) that distributes natural gas to residential and industrial clients through a natural gas pipeline (with a capacity of 318 mmcf/d or 9 mmcm/d) connecting Loma La Lata (Neuquén, Argentina) with Chile, which was modified to become an interruptible supply contract.

Finally, we also have natural gas supply contracts with certain thermal power plants in northern Chile (Edelnor, Electroandina, Nopel and Endesa) utilizing two natural gas pipelines (with a carrying capacity of 300 mmcf/d (or 8.5 mmcm/d) each) connecting Salta, Argentina, to Northern Chile (Región II). The contracts with Edelnor and Electroandina have been modified, becoming interruptible supply contracts.

With respect to Brazil, we entered into a 20-year supply contract in 2000 to provide 99 mmcf/d (or 2.8 mmcm/d) of natural gas to the thermal power plant of AES Uruguaiana Empreendimentos S.A. (AESU) through a pipeline linking Aldea Brasilera, Argentina, to Uruguaiana, Brazil (with a capacity of 560 mmcf/d or 15.8 mmcm/d). In May 2009, AESU notified us of the termination of the contract. We are currently in arbitration with AESU. See “Item 8. Financial Information—Legal Proceedings—Argentina-Accrued, probable contingencies—Alleged defaults under natural gas supply contracts.”

Because of certain regulations implemented by the Argentine government (see “—The Argentine natural gas market,” below), we could not meet our export commitments and were forced to declare force majeure under our natural gas export sales agreements, although certain counterparties have rejected our position (see “Item 8. Financial Information—Legal Proceedings”). As a result of actions taken by the Argentine authorities, through measures described in greater detail under “—Regulatory Framework and Relationship with the Argentine Government—Market Regulation—Natural gas,” we have been forced to reduce the export volumes authorized to be provided under the relevant agreements and permits as shown in the chart below:

 

Year

   Maximum
Contracted
Volumes
(MCV)(1)
     Restricted
Volumes(2)
     Percentage
of
Restricted
Volumes
vs. MCV
 
     (mmcm)      (mmcm)         

2011

     6,120.4         2,785.3         45.5

2012

     6,137.2         2,728.4         44.5

2013

     6,120.4         1,828.3         29.9

 

(1) Reflects the maximum quantities committed under our natural gas export contracts. Includes all of our natural gas export contracts pursuant to which natural gas is exported to Chile.
(2) Reflects the volume of contracted quantities of natural gas for export that were not delivered.

The Argentine natural gas market

We estimate (based on preliminary reports of amounts delivered by gas transportation companies) that natural gas consumption in Argentina totaled approximately 1,697 bcf (or 47.9944 bcm) in 2013. We estimate that the number of users connected to distribution systems throughout Argentina amounted to approximately 8,2 million as of October 31, 2013. The domestic natural gas market has grown over recent years, driven by the forces of economic growth in Argentina.

In 2013, we sold approximately 46% of our natural gas to local residential distribution companies, approximately 7% to Compressed Natural Gas end users, approximately 38% to industrial users (including our affiliates Mega and Profertil) and power plants, less than 1% in exports to foreign markets (Chile) and 8% was consumed in YPF downstream operations. Sales are affected by increased consumption by residential consumers during winter months (June-August). During 2013, approximately 80% of our natural gas sales were produced in the Neuquina basin. In 2013, our domestic natural gas sales volumes were 8% lower than those in 2012, See “Item 5. Operating and Financial Review and Prospects—Factors Affecting Our Operations—Relative maturity of our oil and gas assets.”

The Argentine government has taken a number of steps aimed at satisfying domestic natural gas demand, including pricing and export regulations and higher export taxes and domestic market injection requirements. These regulations were applied to all Argentine producers, affecting natural gas production and exports from every producing basin. See “—Delivery commitments—Natural gas supply contracts.” Argentine producers, such as us, complied with the Argentine government’s directions to curtail exports in order to supply gas to the domestic market, whether such directions are issued pursuant to resolutions or otherwise. Resolutions adopted by the Argentine government provide penalties for non-compliance. Rule SSC No. 27/2004 issued by the Undersecretary of

 

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Fuels (“Rule 27”), for example, punishes the violation of any order issued thereunder by suspending or revoking the production concession. Resolutions No. 659 and No. 752 also provide that producers not complying with injection orders will have their concessions and export permits suspended or revoked and state that pipeline operators are prohibited from shipping any natural gas injected by a non-complying exporting producer.

The Argentine government began suspending natural gas export permits pursuant to Rule 27 in April 2004, and in June 2004 the Argentine government began issuing injection orders to us under Resolution No. 659. Thereafter, the volumes of natural gas required to be provided to the domestic market under the different mechanisms described above have continued to increase substantially. The regulations pursuant to which the Argentine government has restricted natural gas export volumes in most cases do not have an expiration date. We are unable to predict how long these measures will be in place, or whether such measures or any further measures adopted will affect additional volumes of natural gas.

See “—Regulatory Framework and Relationship with the Argentine Government” for additional information on these and other related regulations.

Argentine natural gas supplies

Most of our proved natural gas reserves in Argentina are situated in the Neuquina basin (approximately 66% as of December 31, 2013), which is strategically located in relation to the principal market of Buenos Aires and is supported by sufficient pipeline capacity during most of the year. Accordingly, we believe that natural gas from this region has a competitive advantage compared to natural gas from other regions. The capacity of the natural gas pipelines in Argentina has proven in the past to be inadequate at times to meet peak-day winter demand, and there is no meaningful storage capacity in Argentina. Since privatization, local pipeline companies have added capacity, improving their ability to satisfy peak-day winter demand but no assurances can be given that this additional capacity will be sufficient to meet demand.

In order to bridge the gap between supply and demand, especially with respect to peak-day winter demand, the Argentine government has entered into gas import agreements. The Framework Agreement between the Bolivian and the Argentine governments (executed on June 29, 2006) provides for natural gas imports from Bolivia to Argentina to be managed by ENARSA. In May 2010, we accepted the offer made by ENARSA for the sale to us of a minimum amount of 2.5 mmcm/d (or 88.28 mmcf/d) of natural gas obtained by ENARSA from the Republic of Bolivia through initially May 1, 2011 and then extended through May 1, 2013

In April 2013, quantity and price conditions were renegotiated with ENARSA. According to the new conditions, which are set to expire in May 1st, 2014, ENARSA undertook to sell us a minimum amount of 1.5 mmcm/d (or 52.97 mmcf/d) of natural gas during the winter of 2013 and 1.0 mmcm/d (or 35.31 mmcf/d) of natural gas during the summer of 2013 and 2014, at fixed seasonal prices. The offer also establishes an additional quantity of up to 2.5 mmcm/d (or 88.3 mmcf/d).

YPF has provided regasification services to ENARSA since May 2008. In 2011, YPF executed an extension to the Charter Party Agreement and a Regasification Services Agreement with Excelerate Energy to provide and operate a 151,000 cm (or 533,25 cf) regasification vessel moored at the Bahía Blanca port facilities, which allowed for the supply of up to 17 mmcm/d of natural gas(or 600.34 mmcf/d). In December 2013, as a result of the first automatic extension of 36 additional months already included in this Charter Party Agreement, the expiration date of such Agreement was extended to October 2018.

Since beginning its operations, the vessel referred to above has converted liquefied natural gas (LNG) into its gaseous state (natural gas) in an approximate amount of 11,12 bcm (or 392,7 bcf), which has been injected into a pipeline which feeds the Argentine national network. Most of this volume was supplied during the peak demand period, i.e., winter. In 2013, natural gas injected into the network amounted to approximately 3,31bcm (or 116,8 bcf).

In June 2011, YPF, acting as the operator of the UTE Escobar (a joint venture formed by YPF and ENARSA), finalized the construction of a new LNG Regasification Terminal (“LNG Escobar”), which is located in the km 74.5 of the Paraná River. The LNG Escobar terminal has a floating, storage and regasification unit permanently moored at the new port facilities, for which UTE Escobar has executed agreements with Excelerate Energy to provide and operate a 151,000 cm (or 533,252 cf) regasification vessel moored at the LNG Escobar terminal with the capacity to supply up to 17 mmcm/d (or 600 mmcf/d) of natural gas. Since beginning its operations the total volume injected into the network by this vessel was 6,51 bcm (or 229,9 bcf). In 2013 natural gas injected into the network amounted to approximately 2.72 bcm (or 96,2 bcf).

Natural gas transportation and storage capacity

Natural gas is delivered by us through our own gathering systems to the five trunk lines operated by Transportadora de Gas del Norte S.A and Transportadora de Gas del Sur S.A. from each of the major basins. The capacity of the natural gas transportation pipelines in Argentina is mainly used by distribution companies. A major portion of the available capacity of the transportation pipelines is booked by firm customers, mainly during the winter, leaving capacity available for interruptible customers to varying extents throughout the rest of the year.

 

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We have utilized natural underground structures located close to consuming markets as underground natural gas storage facilities, with the objective of storing limited volumes of natural gas during periods of low demand and selling such natural gas during periods of high demand. Our principal gas storage facility, “Diadema,” is located in the Patagonia region, near Comodoro Rivadavia city. The injection of natural gas into the reservoir started in January 2001.

Downstream

During 2013, our Downstream activities included crude oil refining and transportation, and the marketing and transportation of refined fuels, lubricants, LPG, compressed natural gas, and other refined petroleum products in the domestic wholesale and retail markets and certain export markets and also power generation and natural gas distribution.

The Downstream segment is organized into the following divisions:

 

    Refining and Logistic Division;

 

    Refining Division

 

    Logistic Division

 

    Trading Division

 

    Domestic Marketing Division;

 

    LPG General Division; and

 

    Chemicals;

We market a wide range of refined petroleum products throughout Argentina through an extensive network of sales personnel, YPF-owned and independent distributors, and a broad retail distribution system. In addition, we export refined products, mainly from the port at La Plata. The refined petroleum products marketed by us include gasoline, diesel fuel, jet fuel, kerosene, heavy fuel oil and other crude oil products, such as motor oils, industrial lubricants, LPG and asphalts.

Refining division

We wholly own and operate three refineries in Argentina:

 

    La Plata refinery, located in the province of Buenos Aires;

 

    Luján de Cuyo refinery, located in the province of Mendoza; and

 

    Plaza Huincul refinery, located in the province of Neuquén.

Our three wholly-owned refineries have an aggregate refining capacity of approximately 319,500 boe/d. The refineries are strategically located along our crude oil pipeline and product pipeline distribution systems. In 2013, our crude oil production, substantially all of which was destined to our refineries, represented approximately 80.4% of the total crude oil processed by our refineries. Through our stake in Refinor, we also own a 50% interest in a 26,100 boe/d refinery located in the province of Salta, known as Campo Durán.

The following table sets forth the throughputs and production yields for our three wholly-owned refineries for each of the three years ended December 31, 2013, 2012 and 2011:

 

     For the Year Ended December 31,  
     2013      2012      2011  
     (mmboe)  

Throughput crude

     101.4         105.4         103.8   

Throughput Feedstock

     4.1         3.0         3.1   

Throughput crude/Feedstock(1)

     105.5         108.4         107   

Production

        

Diesel fuel

     38.8         41.5         43.5   

Motor Gasoline

     23.1         23.1         22.7   

Petrochemical naphtha

     5.7         6.9         8.1   

Jet fuel

     6.1         6.6         6.4   

Base oils

     1.0         1.3         1.2   

 

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     For the Year Ended December 31,  
     2013      2012      2011  
     (thousands of tons)  

Fuel oil

     1,338         1,295         991   

Coke

     803         916         897   

LPG

     607         589         620   

Asphalt

     198         195         195   

During 2013, our global refinery utilization reached 86.9%, compared to 90.2% in 2012, both calculated over a nominal capacity of 319.5 mboe/d. See below for a description of certain considerations related to the incident that affected our refinery in La Plata during 2013 which limited our processing capacity during certain months of 2013.

The La Plata refinery is the largest refinery in Argentina, with a nominal capacity of 189,000 bbl/d. The refinery includes three distillation units, two vacuum distillation units, two catalytic cracking units, a coking unit, a coker naphtha hydrotreater unit, a platforming unit, a gasoline hydrotreater, two diesel fuel hydrofinishing units, an isomerization unit, an FCC (fluid cracking catalysts) naphtha splitter and desulfuration unit, and a lubricants complex. The refinery is located at the port in the city of La Plata, in the province of Buenos Aires, approximately 60 kilometers from the City of Buenos Aires. During 2013, the refinery processed approximately 147 mbbl/d. The capacity utilization rate at the La Plata refinery for 2013 was 77.6%. As mentioned below, capacity utilization was affected by the shut down of the Coke A unit. In 2012, the refinery processed approximately 165 mbbl/d. The capacity utilization rate at the La Plata refinery for 2012 was 87.5%. The crude oil processed at the La Plata refinery comes mainly from our own production in the Neuquina and Golfo San Jorge basins, representing 81.6% of the total crude oil processed. Crude oil supplies for the La Plata refinery are transported from the Neuquina basin by pipeline and from the Golfo San Jorge basin by vessel, in each case to Puerto Rosales, and then by pipeline from Puerto Rosales to the refinery.

On April 2, 2013 our facilities in the La Plata refinery were hit by a severe and unprecedented storm, recording over 400 mm of rainfall (which was the maximum ever recorded in the area). The heavy rainfall disrupted refinery systems and caused a fire that affected the Coke A and Topping C units in the refinery. This incident temporarily affected the crude processing capacity of the refinery, which had to be stopped entirely. Seven days after the event, the processing capacity was restored to about 100 mbbl/d through the commissioning of two distillation units (Topping IV and Topping D). By the end of May 2013, the Topping C unit resumed operations at full nominal capacity. The Coke A unit has been shut down permanently since the storm, affecting the volume of crude processed in the refinery, due to a reduction in conversion capacity. The storm resulted in a decrease in the volume of crude oil processed. YPF has an insurance policy that provides coverage for the loss of income and property damage due to incidents like the storm that affected the La Plata refinery. See note 11.b to the Audited Consolidated Financial Statements for information regarding the amount recognized in our result of operations in connection with our insurance coverage.

In order to increase the conversion capacity, a new Coke A facility is already under construction and is expected to be commissioned by 2015. The capacity of the new unit will be 1,160 bbl of fresh feed per hour. This feed will come from the bottoms of the Topping and Vacuum Units, providing the refinery with an increase in crude processing capacity. The production of the new facility will be a component for the blend to be used in the production of diesel fuel, motor gasoline; and coke.

In June 2012, we started up a new Gasoil Hydrotreater Unit (HTG “B”) and in November 2012 we finished a revamp of the former Gasoil Hydrotreater Unit (HTG “A”), seeking to comply with Resolution 478/09, which requires that diesel fuel that will be sold in large cities be produced with a maximum level of sulphur of 500 parts per million.

The Luján de Cuyo refinery has a nominal capacity of 105,500 bbl/d, the third largest capacity among Argentine refineries. The refinery includes two distillation units, a vacuum distillation unit, two coking units, one catalytic cracking unit, a platforming unit, a Methyl TerButil Eter (“MTBE”) unit, an isomerization unit, an alkylation unit, a naphtha splitter, a hydrocracking unit, a naphtha hydrotreater unit and two gasoil hydrotreating units. During 2013, the refinery processed approximately 106.4 mbbl/d. During 2013, the capacity utilization rate was 7.0% higher than in 2012. During 2012, the refinery processed approximately 99.4 mbbl/d. Because of its location in the western province of Mendoza and its proximity to significant distribution terminals owned by us, the Luján de Cuyo refinery has become the primary facility responsible for providing the central provinces of Argentina with petroleum products for domestic consumption. The Luján de Cuyo refinery receives crude supplies from the Neuquina and Cuyana basins by pipeline directly into the facility. Approximately 79.1% of the crude oil processed at the Luján de Cuyo refinery in 2013 (and 83.5% of the crude oil processed in this refinery in 2012) was produced by us. Most of the crude oil purchased from third parties comes from oil fields located in the provinces of Neuquén or Mendoza.

 

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In order to comply with government regulations on sulfur specifications for fuels, in June 2013, the Luján de Cuyo refinery started up a new naphtha Hydrotreater Unit (HTN II) and in July 2013, started up a new gasoil Hydrotreater Unit (HDS III).

The Plaza Huincul refinery, located near the town of Plaza Huincul in the province of Neuquén, has an installed capacity of 25,000 boe/d. During 2013, the refinery processed approximately 24.6 mbbl/d. In this period, the capacity utilization rate was 98.3%. During 2012, the refinery processed approximately 23.5 mbbl/d. In this period, the capacity utilization rate was 94.1%. The only products currently produced at the refinery are gasoline, diesel fuel and jet fuel, which are sold primarily in nearby areas and in the southern regions of Argentina. Heavier products, to the extent production exceeds local demand, are blended with crude oil and transported by pipeline from the refinery to La Plata refinery for further processing. The Plaza Huincul refinery receives its crude supplies from the Neuquina basin by pipeline. Crude oil processed at the Plaza Huincul refinery is mostly produced by us. In 2013, 22.6% of the refinery’s crude supplies were purchased from third parties, while in 2012, such purchases reached 18.5% of the refinery’s crude supplies.

Since 1997 and 1998, each of our refineries (La Plata, Luján de Cuyo, and Plaza Huincul) have been certified under the ISO (International Organization for Standardization) 9001 (quality performance) and ISO 14001 (environmental performance). All of them are also certified under the OHSAS 18001 (occupational health and safety performance) standard. The refineries maintain their systems under continuous improvement and revision by authorized organizations.

Logistic division

Crude oil and products transportation and storage

We have available for our use a network of five major pipelines, two of which are wholly-owned by us. The crude oil transportation network includes nearly 2,700 kilometers of crude oil pipelines with approximately 640,000 barrels of aggregate daily transportation capacity of refined products. We have total crude oil tankage of approximately 7 mmbbl and maintain terminal facilities at five Argentine ports.

Information with respect to YPF’s interests in its network of crude oil pipelines is set forth in the table below:

 

From

   To      YPF
Interest
    Length
(km)
    Daily
Capacity
(boe/d)
 

Puesto Hernández

     Luján de Cuyo refinery         100     528        85,200   

Puerto Rosales

     La Plata refinery         100     585        316,000   

La Plata refinery

     Dock Sud         100     52        106,000   

Brandsen

     Campana         30     168        120,700   

Puesto Hernández/ P. Huincul/Allen

     Puerto Rosales         37     888 (1)      232,000   

Puesto Hernández

     Concepción (Chile)         (2 )      428 (3)      114,000   

 

(1) Includes two parallel pipelines of 513 kilometers each from Allen to Puerto Rosales, with a combined daily throughput of 232,000 barrels.
(2) We hold a 36% interest in Oleoducto Transandino Argentina S.A., which operated the Argentine portion of the pipeline, and a 18% interest in Oleoducto Transandino Chile S.A., which operated the Chilean portion of the pipeline.
(3) This pipeline ceased operating on December 29, 2005.

We own two crude oil pipelines in Argentina. One connects Puesto Hernández to the Luján de Cuyo refinery (528 kilometers), and the other connects Puerto Rosales to the La Plata refinery (585 kilometers) and extends to Shell’s refinery in Dock Sud at the Buenos Aires port (another 52 kilometers). We also own a plant for the storage and distribution of crude oil in the northern province of 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 60,000 cubic meters of capacity. We own 37% of Oleoductos del Valle S.A., operator of an 888-kilometer pipeline network, its main pipeline being a double 513 kilometer pipeline that connects the Neuquina basin and Puerto Rosales.

We hold, through Oleoducto Transandino Argentina S.A. and Oleoducto Transandino Chile S.A., an interest in the 428-kilometer transandean pipeline, which transported crude oil from Argentina to Concepción in Chile. This pipeline ceased operating on December 29, 2005, as a consequence of the interruption of oil exports resulting from decreased production in the north of the province of Neuquén. The book value of the assets related to this pipeline was reduced to their recovery value.

We also own 33.15% of Terminales Marítimas Patagónicas S.A., operator of two storage and port facilities: Caleta Córdova (province of Chubut), which has a capacity of 314,000 cubic meters, and Caleta Olivia (province of Santa Cruz), which has a capacity of 246,000 cubic meters. We also have a 30% interest in Oiltanking Ebytem S.A., 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 Brandsen (60,000 cubic meters of storage capacity) to the Axion Energy Argentina S.R.L. (“Axion,” previously ESSO, a former subsidiary of ExxonMobil which was recently acquired by Bridas Corporation) refinery in Campana (168 km), in the province of Buenos Aires.

 

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In Argentina, we also operate a network of multiple pipelines for the transportation of refined products with a total length of 1,801 kilometers. We also own seventeen plants for the storage and distribution of refined products and seven LPG plants with an approximate aggregate capacity of 1,620,000 cubic meters. Three of our storage and distribution plants are annexed to the refineries of Luján de Cuyo, La Plata and Plaza Huincul. Ten of our storage and distribution plants have maritime or river connections. We operate 53 airplane refueling facilities (40 of them are wholly-owned) with a capacity of 22,500 mcm, and we also own 28 trucks, 123 manual fuel dispensers and 17 automatic fuel dispensers. These facilities provide a flexible countrywide distribution system and allow us to facilitate exports to foreign markets, to the extent allowed pursuant to government regulations. Products are shipped mainly by truck, ship or river barge.

Between 2010 and 2013, we completed the construction of tanks and facilities for the reception and blending of ethanol in the storage plants of Luján de Cuyo, Monte Cristo, La Matanza, San Lorenzo and Barranqueras, in order to facilitate compliance with the new specifications for gasoline set forth by Law 26,093. YPF is currently blending ethanol in the Luján de Cuyo, Monte Cristo, San Lorenzo, La Plata, Junín, Plaza Huincul, Barranqueras and La Matanza storage plants.

In 1998, our logistic activities were certified under ISO (International Organization for Standardization) 9001 (quality performance) and ISO 14001 (environmental performance), and recertified in 2012 under ISO 9001:2008 and ISO 14001:2004. In 2010, logistics activities were also certified under OHSAS 18001 (security performance) and recertified in 2013.

Trading division

Our Trading Division sells refined products and crude oil to international customers and crude oil to domestic oil companies. Exports may include crude oil, unleaded gasoline, diesel fuel, fuel oil, LPG, light naphtha and virgin naphtha.

This Division’s export sales are made principally to Brazil and the rest of South America. Sales to international customers for the years 2013 and 2012 totaled Ps.3,792 million and Ps.3,297 million, respectively, 10% and 45% of which, respectively, represented sales of refined products and 57% and 55% of which, respectively, represented sales of marine fuels. On a volume basis, in 2013 and 2012 sales to international customers consisted of 0.9 mmbbl and 3.3 mmbbl of refined products, respectively, and 4.11 mmbbl and 3.94 mmbbl of marine fuels, respectively. Domestic sales of crude oil totaled Ps.1,020 million and Ps.561 million or 2.5 mmbbl and 1.7 mmbbl in 2013 and 2012, respectively. Domestic sales of marine fuels totaled Ps.771 million and Ps.1080 million or 1.2 mmbbl and 1.3 mmbbl in 2013 and 2012, respectively. In addition, imports of high and low sulfur diesel fuel have increased, totaling 7.8 mmbbl in 2013.

Marketing division

Our Marketing Division, markets gasoline, diesel fuel, LPG and other petroleum products throughout the country and countries in the region. We supply all of the fuel market segments: retail, agriculture and industry, including transport. During 2013, we continued to hold a leading position in the sale of the highest quality naphtha (grade 3) “N-Premium” and in the sale of our standard quality naphtha “Super”, reaching a market share, according to our estimates, of 58.7% and 54.3% as of December 31, 2013 (compared with 61,3% and 53.1% in 2012), respectively. Our sales volume for N-Premiun was 1,147 mcm in 2013 (2.4% higher than in 2012) and 3,307 mcm for Super in 2013 (12.2% higher than in 2012).

With respect to diesel fuel, according to our own estimates, as of December 2013 our market share was 57.7% (57.9% in 2012), with an increase in our share of low sulphur content products. Along with D-Euro (10 ppm), for which sales volume was 886 mcm in 2013, our product D-500 (500 ppm) reached a volume of 1887 mcm compared to approximately 968 mcm in 2012, both fuels representing 36.4% of the total diesel fuel sales of the division. The strategy of promoting D-Euro allowed us to allocate a larger portion of our Ultradiesel fuel to the industry, transport and agriculture market segments, adequately supplying the market and minimizing the imports of D-Euro.

With respect to lubricants, we market our products through the three segments of the domestic market: retail, agriculture and industry. Our three manufacturing plants located in the CIE produce YPF’s lubricant, asphalt and paraffin lines of products. Our line of automotive lubricants, including mono-grade, multi-grade and oil, has received approvals and recommendations from leading global automotive manufacturers (Ford, Volkswagen, GM, Porsche and Scania).

Concerning LPG, we are engaged in the wholesale business, which encompasses LPG storage, logistics and commercialization to the domestic and foreign markets. We obtain LPG from our fractioning plants and refineries, as well as from third parties. In addition to butane and propane, we also sell propellants which are used in the manufacturing of aerosols.

With regard to the international market, in addition to the sale of lubricants in Brazil which began at the end of 2010, during 2013 we decreased the commercialization in Chile of lubricants and aviation fuels, mainly as a result of the incident that affected our refinery in La Plata, as mentioned above, which limited the product availability, reaching a volume of 10.8 mcm (-7.2% vs 2012) and 145,6 mcm (+ 1.43% vs 2012) respectively. Moreover, we currently market lubricants through exclusive distributors in four other countries outside Argentina (Uruguay, Paraguay, Bolivia and Ecuador).

 

 

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Retail

As of December 31, 2013, the Retail Division’s sales network in Argentina included 1,542 retail service stations (compared to 1,535 at December 31, 2012), of which 111 are directly owned by us, and the remaining 1,431 are affiliated service stations. OPESSA, our wholly-owned subsidiary, operates actively 174 of our retail service stations, 89 of which are directly owned by us, 26 of which are leased to ACA (Automóvil Club Argentino), and 59 of which are leased to independent owners.

According to our latest internal estimates, as of December 31, 2013, we were the main retailer in Argentina, with 34.1% of the country’s gasoline service stations, followed by Shell, Axion, Petrobras and Oil with shares of 14.5%, 10.8%, 6.4% and 6.3%, respectively. During 2013, our market share in diesel fuel and gasoline, marketed in all segments, remainde flat at 56.45%, according to our analysis of data provided by the Argentine Secretariat of Energy.

The “Red XXI” program, released in October 1997, has significantly improved operational efficiency in service stations. This program provides us with online performance data for each active station and connects most of our network of service stations. As of December 31, 2013, 1,280 stations were linked to the Red XXI network system.

Our convenience stores, “Full YPF” and “Full Express YPF”, included 386 and 95 point of sales as of December 31, 2013, respectively. Also, fuel sales are complemented by a modern oil change service, provide by our “YPF Boxes,” with 256 points of sales. Additionally, we have a marketing loyalty program called “Serviclub” with more than 500.000 card members.

In order to maintain unified standardsa YPF service station operation manual was developed to be implemented in all of our affiliated service stations, in 2013. The main objective of this model is to promote self-management of our service stations. The model is being implemented in stages, starting with 458 service stations throughout the country in 2013 and, and is expected to continue in 2014 with the rest of our service stations.

As of December 31, 2013, 15 modular systems were implemented in remote locations without supply alternatives (Mencue, Las Coloradas, El Huecu, Canalejas, for example). These so-called Social Supply Modules (MAS) have minimal environmental impact and an innovative and technological appearance, using alternative energy and requiring a minimum investment with low operating costs.

Agriculture

Through the Agriculture Division we sell diesel fuel, fertilizers, lubricants, agrochemicals, and ensiling bags (“silobolsa”), among other products, directly or through a network of 104 wholesaler bases (9 owned by YPF), offering an extensive portfolio to the agriculture producer and delivering products to the consumption site. As an option we accept as payment different types of grains, especially soybean, some of which are processed by third party companies to obtain meal and oil that we then sell mainly to the external market. In 2013, revenue from such exports amounted to U.S.$383 million. Although we encountered irregular market conditions in 2013, with serious draughts in the central and northern regions of Argentina affecting demand for fertilizers and agrochemicals, we received approximately 967,000 tons of grains (oilseed and cereal), primarily soy, a 23% increase compared to 2012. In addition, part of the oil produced from processing soybeans is used for the production of fatty acid methyl esters (“FAME”), a product which is used internally for the production of commercial grade diesel fuel, in accordance with local regulations. Oil produced from processing soybeans provides approximately 11% of YPF’s FAME needs.

Industry

This Division supplies the entire domestic industrial and transportation (ground and air) sectors, directly (over 5,500 customers) or through a network of 37 wholesale bases. We offer a broad portfolio of products and services tailor-made according to the needs of our customers. This portfolio includes products such as fuels (diesel, gasoline, fuel oil, Jet A-1), lubricants, coal, asphalts, paraffin’s and derivatives (sulfur, CO2, decanted oil, aromatic extract) and services such as “ YPF Road Card” (fleet management service for the transportation sector), “Expert Service” (certified quality and quantity of bulk lubricants), “Service & Quality” (technical pre—and-post-sales services, training and quality product control) and “Supply solution at customer facilities” (plant operation services and associated logistics).

Our vision as a strategic partner in the industry is to integrate the value chain by promoting energy solutions. In line with this, we have begun to develop a commercial network to meet the needs of road freight transport, energy supply contracts and lubricants to mining companies and energy supply projects in industrial clusters.

Lubricants and Specialties

        During 2013, our lubricants sales decreased by approximately 11.7% by volume compared to 2012. Sales to domestic markets decreased by 4.1%, while sales to export markets decreased by 35.9% from 37.7 mcm in 2012 to 24.1 mcm in 2013. Sales of asphalts and paraffins decreased by 4.8% and 11.2% respectively, compared to 2012.

We export to two main groups. First, to our fully-owned companies in Brazil and Chile, where sales volume decreased by 51% compared to the previous year in Brazil, and by 26% in Chile. On the other hand, we export to our distributor network located in Bolivia, Uruguay, Paraguay and Ecuador, in which sales volume decreased by 26% compared to 2012.

 

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Our lubricants and specialties unit has followed a strategy of differentiation, allowing it to achieve and maintain the leading position in the Argentinean market. Our market share as of December 31, 2013 was approximately 39.2%, compared to 42.2% as of December 31, 2012, according to our analysis of data provided by the Argentine Secretariat of Energy. As indicated above, our line of automotive lubricants has received approvals and recommendations from leading global automotive manufacturers (Ford, Volkswagen, GM, Porsche and Scania).

With respect to lubricants, the performance of the high-end light and heavy products represented by “Elaion” and “Extravida” respectively, were approximately the same in 2013 compared with the previous year (with 40.890 mcm in 2013 compared to 40.894 mcm in 2012).

Sales of our most important Elaion brand (automotive) in 2013 amounted to 12.983m3, a 5% increase compared to 2012.

Sales of the Elaion Moto (used for motorcycles) products (which started to be commercialized across the entire distributor and specialized products network in 2012) increased by 22.5% in 2013 compared to 2012.

Lubricants and Specialties Division has had an integrated management system since 1995. This division currently holds the following certifications: ISO 9001:2008, ISO 14001;2004, OSHAS 18001:2007 ISO/TS 16949-Third edition.

LPG

Through our LPG division we sell LPG to the foreign market, the domestic wholesale market and to distributors that supply the domestic retail market. The LPG division does not directly supply the retail market and such market is supplied by YPF Gas S.A. (we sold approximately 37% of our LPG production in 2013 to YPF Gas S.A.), which is not a YPF company.

We are the largest LPG producer in Argentina with sales in 2013 reaching approximately 593 mtn (compared with 566 mtn in 2012), of which approximately 432 mtn were sold in the domestic market (compared to 472 mtn in 2012). Our principal clients in the domestic market are companies that sell LPG in bottled or in bulk packing to end-consumers and the networks that distribute LPG to households in some regions. Additionally, exports in 2013 reached approximately 161 mtn, compared to 94 mtn in 2012, the main destinations being Chile, Paraguay and Bolivia. The transport of LPG to overseas customers is carried out by truck, pipeline and barges.

Total sales of LPG (excluding LPG used as petrochemical feedstock) were Ps.1,298 million and Ps.1,015 million in 2013 and 2012, respectively.

The LPG division obtains LPG from natural gas processing plants and from our refineries and petrochemical plant. We produced 524 mtn of LPG in 2013 (not including LPG destined for petrochemical usage), and also purchased LPG from third parties, as detailed in the following table:

 

     Purchase
(tons)
2013
 

LPG from Natural Gas Processing Plants:(1)

  

General Cerri

     20,938   

El Portón

     127,904   

San Sebastián

     7,972   
  

 

 

 

Total Upstream

     156,814   
  

 

 

 

LPG from Refineries and Petrochemical Plants:

  

La Plata Refinery

     223,279   

Luján de Cuyo Refinery

     118,470   

CIE

     25,349   
  

 

 

 

Total Refineries & Petrochemical Plants(2)

     367,098   
  

 

 

 

LPG purchased from joint ventures:(3)

     14,992   
  

 

 

 

LPG purchased from unrelated parties

     40,502   

Total

     579,406   
  

 

 

 

 

(1) The San Sebastian plant is a joint-venture in which we own a 30% interest; El Portón is 100% owned by us; General Cerri belongs to a third party with which we have a processing agreement.
(2) This production does not include LPG used as petrochemical feedstock (olefins derivatives, polybutenes and maleic).
(3) Purchased from Refinor.

We also have a 50% interest in Refinor, which produced 308 mtn of LPG in 2013.

 

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Chemicals

Petrochemicals are produced at our petrochemical complexes in Ensenada and Plaza Huincul. Additionally, we also own a 50% interest in Profertil a company that has a petrochemical complex in Bahía Blanca as mentioned below.

Our petrochemical production operations in the CIE are closely integrated with our refining activities (La Plata refinery). This close integration allows for a flexible supply of feedstock, the efficient use of byproducts (such as hydrogen) and the supply of aromatics to increase gasoline octane levels.

The main petrochemical products and production capacity per year are as follows:

 

     Capacity  
     (tons per year)  

CIE:

  

Aromatics

  

BTX (Benzene, Toluene, Mixed Xylenes)

     386.500   

Paraxylene

     38,000   

Orthoxylene

     25,000   

Cyclohexane

     95,000   

Solvents

     66,100   

Olefins Derivatives

  

MTBE

     60,000   

Butene I

     25,000   

Oxoalcohols

     35,000   

TAME

     105,000   

LAB/LAS

  

LAB

     52,000   

LAS

     25,000   

Polybutenes

  

PIB

     26,000   

Maleic

  

Maleic Anhydride

     17,500   

Plaza Huincul:

  

Methanol

     411,000   

Natural gas, the raw material for methanol, is supplied by our Exploration and Production business segment. The use of natural gas as a raw material allows us to monetize reserves, demonstrating the integration between the Chemical and the Upstream units.

We also use high carbon dioxide-content natural gas in our methanol production, allowing us to keep our methanol plant working at 50% of its production capacity during the winter period.

The raw materials for petrochemical production in the CIE, including virgin naphtha, propane, butane and kerosene, are supplied mainly by the La Plata refinery.

In 2013 and 2012, 71.1 % and 80.8%, respectively, of our petrochemicals sales (including propylene) were made in the domestic market. Petrochemical exports are destined to Mercosur countries, the rest of Latin America, Europe and the United States. The increase in exports in 2013 was due to products sold in Brazil, especially Solvente B.

We also participate in the fertilizer business, directly and through Profertil, our 50%-owned subsidiary. Profertil is a joint venture with Agrium (a worldwide leader in fertilizers), that started operations in 2001. Profertil has a production facility in Bahía Blanca which produces 1.1 million tons of urea and 750 thousand tons of ammonia per year. In addition, Profertil commercializes other nutrients and special blends prepared land to optimize land performance.

The CIE was certified under ISO 9001 in 1996 and recertified in 2013 (version 2008). The La Plata petrochemical plant was certified under ISO 14001 in 2001 and last recertified ( version 2004 ) , in 2013.The plant was also certified under OHSAS 18001 in 2005 and last recertified in 2013 ( version 2007). Since 2008, the plant verified the inventory of CO2 emissions under ISO 14064: 1 and, in 2011, inventories of CH4 and N2O emissions were verified as well. The laboratory of our Ensenada petrochemical plant was certified under ISO 17025 (version 2005), in 2005 and recertified in 2013.

 

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The certification of our petrochemical business covers the following processes:

 

    Refining process of crude oil and production of gas and liquid fuels, lubricant base stocks and paraffin, petroleum coke (green coke) and petrochemical products in the units of refining, conversion, lubricants, aromatics, olefins PIB / Maleic and LAB / LAS.

 

    Methanol production and storage.

 

    Management and development of the petrochemical business of the Company, planning and economical/commercial control, commercialization and post-sale service of petrochemical products.

Our Methanol plant was certified under ISO 9001 (version 2000) in December 2001, and last recertified in August 2012 (version 2008). The Methanol plant was also certified under ISO 14001 in July 1998 with the Plaza Huincul Refinery, and last recertified in August 2012 (version 2004), and it was also certified under OHSAS 18001 in December 2008, and last recertified in August 2012 (version 2007).

During 2010, YPF initiated the construction of a new continuous catalytic reforming unit (CCR) in the CIE Complex in Ensenada. Our total investment was U.S.$453.1 million . Start up was in the third quarter of 2013. The new production from this unit is satisfying the growing demand of high octane gasoline in the local market, while at the same time the CCR is providing hydrogen to the new hydrotreater unit in our La Plata refinery.

Other investments and activities

Natural gas liquids

We participated in the development of Mega to increase its ability to separate liquid petroleum products from natural gas. Mega allowed YPF, through the fractionation of gas liquids, to increase production at the Loma La Lata gas field by approximately 5.0 mmcm/d (or 176.5 mmcf/d) in 2001.

We own 38% of Mega, while Petrobras and Dow Chemical have stakes of 34% and 28%, respectively.

Mega operates:

 

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

 

    A natural gas liquids fractionation 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 that links both plants and that transports natural gas liquids.

 

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

Mega commenced operations at the beginning of 2001. Mega’s maximum annual production capacity is 1.35 million tons of natural gasoline, LPG and ethane. YPF is Mega’s main supplier of natural gas. The production of the fractionation plant is used mainly in the petrochemical operations of PBBPolisur S.A. (“PBB”), owned by Dow Chemical Company, and is also exported by tanker to Petrobras’ facilities in Brazil.

Pursuant to Decree No. 2067/08 and resolutions No. 1982/2011 and 1991/2011 of ENARGAS, since December 1, 2011, Mega is required to pay, on a monthly basis, a fee of Ps.0.405 per cubic meter of natural gas it purchases. This requirement has a significant impact on the operations of Mega and has been challenged by the company. On August 14, 2012, the Argentine Judicial Court issued a first instance ruling in favor of Mega, declaring the unconstitutionality of Decree No. 2067/08 and ENARGAS’ resolutions No. 1982/11 and 1991/11. Such ruling was appealed by both the ENARGAS and the Ministry of Planning. On June 18, 2013 the Federal Administrative Court of Appeals ruled in favor of Mega. Such ruling was appealed by both the ENARGAS and the Ministry of Planning before the Supreme Court. On February 25, 2013 Mega filed a petition for declaratory relief, petitioning the court to declare the unconstitutionality of Articles 53 and 54 of the General State Budget Law of 2013 that included in the provisions of Law 26,095 the fee created by Decree No. 2067/08 and ENARGAS resolutions No. 1982/2011 and 1991/2011. If such actions are not resolved in favor of Mega, this fee could significantly and adversely affect Mega’s ability to continue operating. The Audited Consolidated Financial Statements included elsewhere in this annual report do not include any impairment of assets to be accrued if Mega were to cease its activity.

Electricity market – generation

The Argentine Electricity Market

Argentina´s overall power generation was 3.53% higher in 2013 than 2012 according to Compañía Administradora del Mercado Mayorísta Eléctrico S.A. (CAMMESA). In 2013, 63.9% of Argentina’s power generation came from thermal power plants, 31% from hydroelectric power plants, 4.4% from nuclear power plants, 0.2% from spot imports from Uruguay and Paraguay and the balance from unconventional sources such as wind and solar power.

 

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Thermal power plants consumed 2,548,701 m3 of diesel oil (a 39.49% increase compared to 2012), 2,022,053 tn of fuel oil (a 29.30% decrease compared to 2012) and 13,571,018 dam3 of natural gas (a 3.3% decrease compared to 2012).

The average electricity production cost was 280.13 Ps./MWh, a 7% increase compared to 2012, while the annual average marginal cost of production was 809.83 Ps./MWh, a 15.6% increase compared to 2012.

In 2013, a new rule titled Resolution No. 95/2013 of the Secretariat of Energy changed the procedures and increased rates of remuneration that power generation plants receive, giving incentives to increase power plant reliability.

YPF in Power Generation

We participate in three power generation plants with an aggregate installed capacity of 1,622 megawatts (“MW”):

 

    a 100% interest in Central Térmica Tucumán (410 MW combined cycle) through YPF Energía Eléctrica S.A (“YPF EE”);

 

    a 100% interest in Central Térmica San Miguel de Tucumán (370 MW combined cycle) through YPF EE in which we have 100% interest; and

 

    a 40% interest in Central Dock Sud (775 MW combined cycle and 67 MW gas turbines), directly and through Inversora Dock Sud S.A.

On August 1, 2013, as a result of the spinoff of the assets of PlusPetrol Energy S.A., YPF EE was created to continue the power generation operations and businesses of Central Térmica Tucumán and Central Térmica San Miguel de Tucumán.

In 2013, YPF EE generated 4,504 GWh with its two combined cycles. Central Térmica Tucuman’s production was 2,133 GWh, and Central Termica San Miguel de Tucumán’s production was 2,371 Gwh. Additionally, Central Dock Sud generated 4,902 GWh. The energy produced by YPF EE and Central Dock Sud (9,406 GWh in total) represented 7.22 % of Argentina´s electricity generation in 2013.

The energy produced by Central Térmica Tucumán was 12.7% lower in 2013 compared to 2012 due to a serious failure inside the TG-01 unit on May 28. Maintenance works to restore the plant’s availability were finished on November 28 and were successful.

Energy produced by Central Térmica San Miguel de Tucumán in 2013 increased by 5% compared to 2012 despite a hot gas path inspection in unit TG-01 in November and December of 2013.

In August, after taking over the power plants, YPF EE accepted Resolution No. 95/2013 issued by the Secretariat of Energy, which allowed the company to increase rates of remuneration it received for spot electricity sales.

Energy produced by Central Dock Sud in 2013 increased by 24.6 % compared to 2012, primarily because planned major maintenance activities were carried out in Central Dock Sud’s generation facilities.

Additionally, we own assets that are part of Filo Morado Partnership, which has an installed capacity of 63 MW. However the relevant facilities have not been in operation since November 2008.

In addition to YPF EE, we also own and operate power plants supplied with natural gas produced by YPF, which produce power to supply our upstream and downstream activities:

 

    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).

Natural gas distribution

We currently hold through our subsidiary YPF Inversora Energética S.A. (“YPF Inversora Energética”) a 100 % stake in Gas Argentino S.A. (“GASA”), which in turn holds a 70% stake in Metrogas S.A. (“Metrogas”), a natural gas distribution company in the capital region and southern suburbs of Buenos Aires, and one of the main distributors in Argentina. During 2013, Metrogas distributed approximately 19.5 mmcm (689 mmcf) of natural gas per day to 2.3 million customers in comparison with approximately 20.4 mmcm (or 720mmcf) of natural gas per day distributed to 2.3 million customers in 2012. During May 2013, the Company, through its subsidiary YPF Inversora Energética S.A. took control of GASA (the controlling company of Metrogas), by acquiring shares representing a 54.67% interest in GASA. Prior to this acquisition, the Company through its interest in YPF Inversora Energética S.A. owned 45.33% of the capital of GASA (See Note 13 to the Audited Consolidated Financial Statements).

 

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GASA’s debt issues. On May 11, 2009, GASA was notified of a bankruptcy petition brought by an alleged GASA creditor, and on May 19, 2009, GASA filed a voluntary reorganization petition (“concurso preventivo”), which was approved on June 8, 2009. On February 10, 2012, GASA presented a draft debt restructuring proposal addressed to verified unsecured creditors who have been declared admissible. On August 6, 2012, GASA filed with the court an amended debt restructuring proposal. The final proposal includes a debt haircut of 61.4% of the claims admitted by the court and the issuance of new debt securities, with a maturity date of December 31, 2015, an option to extend to December 31, 2016 in case all accrued interest is paid on December 31, 2015, and an interest rate of 8.875%.

On August 22, 2012, the intervening court ratified the GASA agreement. The court protection proceedings will be finalized once the court issues a final declaration confirming that the terms of the agreement have been fulfilled.

Under the terms of the debt restructuring proposal, GASA will deliver new notes in exchange for outstanding claims. The proposal consists of the issuance of two new classes of notes: Class A (for the equivalent of 38.6% of existing notes), and Class B (contingent notes, for the equivalent of 61.4% of existing notes). The new Class B Notes will become due and payable only if the New Class A Notes are accelerated as a result of the occurrence of an event of default on or before December 2015. If an event of default does not occur prior to December 2015, the New Class B Notes will be automatically cancelled.

In compliance with the reorganization proceeding, on March 15, 2013, GASA issued new notes which were delivered in exchange for outstanding claims to financial creditors and non-financial creditors who were admitted and declared acceptable.

On June 13, 2013, GASA’s Board of Directors decided to approve the capitalization of 100% of accrued interest to be paid on June 15, 2013 in respect of the new notes issued on March 15, 2013, and the issuance of additional bonds to effect the capitalization. GASA has received the relevant regulatory authorizations and on July 15, 2013 it issued Additional Negotiable Obligations Class A-L for U.S.$1,167,480 and Class A-U for U.S.$29,632 for the capitalization of such accrued interest.

On July 12, 2013, the relevant court ordered the termination of the reorganization proceedings of GASA.

On October 9, 2013, GASA’s Board of Directors decided to approve the capitalization of 100% of accrued interest to be paid on December 15, 2013 in respect of the new notes issued on March 15, 2013, and the issuance of additional bonds to effect the capitalization. The Company has received the relevant regulatory authorizations and on January 14, 2014 it issued Additional Negotiable Obligations Class A-L for U.S.$2,336,009 and Class A-U for U.S.$59,296 for the capitalization of such accrued interest.

Metrogas debt reorganization. Given the adverse business conditions, Metrogas decided to file a voluntary reorganization petition (“concurso preventivo”) in June 2010.On the same date, Metrogas was notified of the Resolution No. I-1260 dictated by ENARGAS, which provided for the judicial intervention of the company. The resolution based the intervention decision on the filing of a voluntary reorganization petition by Metrogas, and stated that the intervention would control administration and disposition of Metrogas´activities that may in any manner affect its normal gas distribution. On July 15, 2010, the judge approved the commencement of Metrogas’s voluntary reorganization proceedings. On July 2011, Metrogas filed with the court a debt restructuring proposal, which was subsequently amended. The final proposal included a debt haircut of 46.8% of the claims admitted by the court and the issuance of new debt securities, with a maturity date of December 31, 2018 and an interest rate of 8.875%. In June 2012, a noteholders’ meeting was held within the framework of the Article 45 bis of the Bankruptcy Law, where the company’s proposal was unanimously approved. On July 13, 2012, Metrogas informed the Judge that it considered that had obtained the legal majorities established in the Article 45 of the Bankruptcy Law to approve the proposal.

On September 6, 2012, the intervening court ratified the Metrogas’s debt reorganization agreement. It also stipulated the creation of the final creditors’ committee, which will act as controlling agent to determine compliance with the agreement under the terms of articles 59 and 260 of the Bankruptcy Law.

Under the terms of the debt restructuring proposal, Metrogas would deliver new notes in exchange for outstanding claims. The proposal consists of the issuance of two new classes of notes: Class A (for the equivalent of 38.6% of existing notes), and Class B (contingent notes, for the equivalent of 61.4% of existing notes). The new Class B Notes will become due and payable only if the New Class A Notes are accelerated as a result of the occurrence of an event of default on or before December 2015. If an event of default does not occur prior to December 2015, the New Class B Notes will be automatically cancelled.

In compliance with the reorganization proceeding, on January 11, 2013, Metrogas issued new notes which were delivered in exchange for outstanding claims to financial creditors and non-financial creditors who were admitted and declared acceptable.

        On February 1 and February 13, 2013, Metrogas submitted to the intervening Court the documentation evidencing compliance with the debt exchange and the issuance of the new notes in order to obtain the removal of all general inhibitions and the formal declaration of completion of the reorganization proceedings, in accordance with the terms and conditions of Section 59 of the Argentine Bankruptcy Law.

On March 26, 2013, the Metrogas Board of Directors decided by a majority of votes to capitalize 100% of the portion subject to capitalization of accrued interest payable on June 30, 2013 and to issue Additional Negotiable Obligations to effect the capitalization.

Furthermore, the Board also decided to issue New Negotiable Obligations for the new unsecured creditors, as long as their claims have been verified in the relevant court in the reorganization proceedings.

 

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On July 25, 2013, Metrogas issued:

 

    Negotiable Obligations of Late Verification:

Series A-U: U.S.$5,087,459

Series B-U: U.S.$4,013,541

 

    Negotiable Obligations of Capitalization:

Additional Series A-L: U.S.$6,756,665

Additional Series A-U: U.S.$704,581

On May 31, 2013, ENARGAS published Resolution ENRG I-2,587/13 providing for the termination of the ENARGAS intervention in Metrogas.

On September 9, 2013, Metrogas made a formal presentation in connection with the reorganization proceedings requesting that the court formally declare the completion of the proceedings.

On October 9, 2013, the Metrogas Board of Directors decided by a majority of votes to capitalize 50% of the portion subject to capitalization of accrued interest payable on December 31, 2013 and to issue Additional Negotiable Obligations to effect the capitalization.

On January 29, 2014, Metrogas issued:

 

    Negotiable Obligations of Capitalization:

Additional Series A-L: U.S.$ 3.516.500

Additional Series A-U: U.S.$ 371.456

On November 18, 2013 Metrogas received a notice from the National Commercial Court of First Instance No. 26, Clerk’s Office No. 51, on the file entitled Metrogas S.A. about Reorganization Proceedings (filed on 10/17/2010 Court “D”). This notice, dated November 8, 2013, sets forth the Court’s decision to terminate the reorganization proceedings following Metrogas’s compliance with the terms of Sect. 59 of the Argentine Bankruptcy Law.

Metrogas tariff issues: In January 2002, pursuant to the Public Emergency Law, the tariffs that Metrogas charges to his customers were converted from their original dollar values to pesos at a rate of Ps.1.00 to U.S.$1.00. Thus the company’s tariffs were frozen since indexation of any kind is not permitted under the Public Emergency Law.

The Public Emergency Law also provides that the Argentine government should renegotiate public utility services agreements affected by the pesification. In February 2002, the Government issued Executive Order No. 293, which entrusted the Ministry of Economy with the renegotiation of public utility licenses and created a Committee for the Renegotiation of Contracts for Public Works and Services (“CRC”).

On July 3, 2003, by means of Executive Order No. 311/03, the “Unit for the Renegotiation and Analysis of Utility Contracts” (“UNIREN”) was created, aiming at giving advice during the renegotiation process of public works and services contracts and developing a regulatory framework common to all public services. The UNIREN continues the renegotiation process developed by the previous CRC.

The Emergency Law, which was originally schedule to be terminated in December 2003, was consecutively extended up to December 31, 2013 (currently extended until December 31, 2015). As a consequence, the renegotiation terms for licenses and concessions of utility services were also extended.

Metrogas and the UNIREN signed a temporary agreement in September 2008. In November 2012 the ENARGAS published the resolution No. 2,407/12 that authorizes Metrogas, following the terms of the temporary agreement previously mentioned, to apply a fixed amount in each customer’s bill, differentiating by type of customer according to the terms of the resolution and following the application of the methodology to be determined by the regulating agency. The resolution also states that the revenue charged by the company is to be deposited in a trust, and the funds collected are to be used for infrastructure investments, connection works, repowering, expansion and technology upgrades of the gas distribution system as well as any other cost associated with supply of gas distribution to customers. Metrogas needs to submit for approval of the execution committee (a regulatory committee created by Resolution 2407/12), a consolidation and expansion investment plan that expresses both physically and financially the details of such plan, which is to be aligned with the goals set in the trust’s contract between Metrogas and Nación Fideicomisos S.A. (“NAFISA”).

 

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Metrogas has been invoicing this new tariff charge since December 3, 2012.

On March 27, 2013, Metrogas received, from the Execution Committee, the notification of approval of the Consolidation and Expansion Investment Plan submitted on February 1, 2013.

Seasonality

For a description of the seasonality of our business, see “Item 5. Operating and Financial Review and Prospects—Factors Affecting Our Operations—Seasonality.”

Research and Development

Our R&D projects and activities are related to the entire hydrocarbons value chain, including exploration of new sources of oil or gas, extraction and conditioning for transportation, transformation and manufacturing of products at industrial facilities, and their distribution to the end customer. In 2013, approximately U.S.$16 million was allocated to R&D activities, 21% of which corresponded to cooperation with external technology centers. In order to support these R&D activities, we invested U.S.$4.5 million in new laboratory equipment.

Twelve important research and development projects are being partially subsidized by ANPCYC (a technology funding organization of the Argentine government). Uncertainty about what the main technologies in the future will be, prospective R&D results and business cycles led us to develop a technology plan that supports YPF’s business strategy. The focus of the plan includes hydrocarbons, the natural gas value chain, oil refining and oil derivatives and petrochemicals, the future diversification of energy uses, biofuels production and electricity generation.

R&D efforts were focused on the exploration and exploitation of unconventional resources, where our most important challenges required the development and application of very specific technologies, including design and development of simulation modeling, specific software, measuring equipment, fluid and materials design for optimizing perforation, hydraulic stimulation and production in our oilfields.

To optimize production of mature fields, we focused on the development of enhanced oil recovery technologies in order to increase recovery of oil from mature fields, and the development of new processes and materials to reduce the operational costs of our facilities.

Regarding refining and marketing of petroleum products, we applied our technological knowledge to optimize refinery operations and improve product quality, with a strong focus on achieving energy efficiency and environmental improvements.

In the petrochemical business, R&D activities were mainly focused on the development of new products with higher added value, such as special solvents, fertilizers and several agricultural products.

As of December 2013, our R&D projects portfolio consisted of 90 projects; 49 of which are under execution; 18 have been under technical-economic feasibility evaluation since December 31, 2013 and 23 of which are short-term high impact projects (Quick Wins).

At the end of 2013, YPF created YPF Tecnología S.A. (YPF holds an equity stake of 51% and CONICET, a state-owned research and development organization, holds an equity stake of 49%). The Board of Directors of YPF Tecnología consists of 3 directors appointed by YPF and 2 directors appointed by CONICET; additionally, the Chairman and the General Manager of YPF Tecnología are appointed by YPF. All lines of research and development carried out in YPF Tecnología will be in line with the needs of YPF.

For operation of YPF Tecnología, 5 hectares on the farm belonging to the National University of La Plata were acquired, and a 12,000 m2 building is planned for construction, with an estimated investment of U.S.$ 48 million (approximately U.S.$ 25 million relates to YPF’working interest). Completion of the work is expected in July 2015.

We expect that about 250 professionals will work in the new building, and their main goal is to acquire knowledge, to work in research and development about unconventional fields and secondary and tertiary oil recovery from mature fields. Additionally, development of alternative energies such as marine, geothermal, wind and solar energy, among others, will be part of their objectives. All of these activities will be supported by a staff of over 6,000 researchers and doctors from different areas of science, available to the CONICET through agreements with different universities and institutes of research and development.

 

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Competition

In our Exploration and Production business, we encounter competition from major international oil companies and other domestic oil companies in acquiring exploration permits and production concessions. Our Exploration and Production business may also encounter competition from oil and gas companies created and owned by certain Argentine provinces, including La Pampa, Neuquén, Santa Cruz and Chubut. See “—Regulatory Framework and Relationship with the Argentine Government—Overview” and “—Regulatory Framework and Relationship with the Argentine Government—Law No. 26,197.”

In this new context, several measures to promote the development of the industry have occurred. The Argentine government established a program to encourage additional production of natural gas which provides participating companies with a natural gas price of U.S.$/7.5 mmbtu for such additional production. . Producers who account for more than 70 % of the total natural gas production in the country participate in the program through contracts with the Argentine government. In late 2013, the Argentine government launched a similar program aimed at second tier producers (mid and small sized oil and gas companies with less diversified portfolios), to further promote the development of indigenous natural gas resources. Still another measure to promote de oil and gas industry was the creation of the “Investment Promotion Scheme for the Exploitation of Hydrocarbons” in Argentina set forth in in Decree 929/13. The decree creates an allowance to export, free of export taxes, up to 20% of hydrocarbons produced from projects requiring an investment in excess of U.S.$1 billion. Companies accessing the allowance can also retain dollars from their exports abroad. YPF believes that the new measures have helped attract strategic partners for the development of its unconventional resource base, such as Chevron and Dow Chemical, who in turn increase the number of participants in the market, thus causing the market to become more dynamic in the long term.

In our Refining and Marketing and Chemicals businesses, we face competition from several major international oil companies, such as Axion (previously ESSO, a former subsidiary of ExxonMobil which was recently acquired by Bridas Corporation), Shell and Petrobras, as well as several domestic oil companies. In our export markets, we compete with numerous oil companies and trading companies in global markets.

We operate in a dynamic market in the Argentine downstream industry and the crude oil and natural gas production industry. Crude oil and most refined products prices are subject to international supply and demand and, in certain cases, to Argentine regulations; accordingly, prices may fluctuate for a variety of reasons. On April 10, 2013, Resolution 35/2013 of the Argentine Secretariat of Domestic Commerce determined a maximum prices for fuel at all service stations for period of six months, which would not exceed the highest outstanding price as of April 9, 2013 in each of the regions identified in the Annex of the Resolution. See “—Regulatory Framework and Relationship with the Argentine Government.” Changes in the domestic and international prices of crude oil and refined products have a direct effect on our results of operations and on our levels of capital expenditures. See “Item 3. Key Information—Risk Factors—Risks Relating to the Argentine Oil and Gas Business and Our Business—oil and gas prices could affect our level of capital expenditures.”

On May 3, 2012, the Expropriation Law was passed by Congress. The Expropriation Law declared achieving self-sufficiency in the supply of hydrocarbons, as well as in the exploitation, industrialization, transportation and sale of hydrocarbons, a national public interest and a priority for Argentina. In addition, its stated goal is to guarantee socially equitable economic development, the creation of jobs, the increase of the competitiveness of various economic sectors and the equitable and sustainable growth of the Argentine provinces and regions. See “—Regulatory Framework and Relationship with the Argentine Government—The Expropriation Law.”

It is expected that the Argentine government’s actions taken to promote the industry along with the competitive responses of different players during 2013 have further strengthened the competitive nature of our industry and fostered a positive business environment. Nevertheless, we cannot assure you that all the actions and measures previously mentioned will be taken by the Argentine government and players in our industry.

As mentioned before, the Argentine peso has recently been subject to devaluation (approximately 23% during January 2014). The Argentine government is analyzing certain measures in response to such devaluation and the impact on the rest of the economy, including inflation. As discussed under the section “Risk Factors,” devaluation may adversely affect our business and results of operations. Similar implications may apply to our competitors, thus creating several competitive tensions beyond our control.

Environmental Matters

YPF-Argentine operations

Our operations are subject to a wide range of laws and regulations relating to the general impact of industrial operations on the environment, including air emissions and waste 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

 

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continue to make expenditures to comply with these laws and regulations. In Argentina, local, provincial and national authorities are moving towards more stringent enforcement of applicable laws. In addition, since 1997, Argentina has been implementing regulations that require our operations to meet stricter environmental standards that are comparable in many respects to those in effect in the United States and in countries within the European Community. These regulations establish the general framework for environmental protection requirements, including the establishment of fines and criminal penalties for their violation. We have undertaken measures to achieve compliance with these standards and are undertaking various abatement and remediation projects, the more significant of which are discussed below. We cannot predict what environmental legislation or regulation will be enacted in the future or how existing or future laws will be administered or enforced. Compliance with more stringent laws or regulations, as well as more vigorous enforcement policies of regulatory agencies, could require additional expenditures in the future by us, including the installation and operation of systems and equipment for remedial measures, and could affect our operations generally. In addition, violations of these laws and regulations may result in the imposition of administrative or criminal fines or penalties and may lead to personal injury claims or other liabilities.

We continued making investments in order to comply with new Argentine fuel specifications, pursuant to Resolution No. 1283/06 (amended by Resolution No. 478/2009) of the Argentine Secretariat of Energy (which replaces Resolution No. 398/03) relating to, among other things, the purity of diesel fuels. In the La Plata Refinery, a new ultra-low sulphur diesel fuel desulphuration plant (HTGB) was started up during 2012. In Luján de Cuyo refinery, new HDS III (diesel desulphuration) and HTN II (gasoline desulphuration) plants were started up in 2013. Additionally, we are increasing the tankage capacity of several of our terminals in order to optimize fuel distribution logistics. During 2013, new diesel tanks were implemented in Luján de Cuyo refinery and Montecristo terminal.

First stage projects related to biofuels, such as the addition of bioethanol to gasoline and FAME to diesel fuel, were accomplished by the end of 2009 and were operational by the beginning of 2010. During 2010 and 2011, additional bioethanol facilities at several terminals were installed and became ready to operate. Also, during this period, further investments were made in several terminals in order to allow the increased addition of FAME to diesel fuel and to improve the related biofuel logistics. A new facility for FAME blending was started up in 2013 in the Montecristo terminal. These projects are expected to enable YPF to comply with governmental requirements and to enter into the renewable energy sources market.

At each of our refineries during 2013, we continued with the initiatives relating to remedial investigations, feasibility studies and pollution abatement projects, which are designed to address potentially contaminated sites and air emissions. In addition, we have implemented an environmental management system to assist our efforts to collect and analyze environmental data in our upstream and downstream operations.

Also, as part of our commitment to satisfying domestic demand for fuels and meeting high environmental standards, during 2013 we started up a new CCR unit which involved an investment of U.S.$453 million. The plant uses the latest worldwide technology to perform chemical processes and improvements in productivity, safety and environmental standards. Additionally, the plant produces aromatics that can be used as octane enhancers for gasoline and automotive applications, as well as increases hydrogen production to feed the fuel hydrogenation processes to increase fuel quality and reduce sulfur content, further reducing the environmental impact of internal combustion engines.

We also continue construction of a new Coker Unit at La Plata refinery which will involve an investment of approximately U.S.$ 790 million, replacing the one that was recently severely damaged in the incident occurred on April 2, 2013. The new unit design is expected to optimize energy efficiency and minimize particulate matter emissions. We expect that this project will be completed by 2015.

In addition to the projects mentioned above, we have begun to implement a broad range of environmental projects in the domestic Exploration and Production and Refining and Marketing and Chemicals segments, such as a new flare in the Luján de Cuyo refinery, wastewater treatment and fire protection facilities.

We and several other industrial companies operating in the La Plata area have entered into a community emergency response agreement with three municipalities and local hospitals, firefighters and other health and safety service providers to implement an emergency response program. This program is intended to prevent damages and losses resulting from accidents and emergencies, including environmental emergencies. Similar projects and agreements were developed at other refineries and harbor terminals as well.

In 1991, we entered into an agreement with certain other oil and gas companies to implement a plan to reduce and assess environmental damage resulting from oil spills in Argentine surface waters to reduce the environmental impact of potential oil spills offshore. This agreement involves consultation on technological matters and mutual assistance in the event of any oil spills in rivers or at sea due to accidents involving tankers or offshore exploration and production facilities.

With respect to climate change, YPF has:

 

    committed to active promotion of identification and pursuit of opportunities to reduce greenhouse gas emissions in our operations; intensifying the execution of internal projects for the obtention of credits under the relevant clean development mechanisms through the efficient use of resources, contributing to the transfer of technology and to the sustainable development of Argentina;

 

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    obtained in December 2010 the approval of United Nations for an industrial project developed by YPF in Argentina defined as a Clean Development Mechanism (CDM) project, the first of its kind in the world. The project in the La Plata refinery reduces the emissions of greenhouse waste gases from fossil fuels used for process heating by replacing these fuels with recovered waste gases that were previously burned in flares. The project increases energy efficiency by reducing the demand for fuel oil and natural gas, allowing an annual emission reduction of approximately 200,000 tons of carbon dioxide. During 2013 the La Plata project reduced CO2e emissions by 79.150 tons;

 

    obtained in December 2011 the approval of United Nations for an industrial project developed by YPF in Argentina defined as a Clean Development Mechanism (CDM) at the Luján de Cuyo refinery. During 2013 the project reduced CO2e emissions by 9,820 tons;

 

    secured the approval of the CDM project: YPF developed a new methodology, which was approved by United Nations in 2007 under the name of AM0055 “Baseline and Monitoring Methodology for the recovery and utilization of waste gas in refinery facilities”. At the moment, 5 CDM projects in the world (Argentine, China, and Egypt) are being developed applying this methodology designed by YPF; and

 

    undertaken and verify third-party GHG (Greenhouse Gas) emission inventories for refining and chemical operations in accordance with the ISO 14064 standard. The inventory at CIE has been verified since 2008. In May 2013, the verification process inventory of greenhouse gases in the La Plata complex and the Luján de Cuyo refinery was completed. A 2013 inventory check, ending in the first half of 2014, is planned.

Our estimated capital expenditures are based on currently available information and on current laws. Any future information or future changes in laws or technology could cause a revision of such estimates. Moreover, while we do not expect environmental expenditures to have a significant impact on our future results of operations, changes in management’s business plans or in Argentine laws and regulations may cause expenditures to become material to our financial position, and may affect results of operations in any given year.

Unconventional oil and gas efforts led by YPF

Organically rich shale gas and oil accumulations are drawing increasing attention worldwide as sources of significant natural gas and oil reserves.

Since 2008, YPF has led various exploration and development projects related to unconventional resources in Argentina, the most important being in the Vaca Muerta formation within Neuquina basin.

Hydraulic stimulation, a long time proven technology, allows these resources to be extracted in an efficient and environmentally-friendly way. Hydraulic stimulation consists of injecting high pressure fluids and sand into the wellbore to crack the rock and enable the trapped hydrocarbons in the formation to flow to the surface like in any conventional well.

On average, this technique uses water (99.5% can be recycled), additives (0.5%) and sand (to keep the cracks opened). These additives are the same as those used in products for household and commercial applications, such as sodium chloride (used in table salt), borate salts (cosmetics), potassium carbonate (detergents), guar gum (ice cream) and isopropyl alcohol (used in deodorants).

The water used for the development of these reservoirs is acquired from bodies of running water and it represents only a small percentage of the total flow. An example would be the development of unconventional resources in the Neuquina basin, which would consume only 0.1% of the flow of the Neuquén rivers within a given year. This accounts for much lower volumes than those used for agricultural and human consumption in the province.

The water handling process complies with all applicable environmental regulations. The policies for the use, treatment and reuse of the water are rigorous and detailed controls are carried out by the environmental authorities at both the provincial and national level.

The Vaca Muerta formation if found between 2,500 and 4,000 meters of depth, more than 2,000 meters below the water table, which is usually located at depths of 300-500 meters. See “—Risk Factors— Risks Relating to the Argentine Oil and Gas Business and Our Business — Our domestic operations are subject to extensive regulation” and “—Oil and gas activities are subject to significant economic, environmental and operational risks.”

 

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YPF Holdings-Operations in the United States

Laws and regulations relating to health and environmental quality in the United States affect the operations of YPF Holdings, a 100% subsidiary of YPF. See “—Regulatory Framework and Relationship with the Argentine Government—U.S. Environmental Regulations.”

In 1995 YPF acquired Maxus Energy Corporation (“Maxus”), a U.S. corporation headquartered in Dallas, Texas. In connection with the sale of Diamond Shamrock Chemicals Company (“Chemicals Company”) to a subsidiary of Occidental Petroleum Corporation (“Occidental”) in 1986, Maxus had agreed to indemnify Chemicals and Occidental from and against certain liabilities relating to the business and activities of Chemicals Company 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 Company prior to the Closing Date.

In addition, under the agreement pursuant to which Maxus sold Chemicals Company to Occidental (the “1986 Stock Purchase Agreement”), Maxus is obligated to indemnify Chemicals Company and Occidental for certain environmental costs incurred on projects involving remedial activities relating to chemical plant sites or other property used to conduct Chemicals Company’s business 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 Company and as to which Chemicals Company provided written notice prior to September 4, 1996, irrespective of when Chemicals Company incurs and gives notice of such costs.

Tierra Solutions Inc. (“Tierra”), a subsidiary of YPF Holdings, was formed to deal with the results of the alleged obligations of Maxus, as described above, resulting from actions or facts that occurred primarily between the 1940s and 1970s while Chemicals Company was controlled by other companies.

See “Item 8. Financial Information—Legal Proceedings—YPF Holdings” below for a description of environmental matters in connection with YPF Holdings.

Offshore Operations

All of the offshore fields in which we have a working interest have in place a Health, Safety, Environmental and Community (“HSEC”) management plan to address risks associated with the project. In addition, all drilling projects that we operate or in which we have a working interest have in place an Emergency Response Plan (“ERP”), including response plans for oil spills.

The HSEC management plans in place include ERPs for an oil spill or leak, and these ERPs are regularly assessed for adequacy in light of available information and technical developments. We review our HSEC management plans for our drilling projects on a regular basis to seek to ensure that appropriate measures are in place for every phase of the project.

Neptune

Under the Neptune Joint Operating Agreement, the operator of the field is required to maintain an HSEC management plan based on health and safety rules agreed upon between the operator and the non-operators. As a non-operator, we are entitled to review the operator’s safety and environmental management systems for compliance with the HSEC management plan, but we do not have direct control over the measures taken by the field operator to remedy any particular spill or leak. The operator of the field is required to notify all non-operators, including us, in writing of any spill greater than 50 barrels, among other incidents.

The HSEC management plan for Neptune, which is maintained by the operator of the field, includes the following critical elements and procedures:

 

    Emergency Shutdown (ESD) System

 

    Fire Detection System

 

    Combustible Gas Detection System

 

    Ventilation Systems (Mechanical)

 

    Spill/Leak Containment Systems

 

    Vent/Flare System

 

    Subsea Well Control System

 

    Temporary Refuge

 

    Escape Water Craft

 

    Critical Power Systems (including electric, pneumatic, hydraulic)

 

    Emergency Communication Systems

 

    Hull Ballast Systems

 

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    Hull Tendons

 

    Riser Hang-off Components

 

    Design HSE Case Critical Procedures

 

    Emergency Shutdown (ESD) Procedures

 

    Evacuation Procedures

 

    Dire Fighting Procedures

 

    Helideck Operations Procedures

 

    Emergency Response Procedures

Additionally, the operator’s Emergency, Preparedness and Response procedures include teams that generally are on call 24 hours a day, 7 days a week and are summoned based on the severity level of the emergency (1-low up to 7-extreme) through a third party London based emergency dispatcher. The operator’s teams include the following:

 

    Fire and Safety Team (FAST) Site Response (Level 1 to 2 severity): Provides initial on-scene response and incident containment in the operator’s tower building including evacuation, first aid, CPR, search and rescue.

 

    Incident Management Team (IMT)—Asset/Local Response (Level 2 to 5 severity): Provides tactical, operational, HSEC, planning, logistical and regulatory notification support and other technical expertise. An Incident Management Center is established for the IMT in one room of the operator building in Houston. The IMT is also supported by a drilling-specific team from the World Wide Drilling group for any incidents during drilling and completions activities.

 

    Emergency Management Team (EMT)—Petroleum/Asset Response (Level 3 to 5 severity): Provides support to the IMT with emphasis on strategic issues affecting the Asset and Petroleum including internal and external stakeholder management, financial, legal, and communication support. An Emergency Management Room for the EMT is established in one room of the operator’s building in Houston.

 

    Crisis Management Team (CMT)—Operator Response (Levels 5 to 7 severity): Provides support to the EMT with emphasis on strategic issues affecting the operator including communications with stakeholders at senior levels.

 

    External Response Organizations: Summoned for any severity level based on needs assessed by the IMT, EMT or CMT. Includes government response groups and external oil spill response organizations and emergency management consultants.

The HSEC management plan is administered by a leading oil field services company contracted by the operator and includes a plan of action in the event of a spill or leak.

Property, Plant and Equipment

Most of our property, which comprises investments in assets which allow us to explore and/or exploit crude oil and natural gas reserves, as well as refineries, storage, manufacturing and transportation facilities and service stations, is located in Argentina. As of December 31, 2013, more than 99% of our proved reserves were located in Argentina. We also own property outside Argentina, mainly in the United States. See “—Exploration and Production—Principal properties.”

Our petroleum exploration and production rights are in general based on sovereign grants of concession. Upon the expiration of the concession, our exploration and production assets associated with the particular property subject to the relevant concession revert to the government. In addition, as of December 31, 2013, we leased 85 service stations to third parties and also had activities with service stations that are owned by third parties and operated by them under a supply contract with us for the distribution of our products.

Insurance

The scope and coverage of the insurance policies and indemnification obligations discussed below are subject to change, and such policies are subject to cancellation in certain circumstances. In addition, the indemnification provisions of certain of our drilling, maintenance and other service contracts may be subject to differing interpretations, and enforcement of those provisions may be limited by public policy and other considerations. We may also be subject to potential liabilities for which we are not insured or in excess of our insurance coverage, including liabilities discussed in “Item 3. Key Information—Risk Factors—Risks Relating to the Argentine Oil and Gas Business and Our Business—We may not have sufficient insurance to cover all the operating hazards that we are subject to,” “Item 3. Key Information—Risk Factors—Risks Relating to the Argentine Oil and Gas Business and Our Business—The oil and gas industry is subject to particular economic and operational risks” and “Item 3. Key Information—Risk Factors—Risks Relating to the Argentine Oil and Gas Business and Our Business—We may incur significant costs and liabilities related to environmental, health and safety matters.”

 

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Argentine operations

We insure our operations against risks inherent in the oil and gas industry, including loss of or damage to property and our equipment, control-of-well incidents, loss of production or profits incidents, removal of debris, sudden and accidental pollution, damage and clean up and third-party claims, including personal injury and loss of life, among other business risks. Our insurance policies are typically renewable annually and generally contain policy limits, exclusions and deductibles.

Our insurance policy covering our Argentine operations provides third party liability coverage up to U.S.$400 million per incident, with a deductible of U.S.$2 million, in each and every loss . Certain types of incidents, such as intentional pollution and gradual and progressive pollution are excluded from the policy’s coverage. The policy’s coverage extends to control-of-well incidents, defined as an unintended flow of drilling fluid, oil, gas or water from the well that cannot be contained by equipment on site, by increasing the weight of drilling fluid or by diverting the fluids safely into production. Our policy provides coverage for third-party liability claims relating to pollution from a control-of-well event ranging from U.S.$75 million for certain onshore losses and a maximum combined single limit of U.S.$250 million for offshore losses.

Our insurance policy also covers physical loss or damage in respect of, but not limited to, onshore and offshore property of any kind and description (whether upstream or downstream), up to U.S.$1,500 million per incident, with varying deductibles of between U.S.$1 million and U.S.$10 million, including loss of production or profits with deductibles of 90 days for downstream operations and 60 days with a minimum deductible of U.S.$20 million for upstream operations.

Argentine regulations require us to purchase from specialized insurance companies (Aseguradoras de Riesgos de Trabajo – ART) insurance covering the risk of personal injury and loss of life of our employees. Our insurance policies cover medical expenses, lost wages and loss of life, in the amounts set forth in the applicable regulations. These regulatory requirements also apply to all of our contractors.

We have adopted a position in agreements entered into with contractors that provide drilling services, well services or other services to our exploration and production operations (“E&P Services Agreements”), whereby contractors are generally responsible for indemnifying us to varying degrees for certain damages caused by their personnel and property above the drilling surface. Similarly, we are generally responsible under our drilling contracts to indemnify our contractors for any damages caused by our personnel and property above the drilling surface.

In connection with losses or liabilities resulting from damages caused below the surface, we have agreed with some contractors that YPF assumes responsibility for indemnifying our contractors provided that such damages below the surface have not been caused by the negligence of the contractor in which case the contractor shall be liable up to a limited amount agreed by the parties in the E&P Services Agreements. However, we have also agreed with a number of contractors that YPF shall be responsible and shall indemnify contractors for damages or liabilities caused below the surface, unless such damages or liabilities result from the gross negligence or wilful misconduct of contractors, in which case contractor shall be liable in full or, in certain cases, up to a limited amount.

E&P Services Agreements usually establish that contractors are responsible for pollution or contamination including clean-up costs and third party damages caused above the surface by the spill of substances under their control, provided that the damage has been caused by the negligence or willful misconduct of the contractor. In the event of pollution or contamination produced below the surface, contractors shall also typically be liable for damages caused due to the contractor’s negligence or willful misconduct. However, in this last case the damages are also usually limited to an amount agreed upon by the parties in the E&P Services Agreement.

We are also partners in several joint ventures and projects that are not operated by us. Contractual provisions, as well as our obligations arising from each agreement, can vary. In certain cases, insurance coverage is provided by the insurance policy entered into by the operator, while in others, our risks are covered by our insurance policy covering our Argentine operations. In addition, in certain cases we may contract insurance covering specific incidents or damages which are not provided for in the operator’s insurance policy. We also retain the risk for liability not indemnified by the field or rig operator in excess of our insurance coverage.

With respect to downstream servicing contracts, contractors are usually responsible for damages to their own personnel and caused by them to third parties and they typically indemnify us for damages to equipment. A mutual hold-harmless provision for indirect damages such as those resulting from loss of use or loss of profits is normally included.

Gulf of Mexico operations

Our operations in the Gulf of Mexico currently include only our 15% working interest, through Maxus U.S. Exploration Company (a YPF Holdings subsidiary), in the Neptune field, which is operated by BHP Billiton.

 

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Our Gulf of Mexico operations insurance policy provides coverage for property damage, operator’s extra expenses, loss of production and third party liability, subject to certain customary exclusions such as property damage resulting from wear and tear and gradual deterioration. The following limits and deductibles are applicable to our insurance coverage:

 

    Physical loss or damage to owned property and equipment is limited to U.S.$772 million (100%), with deductibles ranging from U.S.$0.75 million (100%) to U.S.$1.25 million (100%).

 

    Coverage for operator’s extra expenses is subject to a limit of U.S.$250 million (100%) per incident, with a U.S.$1 million deductible (100%) (U.S.$10 million (100%) in respect of incidents related to windstorms). Our control-of-well insurance mainly covers expenses incurred on account of bringing or attempting to bring under control a well that is out of control or extinguishing a well fire, including but not limited to the value of materials and supplies consumed in the operation, rental of equipment, fees of individuals, firms or corporations specializing in fire fighting and/or the control of wells, deliberate well firing, and cost of drilling direction relief well(s) necessary to bring the well(s) under control or to extinguish the fire and excludes bodily injury, damage to property of others and loss of hole (except in respect of certain costs incurred in re-drilling and/or recompletion as a result of an occurrence). For the purpose of this insurance, a well shall be deemed to be out of control only when there is an unintended flow from the well of drilling fluid, oil, gas or water (1) which flow cannot promptly be (a) stopped by use of the equipment on site and/or the blowout preventor, storm chokes or other equipment; or (b) stopped by increasing the weight by volume of drilling fluid or by use of the other conditioning materials in the well; or (c) safely diverted into production; or (2) which flow is deemed to be out of control by the appropriate regulatory authority.

 

    Loss of production following damage to insured property or extra expenses paid by the operator arising from an incident is covered up to a limit of U.S.$32.0 million (15%) with a waiting time of 60 days

 

    Gulf of Mexico windstorm coverage is subject to a limit of U.S.$40 million (for the insured’s interest) with respect to each and every occurrence and in the aggregate in respect of Named Gulf of Mexico Windstorm (this limit applies across Property, OEE and Loss of Production); which is excess of a retention of U.S.$10 million (100%) each and every occurrence plus 90 days waiting time in respect of loss of production.

 

    Coverage for third party liability arising from personal injury or loss of life, which extends to our employees, contractors and unaffiliated third party individuals, is subject to a limit of U.S.$333.33 million (100 %) per incident, with a U.S.$5,000 deductible (100%).

According to the procedures applicable to the Neptune field consortium, its operator shall use its best efforts to require contractors to carry insurance coverage for worker compensation, employers liability, commercial general liability and automobile liability. To our knowledge, based solely on inquiries made to the operator, this policy is applicable to all contracts and a majority of contractors carry such insurance. Contractors providing aircraft and watercraft are required to provide further insurance cover relevant to this activity. In addition, our own insurance policy covers risks of physical loss or damage incurred as a result of negligence by any contractor to supplies and equipment of every kind and description incidental to our operations, including, among others, materials, equipment, machinery, outfit and consumables, in each case as defined in our insurance contract and with the deductibles and exclusions specified therein. The consortium or operator, as applicable, is responsible for indemnifying a contractor for damages caused by its personnel and property. The operator or consortium, as applicable, is also responsible for indemnifying contractors for certain losses and liabilities resulting from pollution or contamination.

Regulatory Framework and Relationship with the Argentine Government

Overview

The Argentine oil and gas industry has been and continues to be subject to certain policies and regulations that have resulted in domestic prices that are, in some cases, lower than prevailing international market prices, export regulations, domestic supply requirements that oblige us from time to time to divert supplies from the export or industrial markets in order to meet domestic consumer demand, and incremental export duties on the volumes of hydrocarbons allowed to be exported. These governmental pricing and export regulations and tax policies have been implemented in an effort to satisfy increasing domestic market demand.

The Argentine oil and gas industry is regulated by Law No. 17,319, referred to as the “Hydrocarbons Law,” which was enacted in 1967 and amended by Law No. 26,197 in 2007, which established the general legal framework for the exploration and production of oil and gas, and Law No. 24,076, referred to as the “Natural Gas Law,” enacted in 1992, which established the basis for deregulation of natural gas transportation and distribution industries.

 

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The National Executive Office issues the regulations to complement these laws. The regulatory framework of the Hydrocarbons Law was established on the assumption that the reservoirs of hydrocarbons would be national properties and Yacimientos Petrolíferos Fiscales Sociedad del Estado, our 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 provided for transfer of hydrocarbon reservoirs from the Argentine government to the provinces, subject to the existing rights of the holders of exploration permits and production concessions.

The Privatization Law granted us 24 exploration permits covering approximately 132,735 square kilometers and 50 production concessions covering approximately 32,560 square kilometers. The Hydrocarbons Law limits to five the number of concessions that may be held by any one entity, and also limits the total area of exploration permits that may be granted to a single entity. Based on our interpretation of the law, we were exempted from such limit with regard to the exploration permits and production concessions awarded to us by the Privatization Law. Nevertheless, the National Department of Economy of Hydrocarbons (Dirección Nacional de Economía de los Hidrocarburos), applying a restrictive interpretation of Section 25 and 34 of the Hydrocarbons Law, has objected to the award of new exploration permits and production concessions in which we have a 100% interest. As a result, our ability to acquire 100% of new exploration permits and/or production concessions has been hindered, although this interpretation has not impeded our ability to acquire any permits or concessions where an interest is also granted to other parties. As a consequence of the transfer of ownership of certain hydrocarbons areas to the provinces, we participate in competitive bidding rounds organized since the year 2000 by several provincial governments for the award of contracts for the exploration of hydrocarbons.

In October 2004, the Argentine Congress enacted Law No. 25,943 creating a new state-owned energy company, 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 natural gas, and the generation, transportation, distribution and sale of electricity. Moreover, Law No. 25,943 granted to ENARSA all exploration concessions in respect to offshore areas located beyond 12 nautical miles from the coast line up to the outer boundary of the continental shelf that were vacant at the time of the effectiveness of this law (i.e., November 3, 2004).

In addition, in October 2006, Law No. 26,154 created a regime of tax incentives aimed at encouraging hydrocarbon exploration and which apply to new exploration permits awarded in respect of the offshore areas granted to ENARSA and those over which no rights have been granted to third parties under the Hydrocarbons Law, provided the provinces in which the hydrocarbon reservoirs are located adhere to this regime. Association with ENARSA is a precondition to qualifying for the benefits provided by the regime created by Law No. 26,154. The benefits include: early reimbursement of the value added tax for investments made and expenses incurred during the exploration period and for investments made within the production period; accelerated amortization of investments made in the exploration period and the accelerated recognition of expenses in connection with production over a period of three years rather than over the duration of production; and exemptions to the payment of import duties for capital assets not manufactured within Argentina. As of the date of this annual report, we have not used the tax incentives previously mentioned.

Ownership of hydrocarbons reserves was transferred to the provinces through the enactment of the following legal provisions that effectively amended the Hydrocarbons Law:

 

    In 1992, the Privatization Law approved the transfer of the ownership of hydrocarbons reserves to the provinces where they are located. However, this law provided that the transfer was conditioned on the enactment of a law amending the Hydrocarbons Law to contemplate the privatization of Yacimientos Petrolíferos Fiscales Sociedad del Estado.

 

    In October 1994, the Argentine National Constitution was amended and pursuant to Article 124 thereof, provinces were granted the primary control of natural resources within their territories.

 

    In August 2003, Executive Decree No. 546/03 transferred to the provinces the right to grant exploration permits, hydrocarbons exploitation and transportation concessions in certain locations designated as “transfer areas,” as well as in other areas designated by the competent provincial authorities.

 

    In January 2007, Law No. 26,197 acknowledged the provinces’ ownership of the hydrocarbon reservoirs in accordance with Article 124 of the National Constitution (including reservoirs to which concessions were granted prior to 1994) and granted provinces the right to administer such reservoirs.

The Expropriation Law

On May 3, 2012, the Expropriation Law (Law No. 26,741) was passed by the Argentine Congress and, on May 7, it was published in the Official Gazette of the Republic of Argentina. The Expropriation Law declared achieving self-sufficiency in the supply of hydrocarbons, as well as in the exploitation, industrialization, transportation and sale of hydrocarbons, a national public interest and a priority for Argentina. In addition, its stated goal is to guarantee socially equitable economic development, the creation of jobs, the increase of the competitiveness of various economic sectors and the equitable and sustainable growth of the Argentine provinces and regions.

 

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Article 3 of the Expropriation Law provides that the principles of the hydrocarbon policy of the Republic of Argentina are the following:

 

  (a) Promote the use of hydrocarbons and their derivatives to promote development, and as a mechanism to increase the competitiveness of the various economic sectors and that of the provinces and regions of Argentina;

 

  (b) Convert hydrocarbon resources to proved reserves and their exploitation and the restoration of reserves;

 

  (c) Integrate public and private capital, both national and international, into strategic alliances dedicated to the exploration and exploitation of conventional and nonconventional hydrocarbons;

 

  (d) Maximize the investments and the resources employed for the achievement of self-sufficiency in hydrocarbons in the short, medium and long term;

 

  (e) Incorporate new technologies and categories of management that contribute to the improvement of hydrocarbon exploration and exploitation activities and the advancement of technological development in the Republic of Argentina in this regard;

 

  (f) Promote the industrialization and sale of hydrocarbons with a high added-value;

 

  (g) Protect the interests of consumers with respect to the price, quality and availability of hydrocarbon derivatives; and

 

  (h) Export hydrocarbons produced in excess of local demand, in order to improve the trade balance, ensuring a rational exploitation of the resources and the sustainability of its exploitation for use by future generations.

According to Article 2 of the Expropriation Law, the National Executive Office will be responsible for setting forth this policy and shall introduce the measures necessary to accomplish the purpose of the Expropriation Law with the participation of the Argentine provinces and public and private capital, both national and international.

Creation of Federal Council of Hydrocarbons

Article 4 of the Expropriation Law provides for the creation of a Federal Council of Hydrocarbons which shall include the participation of (a) the Ministry of Economy, the Ministry of Federal Planning, the Ministry of Labor, and the Ministry of Industry, through their respective representatives; and (b) the provinces of Argentina and the City of Buenos Aires, through the representatives that each may appoint. According to Article 5 of the Expropriation Law, the responsibilities of the Federal Council of Hydrocarbons will be the following: (a) promote the coordinated action of the national and provincial governments, with the purpose of ensuring the fulfillment of the objectives of the Expropriation Law; and (b) adopt decisions regarding all questions related to the accomplishment of the objectives of the Expropriation Law and the establishment of the hydrocarbons policy of the Republic of Argentina that the National Executive Office may submit for consideration.

Expropriation of shares held by Repsol YPF

For purposes of ensuring the fulfillment of its objectives, the Expropriation Law provides for the expropriation of 51% of the share capital of YPF represented by an identical stake of Class D shares owned, directly or indirectly, by Repsol YPF and its controlled or controlling entities. The shares subject to expropriation, which have been declared of public interest, will be assigned as follows: 51% to the federal government and 49% to the governments of the provinces that compose the National Organization of Hydrocarbon Producing States. In addition, the Expropriation Law provides for the expropriation of 51% of the share capital of the company Repsol YPF GAS S.A. represented by 60% of the Class A shares of such company owned, directly or indirectly, by Repsol Butano S.A. and its controlled or controlling entities.

As of the date of this annual report, the transfer of the shares subject to expropriation between National Executive Office and the provinces that compose the National Organization of Hydrocarbon Producing States was still pending. According to Article 8 of the Expropriation Law, the distribution of the shares among the provinces that accept their transfer must be conducted in an equitable manner, considering their respective levels of hydrocarbon production and proved reserves.

To ensure compliance with its objectives, the Expropriation Law provides that the National Executive Office, by itself or through an appointed public entity, shall exercise all the political rights associated with the shares subject to expropriation until the transfer of political and economic rights to the provinces that compose the National Organization of Hydrocarbon Producing States is completed. In addition, in accordance with Article 9 of the Expropriation Law, each of the Argentine provinces to which shares subject to expropriation are allocated must enter into a shareholder’s agreement with the federal government which will provide for the unified exercise of its rights as a shareholder.

Any future transfer of the shares subject to expropriation is prohibited without the permission of the National Congress by a vote of two-thirds of its members.

In accordance with article 9 of the Expropriation Law, the appointment of YPF S.A. Directors representing the expropriated shares shall be completed proportionately considering the holdings of the Argentine government and provincial governments, and one Director shall represent the employees of the Company.

 

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In accordance with Article 16 of the Expropriation Law, the national government and the provinces must exercise their rights pursuant to the following principles: (a) the strategic contribution of YPF to the achievement of the objectives set forth in the Expropriation Law; (b) the administration of YPF pursuant to the industry’s best practices and corporate governance, safeguarding shareholders’ interests and generating value on their behalf; and (c) the professional management of YPF.

See “Risk Factors—Risks Relating to Argentina—The Argentine federal government will control the Company according to domestic energy policies in accordance with Law 26,741 (the “Expropriation Law”)” for a description of the Agreement between Repsol and the Argentine Republic relating to compensation for the expropriation of 51% of the share capital of YPF owned, directly or indirectly, by Repsol, and “Risk Factors—Risks Relating to the Argentine Oil and Gas Business and Our Business—We face risk relating to certain legal proceedings” for a description of the arrangement between Repsol and YPF for the withdrawal of certain claims and actions relating to such expropriation.

    Legal nature of the Company

YPF will continue to operate as a publicly traded corporation pursuant to Chapter II, Section V of Law No 19,550 and its corresponding regulations, and will not be subject to any legislation or regulation applicable to the management or control of companies or entities owned by the national government or provincial governments.

In accordance with Article 17 of the Expropriation Law, YPF will resort to internal and external sources of funding, strategic alliances, joint ventures, transitory business unions, and cooperation partnerships whether public, private or mixed companies, domestic and foreign.

You can find a copy of an English translation of the Expropriation Law in the report on Form 6-K furnished by the Company to the SEC on May 9, 2012 (Item 1).

Decree No. 530/12

In connection with the Expropriation Law, Decree No. 530/12 of the National Executive Office provided for the temporary intervention of YPF for a period of thirty days which was extended by Decree 732/12 until our shareholders’ meeting held on June 4, 2012, with the aim of securing the continuity of its business and the preservation of its assets and capital, securing the provision of fuel and the satisfaction of the country’s needs, and guaranteeing that the goals of the Expropriation Law are met. In accordance with Article 3 of Decree No. 530/2012, the powers conferred by YPF’s by-laws on the Board and/or the President of the Company were temporarily granted to Julio M. De Vido (the “Intervenor”). On May 7, 2012, through Decree No. 676/2012 of the National Executive Office, Mr. Miguel Matías Galuccio was appointed General Manager of the Company during the Intervention. At our general shareholders’ meeting held on June 4, 2012, our shareholders appointed new members of our Board of Directors. See “Item 6. Directors, Senior Management and Employees—Management of the Company.”

Law No. 26,197

Law No. 26,197, which amended the Hydrocarbons Law, transferred to the provinces and the City of Buenos Aires the ownership over all hydrocarbon reservoirs located within their territories and in the adjacent seas up to 12 nautical miles from the coast. Law No. 26,197 also provides that the hydrocarbon reservoirs located beyond 12 nautical miles from the coast to the outer limit of the continental shelf shall remain within the ownership of the federal government.

Pursuant to Law No. 26,197, the Argentine Congress shall continue to enact laws and regulations to develop oil and gas resources existing within all of the Argentine territory (including its sea), but the governments of the provinces where the hydrocarbon reservoirs are located shall be responsible for the enforcement of these laws and regulations, the administration of the hydrocarbon fields and shall act as granting authorities for the exploration permits and production concessions. However, the administrative powers granted to the provinces shall be exercised within the framework of the Hydrocarbons Law and the regulations which complement this law.

Consequently, even though Law No. 26,197 established that the provinces shall be responsible for administering the hydrocarbon fields, the Argentine Congress retained its power to issue rules and regulations regarding the oil and gas legal framework. Additionally, the Argentine government retained the power to determine the national energy policy.

It is expressly stated that the transfer will not affect the rights and obligations of exploration permit and production concession holders, or the basis for the calculation of royalties, which shall be calculated in accordance with the concession title and paid to the province where the reservoirs are located.

Law No. 26,197 provides that the Argentine government shall retain the authority to grant transportation concessions for: (i) transportation concessions located within two or more provinces territory and (ii) transportation concessions directly connected to export pipelines for export purposes. Consequently, transportation concessions which are located within the territory of only one province and which are not connected to export facilities shall be transferred to the provinces.

 

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Finally, Law No. 26,197 grants the following powers to the provinces: (i) the exercise in a complete and independent manner of all activities related to the supervision and control of the exploration permits and production concessions transferred by Law No. 26,197; (ii) the enforcement of all applicable legal and/or contractual obligations regarding investments, rational production and information and surface fee and royalties payment; (iii) the extension of legal and/or contractual terms; (iv) the application of sanctions provided in the Hydrocarbons Law; and (v) all the other faculties related to the granting power of the Hydrocarbons Law.

Decree No. 1277/2012

Decree No. 1277/12 derogated main previsions about free availability of hydrocarbons which were specifically contained in section 5 subsection d) and section 13, 14 and 15 of Decree No. 1055/89, sections 1, 6 and 9 form Decree No. 1212/89 and sections 3 and 5 from Decree No. 1589/89. Decree No. 1277/12 enacted the “Hydrocarbons Sovereignty Regime Rules”, regulating Law No. 26,741.

This regulation creates a commission, the Commission for Planning and Strategic Coordination of the National Plan of Hydrocarbons Investments (the “Commission”) which consists of representatives of Secretariat of Economic Policy and Development Planning, Secretariat of Energy and Argentine Secretariat of Domestic Commerce. This Commission is entrusted with annually making the National Plan for Hydrocarbons Investments. According to section 6 of Annex I, the aforementioned plan will take into consideration a complete and integral evaluation of the hydrocarbons sector of Argentina and will establish the criteria and the desirable goals on matter of investments in exploration, exploitation, refining, transport and commercialization of hydrocarbons.

Decree No. 1277/12 requires every company that performs activities of exploration, exploitation, refining, transport and commercialization of hydrocarbons to supply the Commission with all technical information required. The Commission is also responsible for a National Hydrocarbons Investments Registry for all companies performing the activities of exploration, exploitation, refining, transport and commercialization. All these companies will also need to file an annual plan of investments before the Commission.

With respect to the refining industry, Decree No. 1277/12 gives the Commission the power to regulate the minimum utilization rates for primary or secondary refining. It also has the ability to enact measures of promotion and coordination, aimed to guarantee the development of the local processing capacity according with the goals established by the National Plan of Hydrocarbons Investments.

With respect to commercialization, the Commission is entitled to publish reference prices of every component of the costs and sales prices of hydrocarbons and fuels, which should enable the recovery of production costs plus a reasonable profit margin. The Commission also has to periodically audit the reasonability of the informed costs and the respective sales prices, being entitled to adopt necessary measures to prevent or correct distortive practices that might affect the interests of consumers.

Public Emergency

On January 6, 2002, the Argentine Congress enacted Law No. 25,561, the Public Emergency and Foreign Exchange System Reform Law (“Public Emergency Law”), which represented a profound change of the economic model effective as of that date, 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, the Public Emergency Law granted to National Executive Office the authority to enact all necessary regulations in order to overcome the economic crisis which Argentina was then facing. The situation of emergency declared by Law No.25,561 has been extended until December 31, 2015 by Law No.26,896. The National Executive Office is authorized to execute the powers delegated by Law No.25,561 until such date.

After the enactment of the Public Emergency Law, several other laws and regulations have been enacted. The following are to overcome the economic crisis, including (1) the conversion into pesos of deposit, obligations and tariffs of public services, among others, (2) the imposition of customs duties on the export of hydrocarbons with instructions to the National Executive Office to set the applicable rate thereof. The application of these duties and the instruction to the National Executive Office have been extended until January 2017 by Law 26,732. See also “—Taxation” below.

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 National Executive Office to establish a national policy for development of Argentina’s hydrocarbon reserves, with the principal purpose of satisfying domestic demand.

        Pursuant to the Hydrocarbons Law, exploration and production of oil and gas is carried out through exploration permits, production concessions, exploitation contracts or partnership agreements. The Hydrocarbons Law also permits surface reconnaissance of territory not covered by exploration permits or production concessions upon authorization of the Argentine Secretariat of Energy and/or competent provincial authorities, as established by Law No. 26,197, and with permission of the private property owner. Information obtained as a result of surface reconnaissance must be provided to the Argentine Secretariat of Energy and/or competent provincial authorities, which 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.

 

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Under the Hydrocarbons Law, the federal and/or competent provincial authorities may grant exploration permits after submission of competitive bids. Permits granted to third parties in connection with the deregulation and demonopolization process were granted in accordance with procedures specified in Executive Decrees No. 1055/89, 1212/89 and 1589/89 (the “Oil Deregulation Decrees”), and permits covering areas in which our predecessor company, Yacimientos Petrolíferos Fiscales S.A., was operating at the date of the Privatization Law and that were granted to us by such law. In 1991, the National Executive Office established a program under the Hydrocarbons Law (known as Plan Argentina) pursuant to which exploration permits were 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 kilometers (15,000 square kilometers 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. The first basic term is up to four years, the second basic term is up to three years, the third basic term is up to two years and the extension term is up to five years. 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, with the permit holder deciding which portion of the acreage to keep. 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 has the right to obtain an exclusive concession for the production and development of this oil and gas. The Hydrocarbons Law provides that oil and gas production concessions shall remain in effect for 25 years as from the date of the award of the production concession, in addition to any remaining exploration term at the date of such award. The Hydrocarbons Law further provides for the concession term to be extended for up to 10 additional years, subject to terms and conditions approved by the grantor at the time of the extension. Under Law No. 26,197, the authority to extend the terms of current and new permits and concessions has been vested in the governments of the provinces in which the relevant block is located (and the Argentine government in respect of offshore blocks beyond 12 nautical miles). In order to be entitled to the extension, a concessionaire, such as us, must have complied with all of its obligations under the Hydrocarbons Law, including, without limitation, evidence of payment of taxes and royalties and compliance with environmental, investment and development obligations. Upon the expiration of the 10-year extension period of the current concessions, the provinces are entitled to award new concessions or contracts in respect of the relevant blocks.

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 “—Transportation of Liquid Hydrocarbons” below.

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.

According to the Hydrocarbons Law, holders of production concessions, including us, are also required to pay royalties to the province where production occurs. A 12% royalty, and an additional 3% royalty in certain concessions for which the expiration has been extended (see “—Extension of Exploitation Concessions in the province of Neuquén, —Mendoza, —Salta, —Santa Cruz, —Chubut and —Tierra del Fuego” below), is payable on the value at the wellhead (equal to the price upon delivery of the product, less transportation, treatment costs and other deductions) of crude oil production and natural gas volumes commercialized. Notwithstanding the foregoing, in the extension of our concessions in Santa Cruz, we agreed to a 10% royalty (instead of 12%) for nonconventional hydrocarbons. The value is calculated based upon the volume and the sale price of the crude oil and gas produced, less the costs of transportation and storage. In addition, pursuant to Resolution S.E. 435/04 issued by the Argentine Secretariat of Energy, if a concession holder allots crude oil production for further industrialization processes at its plants, the concession holder is required to agree with the provincial authorities or the Argentine Secretariat of Energy, as applicable, on the reference price to be used for purposes of calculating royalties.

As a result of Resolution 394/07 of the Ministry of Economy, among other things, which increased duties on exports of certain hydrocarbons, Argentine companies began to negotiate the price for crude oil in the domestic market, which would in turn be used as the basis for calculation of royalties. In January 2013, the Ministry of Economy issued Resolution 1/13, modifying exhibit I of Resolution 394/07 of the Ministry of Economy, thus setting a new reference price for crude oil (U.S.$70 per barrel) and certain products.

 

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In addition to the above, the Public Emergency Law, which created the export withholdings, established that export withholdings were not to be deducted from the export price for purposes of calculating the 12% royalties. The royalty expense incurred in Argentina is accounted for as a production cost (as explained in “—Exploration and Production—Oil and gas production, production prices and production costs”). According to the Hydrocarbons Law, 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.

Furthermore, pursuant to Sections 57 and 58 of the Hydrocarbons Law, holders of exploration permits and production concessions must pay an annual surface fee that is based on acreage of each block and which varies depending on the phase of the operation, i.e., exploration or production, and in the case of the former, depending on the relevant period of the exploration permit. Additionally, Executive Decree No. 1,454/07, dated October 17, 2007, increased the amount of exploration and production surface fees expressed in Argentine pesos that are payable to the provinces in which the hydrocarbon fields are located or, in the case of offshore and certain other fields, to the Argentine government.

Exploration permits and production or transportation concessions may be terminated 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;

 

    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.

The Hydrocarbons Law further provides that a cure period, of a duration to be determined by the Argentine Secretariat of Energy and/or the competent provincial authorities, must be provided to the defaulting concessionaire prior to the termination.

When a production concession expires or terminates, all oil and gas wells, operating and maintenance equipment and facilities automatically revert to the province where the reservoir is located or to the Argentine government in the case of reservoirs under federal jurisdiction (i.e., located on the continental shelf or beyond 12 nautical miles offshore), without compensation to the holder of the concession.

Certain of our production concessions expire in 2017 (See “—Risk Factors— Risks Relating to the Argentine Oil and Gas Business and Our Business — Argentine oil and gas production concessions and exploration permits are subject to certain conditions and may be cancelled or not renewed.”). The granting of an extension is an unregulated process and normally involves lengthy negotiations between the applicant and the relevant government. Although the Hydrocarbons Law provides that applications must be submitted at least six months prior to the concession expiration date, it is industry practice to commence the process far earlier, typically as soon as the technical and economic feasibility of new investment projects beyond the concession term become apparent.

On March 16, 2006, the Argentine Secretariat of Energy issued Resolution S.E. No. 324/06 establishing that holders of exploration permits and hydrocarbon concessions must file with such agency details of their proved reserves existing in each of their areas, certified by an external reserves auditor, each year. Holders of hydrocarbon concessions that export hydrocarbons are obliged to certify their oil and gas proved reserves. The aforementioned certification only has the meaning established by Resolution S.E. No. 324/06, according to which it is not to be interpreted as a certification of oil and gas reserves under the SEC rules. See “—Exploration and Production—Oil and Gas Reserves.”

In March 2007, the Argentine Secretariat of Energy issued Resolution No 407/07 which approved new regulations concerning the Oil and Gas Exploration and Production Companies Registry. According to Resolution No 407/07, YPF, as a holder of Production Concessions and Exploration Permits, is banned from hiring or in any way benefiting from any company or entity which is developing or has developed oil and gas exploration activities within the Argentine continental platform without an authorization from the relevant Argentine authorities.

In addition, by Resolution 130/2013 of the Ministry of Economy published on April 19, 2013 in the Official Gazette, the Argentine Oil Fund was created. This fund will manage resources for an amount of up to U.S.$2,000 million, to provide loans or capital contributions or acquire financial instruments for the implementation of projects of exploration, exploitation, processing and marketing of hydrocarbons in relation to oil and gas companies in which the Argentine government has interest or the exercise of economic and political rights. See “Item 5—Operating and Financial Review and Prospects-Liquidity and Capital Resources.”

 

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Extension of Exploitation Concessions in the province of Neuquén

In addition to the extension in 2002 of the expiration date of the exploitation concession of the Loma La Lata field until 2027, during the years 2008 and 2009, YPF entered into a number of agreements with the province of Neuquén, pursuant to which the exploitation concession terms of several areas located within the province were extended for a 10-year term, which now expires between 2026 and 2027. As a condition to the extension of the concession terms, YPF has undertaken to do the following under the relevant agreements: (i) to make initial payments to the province of Neuquén in an aggregate amount of approximately U.S.$204 million; (ii) to pay the province of Neuquén an “Extraordinary Production Royalty” of 3% of the production of the areas affected by this extension (in addition, the parties agreed to make additional adjustments of up to an additional 3% in the event of extraordinary income, as defined in each agreement); (iii) to carry out exploration activities in the remaining exploration areas and make certain investments and expenditures until the expiration of the concessions in an aggregate amount of approximately U.S.$3,512 million, and (iv) to make “Corporate Social Responsibility” contributions to the province of Neuquén in an aggregate amount of approximately U.S.$23 million.

Decree No. 1208/2013 of the Province of Neuquén approves an agreement entered into between the Province of Neuquén and YPF S.A. dated July 24, 2013, that (i) separates from the Loma La Lata—Sierra Barrosa concession a surface area of 327.5 km2, (ii) incorporates the separated surface area into the Loma Campana concession and (iii) extends the Loma Campana concession to November 11, 2048, according to Decree 929/13.

Extension of Exploitation Concessions in the province of Mendoza

In April 2011, YPF entered into an agreement with the province of Mendoza to extend the term of the exploitation concessions identified below, and the transportation concessions located within the province, which was ratified by a decree published in July 2011.

The agreement between YPF and the province of Mendoza provides, inter alia, the following:

 

    Concessions involved: El Portón, Barrancas, Cerro Fortunoso, El Manzano, La Brea, Llancanelo, Llancanelo R, Puntilla de Huincán, Río Tunuyan, Valle del Río Grande, Vizcacheras, Cañadón Amarillo, Altiplanicie del Payún, Chihuido de la Sierra Negra, Puesto Hernández and La Ventana;

 

    Exploitation concession terms, which were originally set to expire in 2017, were extended for a 10-year term; and

 

    YPF has undertaken: (i) to make initial payments to the province of Mendoza in an aggregate amount of approximately U.S.$135 million, on the date specified in the agreement; (ii) to pay the province of Mendoza an “Extraordinary Production Royalty” of 3% of the production of the areas included in the agreement; (iii) to carry out exploration activities in the remaining exploration areas and make certain investments and expenditures in a total amount of U.S.$4,113 million until the expiration of the extended term, as stipulated in the agreement; (iv) to contribute with U.S.$16.2 million to a “Social Infrastructure Investment Fund” to satisfy community needs in the province of Mendoza, and; (v) to make payments equal to 0.3% of the annual amount paid as “Extraordinary Production Royalty” in order to fund the purchase of equipment and finance training activities in certain government agencies of the province of Mendoza.

Extension of Exploitation Concessions in the province of Santa Cruz

In November 2012, YPF entered into an agreement with the province of Santa Cruz to extend the term of the exploitation concessions identified below, which was ratified by a provincial law published on November 2012.

The agreement between YPF and the province of Santa Cruz provides, inter alia, the following:

 

    Concessions involved: Cerro Piedra-Cerro Guadal Norte; Cañadón de la Escondida-Las Heras; Cañadón León-Meseta Espinosa; Los Monos; Pico Truncado-El Cordón; Los Perales-Las Mesetas; El Guadal-Lomas del Cuy; Cañadón Vasco; Cañadón Yatel, Magallanes (portion located in Santa Cruz) and Barranca Yankowsky;

 

    Exploitation concession terms, which were originally set to expire in 2017, are extended for a 25-year term; and

 

    YPF has undertaken:

(i) to make initial payments to the province of Santa Cruz in an aggregate amount of approximately of U.S.$200 million, on the date specified in the agreement;

(ii) to pay the province of Santa Cruz a Production Royalty of 12% plus an additional of 3% on the production of conventional hydrocarbons, and 10% on the production of unconventional hydrocarbons;

 

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(iii) to carry out exploration activities in the remaining exploration areas and make certain investments and expenditures on the exploitation concessions, as stipulated in the agreement;

(iv) to contribute with infrastructure investments within the province of Santa Cruz in an amount equivalent to 20% of the initial payment, and;

(v) to contribute to an “Institutional Strengthening Fund” and to carry out a program for technical formation (“YPF y los Trabajadores”) and a program for development of contractors (“Sustenta”) within the province of Santa Cruz.

Negotiation of Extension of Concessions in the province of Tierra del Fuego

The Company has negotiated with the Executive office of the province of Tierra del Fuego the terms in order to extend the Tierra del Fuego and Chorrillos exploitation concessions which are jointly held by YPF (30%), Petrolera LF Company S.R.L. (35%), and Petrolera TDF Company S.R.L. (35%). Petrolera LF Company S.R.L. and Petrolera TDF Company S.R.L. were subsidiaries of Apache and have recently been acquired by us. The final agreement was executed by YPF, Petrolera LF Company S.R.L. and Petrolera TDF Company S.R.L. on December 18, 2013. The agreement grants an extension of the Tierra del Fuego concession until November, 2027 and an extension of the Chorrillos concession until November 2026.

Extension of Concessions in the province of Chubut

The Company has obtained the extension of the following concessions in the Province of Chubut:

 

    El Tordillo – La Tapera and Puesto Quiroga Exploitation Concessions: On October 2, 2013 the Province of Chubut published the Provincial law approving the agreement for the extension of the El Tordillo, La Tapera and Puesto Quiroga concessions located in the Province of Chubut. YPF holds a 12.196% interest in these concessions while Petrobras Argentina S.A. holds a 35.67% interest and TECPETROL S.A. holds the remaining 52.133%. The concessions were extended for a period of 30 years as from 2017. The following are the main terms and conditions of the Extension Agreement entered into by and between the Province of Chubut and the Parties that hold interests in the Concessions:

 

  (i) To make initial payments to the Province of Chubut in an aggregate amount of U.S.$ 18 Million.

 

  (ii) To pay an extraordinary production royalty of 4% of the production of the areas included in the extension.

 

  (iii) To make disbursements and investments aimed at the conservation and protection of the environment.

 

  (iv) To maintain operational a minimum number of drilling and work-over rigs.

 

  (v) Upon expiration of the first ten years of the extension period, the Parties shall transfer and assign to PETROMINERA S.E., the provincial oil company, a 10% interest in the areas covered by the Extension Agreement.

 

    Restinga Alí, Sarmiento, Campamento Central – Cañadón Perdido, Manantiales Behr and El Trébol - Escalante – Escalante Exploitation Concessions: On December 26, 2013 YPF executed an agreement with the Province of Chubut for the extension of the original term of duration of these concessions. YPF holds a 100% interest in all the concessions except for the Campamento Central – Cañadón Perdido Concession where ENAP SIPETROL S.A. and YPF each hold a 50% interest.

The concessions were extended for a period of 30 years following the expiration of the original concession terms which ended in 2017 (Campamento Central – Cañadón Perdido and El Trébol – Escalante), in 2015 (Restinga Alí) and in 2016 (Manantiales Behr).

The following are the main terms and conditions agreed by and between YPF and the Province of Chubut.

 

  (i) To make initial payments to the Province of Chubut in an aggregate amount of U.S.$ 30 million.

 

  (ii) To pay an extraordinary production royalty of 3% of the production of the areas included in the extension agreement.

 

  (iii) To comply with a minimum investment program.

 

  (iv) To maintain a minimum number of drilling and work-over rigs operational.

 

  (v) To assign to PETROMINERA S.E., 41% of YPF’s interest in the El Tordillo, La Tapera and Puesto Quiroga exploitation concessions (equal to 5% of the total interest in the concessions).

 

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ENAP SIPETROL S.A. has agreed to fulfill the obligations set forth in the extension agreement on a pro-rata basis relative to its participation interest in the Campamento Central – Cañadon Perdido concession agreement.

Extension of Exploitation Concessions in the Province of Salta

In October 2012, YPF entered into an agreement with the province of Salta to extend the original term of the exploitation concessions identified below, subject to the approval of the National Executive Office by decree in a sixty-day term.

The agreement was approved by Resolution No. 35/12 of Salta’s Secretariat of Energy on October 26, 2012 and Decree 3694/12 on December 6, 2012. The agreement was signed between YPF, Tecpetrol S.A., Petrobras Argentina S.A., Compañía General de Combustibles S.A. and Ledesma S.A.A.I. and the Province of Salta, and provides the following:

 

    Concessions involved: exploitation concession on the following areas: Sierras de Aguaragüe, Campo Durán-Madrejones, La Bolsa and Río Pescado.

 

    Exploitation concession terms, are extended for a 10-year term from the beginning of expiration of the original 25 year term, thus ending the extension on November 14, 2027.

 

    Commitments: (i) to conduct in Aguaragüe, on the dates indicated in the agreement and during the first two years, the following investments: a minimum amount in development plans, involving the drilling of development wells (at least 3) and expansion of production facilities and treatment of hydrocarbons of U.S.$36 million, (ii) to recognize for the province a special, extraordinary contribution equal to 25% of the amount corresponding to royalties of 12% referred to in art. 59 and 62 of Law 17,319, (iii) to recognize for the province an additional payment, when conditions of extraordinary income are verified in the marketing of crude oil production and natural gas from concessions, when prices exceed U.S.$90/bbl in the case of crude oil and the equivalent of 70% of import prices in the case of natural gas, (iv) to pay the province, in aggregate, a one-time amount of U.S.$5 million as an extension bonus, (v) to make investments for a minimum amount of U.S.$30 million, in aggregate, in additional exploration work to be implemented in the concessions, subject to certain conditions and (vi) to invest U.S.$1 million, in aggregate, in the implementation of social infrastructure projects in the province.

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).

Additionally, prior approval of the Argentine government is required:

 

    for non-Argentine shareholders to acquire control of us; or

 

    if and when the majority of our shares belong to non-Argentine shareholders, such as it was recently the case (see “—The Expropriation Law”), for any additional acquisition of real estate, mineral rights, oil or other Argentine government concessions located within, or with respect to, security zones.

Natural Gas Transportation and Distribution

The gas transmission system is currently divided into two systems principally on a geographical basis (the northern and the southern trunk pipeline systems), designed to give both systems access to gas sources and to the main centers of demand in and around Buenos Aires. These systems are operated by two transportation companies. In addition, the distribution system is divided into nine regional distribution companies, including two distribution companies serving the greater Buenos Aires area.

The regulatory structure for the natural gas industry creates an open-access system, under which gas producers, such as us, will have open access to future available capacity on transmission and distribution systems on a non-discriminatory basis.

Cross-border gas pipelines were built to interconnect Argentina, Chile, Brazil and Uruguay, and producers such as us had been exporting natural gas to the Chilean and Brazilian markets, to the extent permitted by the Argentine government. During the last several years the Argentine authorities have adopted a number of measures restricting exports of natural gas from Argentina, including issuing domestic supply instruction pursuant to Regulation No. 27/04 and Resolutions Nos. 265/04, 659/04 and 752/05 (which require exporters to supply natural gas to the Argentine domestic market), issuing express instructions to suspend exports, suspending processing of natural gas and adopting restrictions on natural gas exports imposed through transportation companies and/or emergency committees created to address crisis situations. See “—Market Regulation— Natural gas export administration and domestic supply priorities.”

 

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Transportation of Liquid Hydrocarbons

The Hydrocarbons Law permits the National Executive Office to award 35-year concessions for the transportation of oil, gas and petroleum products following submission of competitive bids. Pursuant to Law No. 26,197, the relevant provincial governments have the same powers. Holders of production concessions are entitled to receive a transportation concession for the oil, gas and petroleum products that they produce. The term of a transportation concession may be extended for an additional ten-year term upon application to the National Executive Office. 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 Argentine Secretariat of Energy for oil and petroleum pipelines and by the 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 us a 35-year transportation concession with respect to the pipelines operated by Yacimientos Petrolíferos Fiscales S.A. at the time. Gas pipelines and distribution systems sold in connection with the privatization of Gas del Estado are subject to a different regime as described above.

Additionally, pursuant to Law No. 26,197, all transportation concessions located entirely within a province’s jurisdiction and not directly connected to any export pipeline are to be transferred to such province. The National Executive Office retains the power to regulate and enforce all transportation concessions located within two or more provinces and all transportation concessions directly connected to export pipelines.

Refining

Crude oil refining activities conducted by oil producers or others are subject to prior registration of oil companies in the registry maintained by the Argentine Secretariat of Energy and compliance with safety and environmental regulations, as well as to provincial environmental legislation and municipal health and safety inspections.

In January 2008, the Argentine Secretariat of Domestic Commerce issued Resolution No. 14/2008, whereby the refining companies were instructed to optimize their production in order to obtain maximum volumes according to their capacity.

Executive Decree No. 2014/08 of November 25, 2008, created the “Refining Plus” program to encourage the production of diesel fuel and gasoline. The Argentine Secretariat of Energy, by Resolution S.E. No. 1312/08 of December 1, 2008, approved the regulations of the program. Pursuant to this program, refining companies that undertook the construction of a new refinery or the expansion of their refining and/or conversion capacity, and whose plans were approved by the Argentine Secretariat of Energy, were entitled to receive export duty credits to be applied to exports of products within the scope of Resolution No. 394/07 and Resolution No. 127/08 (Annex) issued by the Ministry of Economy. In February 2012, by Notes Nos. 707/12 and 800/12 (the “Notes”) of the Argentine Secretariat of Energy, YPF was notified that the benefits granted under the “Refining Plus” program had been temporarily suspended. The effects of the suspension extend to benefits accrued and not yet redeemed by YPF at the time of the issuance of the Notes. The reasons alleged for such suspension were that the “Refining Plus” program had been created in a context where domestic prices were lower than prevailing prices and that the objectives sought by the program had already been achieved. On March 16, 2012, YPF challenged this temporary suspension.

Market Regulation

Overview

Under the Hydrocarbons Law and the Oil Deregulation Decrees, holders of production concessions, such as us, have the right to produce and own the oil and gas they extract and are allowed to sell such production in the domestic or export markets, in each case subject to the conditions described below.

The Hydrocarbons Law authorizes the National Executive Office to regulate the Argentine oil and gas markets and prohibits the export of crude oil during any period in which the National Executive Office finds domestic production to be insufficient to satisfy domestic demand. If the National Executive Office restricts the export of crude oil and petroleum products or the sale 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 imported crude oil and petroleum products of similar quality; and

 

    in the case of natural gas, not less than 35% of the international price per cubic meter of Arabian light oil, 34 API.

 

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Furthermore, the Oil Deregulation Decrees required the National Executive Office to give twelve months’ notice of any future export restrictions. Notwithstanding the above provisions, certain subsequently-enacted resolutions (Resolution S.E. 1679/04, Resolution S.E. 532/04 and Resolution of the Ministry of Economy 394/07) have modified the aforementioned price mechanism, resulting, in certain cases, in prices to producers that are below the levels described above.

In addition, on May 3, 2012, the Expropriation Law was passed by the Argentine Congress and, on May 7, it was published in the Official Gazette of the Republic of Argentina. The Expropriation Law declared achieving self-sufficiency in the supply of hydrocarbons, as well as in the exploitation, industrialization, transportation and sale of hydrocarbons, a national public interest and a priority for Argentina. In addition, its stated goal is to guarantee socially equitable economic development, the creation of jobs, the increase of the competitiveness of various economic sectors and the equitable and sustainable growth of the Argentine provinces and regions. Furthermore, Decree No. 1277/12 derogated main previsions about free availability of hydrocarbons which were specifically contained in section 5 subsection d) and section 13, 14 and 15 of Decree No. 1055/89, sections 1, 6 and 9 form Decree No. 1212/89 and sections 3 and 5 from Decree No. 1589/89. Decree No. 1277/12 enacted the “Hydrocarbons Sovereignty Regime Rules,” regulating Law No. 26,741. This regulation creates the Commission, which among other matters is entitled to publish reference prices of every component of the costs and sales prices of hydrocarbons and fuels, which should permit covering up production costs and obtaining a reasonable profit margin. See “The Expropriation Law” and “Decree No. 1277/2012.”

On July 15, 2013 Decree No. 929/2013 was published in the Official Gazette. Decree 929/2013 provides for the creation of an Investment Promotion Regime for the Exploitation of Hydrocarbons (the “Promotion Regime”), both for conventional and unconventional hydrocarbons to be applied across the Argentine territory. Applications to be included in this Promotion Regime may be filed by subjects duly registered with the National Registry of Hydrocarbon Investments who are holders of exploration permits and/or exploitation concessions and/or third parties associated with those holders and who submit an Investment Project for Hydrocarbon Exploitation (the “Investment Project”) to the Commission of Strategic Planning and Coordination of the National Hydrocarbons Investment Plan created by Decree No. 1,277/12, entailing a direct investment in foreign currency of at least U.S.$ 1 billion, calculated at the time of submission of the Investment Project, and to be invested in the first five years of the Project. Beneficiaries to this Promotion Regime shall enjoy the following benefits, among others: i) they shall be entitled, under the terms of Law No. 17,319, as from the fifth anniversary of the start-up of their respective Investment Project, to freely export 20% of the production of liquid and gaseous hydrocarbons produced under such Projects, at a 0% export tax rate, if applicable; ii) they shall freely dispose of 100% of the proceeds derived from the export of the hydrocarbons mentioned in i) above, provided the approved Investment Project would have generated an inflow of foreign currency into Argentina’s financial market equal to at least U.S.$ 1 billion, following the requirements mentioned above; iii) the Decree sets forth that if hydrocarbon production in Argentina is not enough to cover domestic supply needs in accordance with section 6 of Law No. 17,319, beneficiaries to the Promotion Regime, as from the fifth anniversary of the start-up of their respective Investment projects, shall be entitled to obtain, in relation to the aforementioned exportable rate of liquid and gaseous hydrocarbons produced in said Projects, a price not lower than the reference export price calculated without deducting any export duties that would have been applicable.

Additionally, the Decree created a new type of concession for the “Exploitation of Unconventional Hydrocarbons,” consisting of the extraction of liquid and/or gaseous hydrocarbons through unconventional stimulation techniques applied to reservoirs located in geological formations of schist and slates (shale gas or shale oil), tight sands (tight oil and tight gas), coal layers (coal bed methane) and, in general, from any reservoir that presents low-permeability rock as its main feature. In this respect, the Decree provides that holders of exploration permits and/or exploitation concessions that are beneficiaries of the Promotion Regime shall be entitled to apply for a “Concession for Unconventional Hydrocarbons Exploitation.” Likewise, holders of a Concession for Unconventional Hydrocarbons Exploitation who are also holders of an adjacent and pre-existing concession may request the unification of both areas into a single unconventional exploitation concession, provided the geological continuity of such areas is duly proven.

Production of crude oil and reserves

Executive Decree No. 2014/08 of November 25, 2008, created the “Petroleum Plus” program to encourage the production of crude oil and the increase of reserves through new investments in exploration and development. The Argentine Secretariat of Energy, by Resolution S.E. No. 1312/08 of December 1, 2008, approved the regulations of the program. The program entitled production companies which increased their production and reserves within the scope of the program, and whose plans were approved by the Argentine Secretariat of Energy, to receive export duty credits to be applied to exports of products within the scope of Resolution No. 394/07 and Resolution No. 127/08 (Annex) issued by the Ministry of Economy. In February 2012, YPF was notified by the Argentine Secretariat of Energy that the benefits granted under the “Petroleum Plus” program had been temporarily suspended. The effects of the suspension extend to benefits accrued and not yet redeemed by YPF at the time of the issuance of the Notes. The reasons alleged for such suspension were that the “Petroleum Plus” program had been created in a context where domestic prices were lower than prevailing prices and that the objectives sought by the program had already been achieved. On March 16, 2012, YPF challenged this temporary suspension.

 

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Refined products

In April 2002, the Argentine government and the main oil companies in Argentina, including us, reached an agreement on a subsidy provided by the Argentine government to public bus transportation companies. The Agreement on Stability of Supply of Diesel Oil was approved by Executive Decree No. 652/02 and assured the transportation companies their necessary supply of diesel oil at a fixed price of Ps.0.75 per liter from April 22, 2002 to July 31, 2002. Additionally, it established that the oil companies are to be compensated for the difference between this fixed price and the market price through export duty credits. Subsequent agreements entered into between the Argentine government and the main oil companies in Argentina extended the subsidy scheme until December 2009, while the aforementioned fixed price was revised from time to time, the current price being Ps.2.50 per liter.

In March 2009, Executive Decree No. 1390/09 empowered the Chief of Staff to sign annual agreements extending the diesel oil subsidy to transportation companies for the fiscal year 2009 and until the end of the public emergency declared by the Public Emergency Law and its amendments, and instructed such official to incorporate the necessary modifications in order to extend the possibility to compensate with export duty credits on all hydrocarbon products currently exported, or with cash. As of the date of this annual report, execution of the annual agreements for the fiscal years 2010 and 2011 is pending. Nevertheless, the subsidy scheme has continued to be in place on the basis of the monthly communications issued by the Argentine Secretariat of Transport notifying oil companies of the volumes to be delivered to each beneficiary of the scheme at the fixed price, and the Argentine government has continued to compensate oil companies for deliveries of diesel oil made under the scheme. Additionally, as of the date of this annual report, agreements for the fiscal years 2012 and 2013 have been executed.

Over the past months, the Argentine Secretariat of Transport has substantially reduced the volumes of diesel oil subsidized under this scheme. In addition, on January 11, 2012, the Argentine Secretary of Transport filed with the National Antitrust Commission (“CNDC”) a complaint against five oil companies (including YPF) for alleged abuse of a dominant position regarding bulk sales of diesel oil to public bus transportation companies. The alleged conduct consists of selling bulk diesel oil to public bus transportation companies at prices higher than the retail price charged in service stations. On January 26, 2012, the Argentine Secretariat of Domestic Commerce issued Resolution No. 6/2012 whereby, effective from the date of the resolution, (i) each of these five oil companies was ordered to sell diesel oil to public bus transportation companies at a price no higher than the retail price charged by its nearest service station, while maintaining both historic volumes and delivery conditions; and (ii) created a price monitoring scheme for both the retail and the bulk markets to be implemented by the CNDC. YPF challenged this Resolution and requested a preliminary injunction against its implementation. YPF’s preliminary injunction has been granted and the effects of the Resolution have been temporarily suspended. See “Item 8. Financial Information—Legal proceedings—Argentina—Non-accrued, possible contingencies—CNDC investigation.”

On March 13, 2012, YPF was notified of Resolution No. 17/2012, issued by the Argentine Secretariat of Domestic Commerce, pursuant to which YPF, Shell and Axion (previously Esso) were ordered to supply jet fuel for domestic and international air transport at a price, net of taxes, not to exceed by 2.7% the price, net of taxes, of medium octane gasoline (not premium) offered at its closest service station to the relevant airport, while maintaining its existing supply logistics and its usual supply quantities. The above mentioned resolution benefits companies that operate in the field of commercial passenger and/or cargo aviation which are registered under the Argentine National Aircraft Registry. According to a later clarification from the Argentine Secretariat of Domestic Commerce, the beneficiaries of the measure adopted by this resolution are the following companies: Aerolíneas Argentinas, S.A., Andes Líneas Aéreas S.A., Austral – Cielos del Sur, LAN Argentina, S.A. and Sol S.A. Líneas Aéreas. In addition, in said resolution, the Argentine Secretariat of Domestic Commerce suggested the implementation of a price surveillance system by the CNDC. YPF appealed the Resolution and on May 15, 2012 it was notified that the Federal Civil and Commercial Court of Appeals accepted YPF’s presentation and suspended the effectiveness of Resolution No. 17/2012 until the final judgement regarding its legality. On August 31, 2012 YPF was notified of the decision of such Court of Appeals who declared the Resolution to be null, on the basis of lack of authority of the Argentine Secretariat of Domestic Commerce. This decision was appealed by the Secretariat and a final judgment is pending.

The Argentine Secretariat of Energy has issued a series of resolutions affecting the fuel market. For example, Resolution S.E. No. 1,102/04 created the Registry of Liquid Fuels Supply Points, Self Consumption, Storage, Distributors and Bulk Sellers of Fuels and Hydrocarbons, and of Compressed Natural Gas; Resolution S.E. No. 1,104/04 created a bulk sales price information module as an integral part of the federal fuel information system, as well as a mechanism for communication of volumes sold; Resolution S.E. No. 1,834/05 compels service stations and/or supply point operators and/or self consumption of liquid fuels and hydrocarbons who have requested supply, and have not been supplied, to communicate such situation to the Argentine Secretariat of Energy; and Resolution S.E. No. 1,879/05 established that refining companies registered by the Argentine Secretariat of Energy, who are parties to contracts that create any degree of exclusivity between the refining company and the fuel seller, shall assure continuous, reliable, regular and non-discriminatory supply to its counterparties, giving the right to the seller to obtain the product from a different source, and thereupon, charging any applicable overcosts to the refining company.

Disposition S.S.C. No. 157/06 of the Undersecretariat of Fuels provides that fuel sellers who are parties to contracts that create any degree of exclusivity between the refining company and the fuel seller, and which for any reason are seeking to terminate such contract, shall report the termination in advance with the Undersecretariat of Fuels in order to inform the Argentine Secretariat of Domestic Commerce of the situation. In that case, the Argentine Secretariat of Domestic Commerce is to: (i) issue a statement regarding the validity of the termination of the contract and (ii) use all necessary means to allow the fuel seller terminating the contract to execute another agreement with a refining company and/or fuel broker in order to guarantee its fuel supply.

 

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Resolution S.E. No. 1679/04 reinstalled the registry of diesel oil and crude oil export transactions created by Executive Decree No. 645/02, and mandated that producers, sellers, refining companies and any other market agent that wishes to export diesel oil or crude oil to register such transaction and to demonstrate that domestic demand has been satisfied and that they have offered the product to be exported to the domestic market. In addition, Resolution S.E. No. 1338/06 added other petroleum products to the registration regime created by Executive Decree No. 645/02, including gasoline, fuel oil and its derivatives, aviation fuel, coke coal, asphalts, certain petrochemicals and certain lubricants. Resolution No. 715/07 of the Argentine Secretariat of Energy empowered the National Refining and Marketing Direction to determine the amounts of diesel oil to be imported by each company, in specific periods of the year, to compensate exports of products included under the regime of Resolution No. 1679/04; the fulfillment of this obligation to import diesel fuel is necessary to obtain authorization to export the products included under Decree No. 645/02 (crude, fuel oil, diesel fuel, coke coal and gasoline, among others). In addition, Resolution No. 25/06 of the Argentine Secretariat of Domestic Commerce, issued within the framework of Law No. 20,680, imposes on each Argentine refining company the obligation to supply all reasonable diesel fuel demand, by supplying certain minimum volumes (established pursuant to the resolution) to their usual customers, mainly service station operators and distributors.

On August 17, 2010, the Argentine Secretariat of Domestic Commerce issued Resolution No. 295/10, imposing that the trade price of liquid fuels should be rolled back to those prices prevailing on July 31, 2010. This Resolution has been successfully challenged by another company and a preliminary injunction was granted suspending the effectiveness of such Resolution. This Resolution was later on repealed by Resolution No. 543/10 of the Argentine Secretariat of Domestic Commerce.

On February 2, 2011, the Argentine Secretariat of Domestic Commerce issued Resolution No. 13/11 stating that the retail price of liquid fuels had to be rolled back to those prices prevailing on January 28, 2011. This resolution also required refineries and oil companies to continue to supply amounts of fuel to the domestic market consistent with amounts supplied the prior year, as adjusted for the positive correlation between the increase in the demand of fuel and gross domestic product. On March 29, 2011, however, the Argentine Secretariat of Domestic Commerce issued Resolution No. 46/11, which repealed Resolution No. 13/11, alleging that market conditions had changed since its issuance.

In addition, an May 3, 2012, the Expropriation Law was enacted by the Argentine Congress and, on May 7, 2012 it was published in the Official Gazette of the Republic of Argentina. The Expropriation Law declared achieving self-sufficiency in the supply of hydrocarbons, as well as in the exploitation, industrialization, transportation and sale of hydrocarbons, a national public interest and a priority for Argentina. In addition, its stated goal is to guarantee socially equitable economic development, the creation of jobs, the increase of the competitiveness of various economic sectors and the equitable and sustainable growth of the Argentine provinces and regions. Furthermore, Decree No. 1277/12 derogated main previsions about free availability of hydrocarbons which were specifically contained in section 5 subsection d) and section 13, 14 and 15 of Decree No. 1055/89, sections 1, 6 and 9 form Decree No. 1212/89 and sections 3 and 5 from Decree No. 1589/89. Decree No. 1277/12 enacted the “Hydrocarbons Sovereignty Regime Rules,” regulating Law No. 26,741. This regulation creates the Commission, which among other matters is entitled to publish reference prices of every component of the costs and sales prices of hydrocarbons and fuels, which should permit covering up production costs and obtaining a reasonable profit margin. See “The Expropriation Law” and “Decree No. 1277/12.”

On April 10, 2013, Resolution 35/2013 of the Argentine Secretariat of Domestic Commerce, determined a price cap for fuel at all service stations for period of six months, which shall not exceed the highest outstanding price as of April 9, 2013 in each of the regions identified of the Annex of the Resolution.

On December 30, 2013, the Planning and Strategic Coordination Commission of the National Hydrocarbon Investment Plan (Comisión Nacional de Planificación y Coordinación Estratégica del Plan Nacional de Inversiones Hidrocarburíferas) approved, through Resolution No. 99/2013, the general rules for the grant of quotes of liquid fuels volumes allowed to be imported by locally registered companies, including, among others, oil companies registered in the relevant registries of the Secretariat of Energy. These Rules regulate the requirements, grant of volumes to be imported and other conditions to be complied with by the companies that wish to import liquid fuels free of the tax on liquid fuels (imposed by Law 23.966) and the tax on diesel oil (imposed by Law 26.098), jointly with other fuels up to a maximum aggregate amount of 7 million m3.

Natural gas

In January 2004, Executive Decree No. 180/04 (i) created the Electronic Gas Market (MEG) for the trade of daily spot sales of gas and a secondary market of transportation and distribution services and (ii) established information obligations 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 system any volume of natural gas (further regulated by Resolution No. 1,146/04 issued on November 9, 2004 and Resolution No. 882/05 issued by the Argentine Secretariat of Energy). According to Executive Decree No. 180/04, all daily spot sales of natural gas must be traded within the MEG.

 

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In January 2004, Executive Decree No. 181/04 authorized the Argentine Secretariat of Energy to negotiate with natural gas 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 June 14, 2007, Resolution No. 599/07 of the Argentine Secretariat of Energy approved a proposal of agreement with natural gas producers regarding the supply of natural gas to the domestic market during the period 2007 through 2011 (the “Agreement 2007-2011”), giving such producers a five-business-day term to enter into the Agreement 2007-2011. We executed the Agreement 2007-2011 taking into account that producers that did not enter into the Agreement 2007-2011 would be required to satisfy domestic demand before those who entered into the agreement 2007-2011. Producers are authorized to withdraw from the Agreement 2007-2011 and will be treated as any producer that has not entered into the Agreement 2007-2011. On January 5, 2012, the Official Gazette published Resolution S.E. No. 172, which temporarily extends the assignation rules and other criteria established by Resolution No. 599/07 until new legislation is passed replacing such rules and criteria.

On February 17, 2012, we filed a motion for reconsideration of Resolution S.E. No. 172 with the Argentine Secretariat of Energy.

The purpose of the Agreement 2007-2011 was to guarantee the supply of the domestic market demand at the levels registered in 2006, plus the growth in demand by residential and small commercial customers (the “Agreed Demand Levels”). Producers that have entered into the Agreement 2007-2011 would commit to supply a part of the Agreed Demand Levels according to certain shares determined for each producer based upon its share of production for the 36 months prior to April 2004. For this period, our share of production was approximately 36.5%, or 36.8 mmcm/d (or 1,300 mmcf/d). The Agreement 2007-2011 also provides guidelines for the terms of supply agreements for each market segment, and certain pricing limitations for each market segment of the Agreed Demand Levels. In order to guarantee any domestic market demand of natural gas in excess of the Agreed Demand Levels, Resolution S.E. No. 599/07 maintains the effectiveness of the Resolutions that implemented the curtailment of natural gas export commitments and the re-routing of such natural gas volumes to certain sectors of the domestic market. See “—Natural gas export administration and domestic supply priorities.” The Resolution also states that the Agreement 2007-2011 does not prevent the possible suspension or termination of export permits.

We were compelled to execute the Agreement 2007-2011, among other reasons, in order to mitigate our potential damages. Producers failing to sign the Agreement 2007-2011 could be penalized and subject to other unfavorable measures by regulatory authorities. However, we expressly stated that the execution of the Agreement 2007-2011 did not entail any recognition by us of the validity of the terms and conditions of the various Resolutions of the Argentine Secretariat of Energy establishing programs for the curtailment or re-routing of exports to satisfy domestic demand. We challenged Resolution No. 599/07 and stated that we signed the Agreement 2007-2011 taking into account the potential consequences of not doing so.

The Argentine Secretariat of Energy created, by its Resolution No. 24/08 issued on March 13, 2008, a program named “Gas Plus” to encourage natural gas production resulting from discoveries, new fields and tight gas, among other factors. The natural gas produced under the Gas Plus program is not be subject to the Agreement 2007-2011 and the price conditions established under such Agreement.

The Argentine Secretariat of Energy, through Resolution No. 1031/08 issued on September 12, 2008, modified Resolution No. 24/07, establishing the specific conditions petitioners must meet in order to qualify for the Gas Plus program. Certain of such conditions were modified by Resolution No. 695/09 of the Argentine Secretariat of Energy, which demands compliance with commitments already assumed.

The Argentine Secretariat of Energy, through Resolution No. 1070/08 issued on October 1, 2008, ratified the complementary agreement entered into between Argentine natural gas producers and the Argentine Secretariat of Energy on September 19, 2008 (the “Complementary Agreement”), which (i) modified gas prices at the wellhead and segmented the residential sector in terms of natural gas demand, and (ii) established the requirement that natural gas producers contribute to the fiduciary fund created by Law No. 26,020. The Complementary Agreement also contains certain requirements concerning the provision of LPG to the domestic market. See “—Liquefied Petroleum Gas.” Through Resolution No. 1417/08, the Secretariat of Energy determined the basin prices for the residential segment applicable to the producers that signed the Complementary Agreement. On January 13, 2010, the natural gas producers signed an addendum to the Complementary Agreement which extended the commitment to contribute to the fiduciary funds created by Law No. 26,020 until December 31, 2010. On January 25, 2011, the natural gas producers signed a second addendum to the Complementary Agreement which extended such commitment until December 31, 2011.

On March 19, 2012, the Official Gazette published Resolution SE No. 55/2012 of the Secretariat of Energy, which extended the Complementary Agreement for 2012 and established the following with respect to non-signing parties: (i) the natural gas price increase established by the Complementary Agreement will not be applicable to natural gas injected into the gas system by non-signing parties; (ii) natural gas injected by non-signing parties will be consumed first in the order of priority by residential users, which has the lowest tariffs; and (iii) non-signing parties must fulfill all of the commitments undertaken by natural gas producers under the Agreement 2007-2011, which was extended by Resolution S.E. No. 172. On March 23, 2012, Resolution SE No. 55/2012 was supplemented by Resolution ENARGAS No. 2087/2012, which sets forth, among others, the procedure that distribution companies should follow to secure amounts to be deposited with the fiduciary fund created by Law No. 26,020. Additionally,

 

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according to this resolution, producers which have not signed the 2012 extension of the Complementary Agreement are not allowed to charge the well-head price increases for gas set forth in Resolutions SE No. 1070/2008 and 1417/2008 to consumers directly supplied by distribution companies. Thus, such non-signing producers have to invoice the lower prices which were in effect prior to the adoption of these resolutions for the gas supplied to the distribution companies.

Thereafter, on April 19, 2012, December 18, 2012 and December 19, 2013, YPF signed the 2012, 2013 and 2014 extensions of the Complementary Agreement, respectively.

Executive Decree No. 2067/08 of December 3, 2008, created a fiduciary fund to finance natural gas imports destined for injection into the national pipeline system, when required to satisfy the internal demand. The fiduciary fund is funded through the following mechanisms: (i) various tariff charges which are paid by users of regular transport and distribution services, gas consumers that receive gas directly from producers and companies that process natural gas; (ii) special credit programs that may be arranged with domestic or international organizations; and (iii) specific contributions assessed by the Argentine Secretariat of Energy on participants in the natural gas industry. This decree has been subject to different judicial claims and judges throughout the country have issued precautionary measures suspending its effects. On November 8, 2009, ENARGAS published Resolution No. 1982/11, which supplements Decree No. 2067/08. This Resolution adjusts the tariff charges established by Executive Decree No. 2067/08 to be paid by users in the residential segment and gas processing and electric power companies, among others, starting December 1, 2011. On November 24, 2011, ENARGAS issued Resolution No. 1991/11, which extends the type of users that will be required to pay tariff charges. YPF has challenged these Resolutions. On April 13, 2012, a precautionary measure was granted regarding the processing plant El Porton, suspending the effects of these Resolutions with respect to such plant.

On November 5, 2012 the Official Gazette published Law No. 26,784 which approves the National Administration Budget for 2013. Article 54 of the Law established that the tariff charges and the fiduciary fund established by Executive Decree No. 2067/08 and all its supplementary acts shall be ruled by Law No. 26,095.

On July 17, 2009, the Ministry of Federal Planning and certain natural gas producers (including YPF) signed an agreement which sets forth: (i) natural gas prices at the wellhead for the electric power generators segment from July to December 2009, and (ii) amounts to be received by natural gas producers for volumes sold to the residential segment from August 2009 onwards. These amounts are adjusted on a monthly basis so that they represent 50% of the amount collected by the fiduciary fund to finance natural gas imports.

On October 4, 2010, the Official Gazette published ENARGAS Resolution No. 1410/10, which approves new rules for natural gas dispatch applicable to all participants in the gas industry and imposing the following new and more severe priority demand gas restrictions on producers:

 

    Distributors remain able to solicit all the gas necessary to cover the priority demand despite such gas volumes’ exceeding those that the Argentine Secretariat of Energy would have allocated by virtue of the Agreement 2007-2011 ratified by the Resolution No. 599/07. See “—Exploration and Production—Delivery commitments.”

 

    Producers are obligated to confirm all the natural gas requested by distributors in respect of the priority demand. The producers’ portion of such volumes follows the allocation criterion established by the Resolution No. 599/07. We cannot predict the amount of the estimated domestic demand that a producer may be required to satisfy regardless of whether such producer signed the Agreement 2007-2011.

 

    Once the priority demand has been satisfied, the remaining demands are fulfilled with exports last in order of priority.

 

    In the event a producer is unable to meet the requested demand, transporters are responsible for redirecting gas until a distributor’s gas demand is met. The gas deficiency is either (i) deducted from the producer suffering the deficiency if it is able to meet the demands of its other clients in the same basin or (ii) recuperated from the remainder of the gas producers in the event the deficient producer is not able to serve any of its clients in the same basin.

As a result, this regime imposes a jointly liable supply obligation on all producers in the event any producer experiences a gas supply deficiency. We have challenged the validity of the aforementioned regulation.

On December 17, 2010 certain natural gas producers (including YPF) signed an agreement which set forth the percentage of regasified LNG assigned to each natural gas producer for 2011. Amounts produced under this agreement were counted towards such producers’ commitments to supply natural gas to distributors under Resolution No. 599/07. As of the date of this annual report, a similar agreement has not been entered into for 2012.

On August 27, 2012 the Official Gazette published Resolution SE No. 1445/2012 of the Secretariat of Energy, according to considerations set by Decree No. 1,277/2012, which modified gas prices at the wellhead for compressed natural gas (CNG) which represents an increase of approximately 369% of the prices realized by the Company for such segment product.

On December 2012, YPF and other gas producing companies of Argentina agreed with the Commission to establish an incentive scheme for the additional injection (all gas injected by the companies above certain threshold) of natural gas. On February 14, 2013 Resolution 1/2013 of the Commission was published in the Official Gazette. This Resolution formally creates the “Natural

 

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Gas Additional Injection Stimulus Program.” Under this regulation, gas producing companies are invited to file with the Commission before June 30th, 2013 projects to increase natural gas injection , in order to receive an increased price of 7.5 U.S.$/MBTU for all additional natural gas injected. These projects shall comply with minimum requirements established in Resolution 1/2013, and will be subject to consideration approval by the Commission, including a maximum term of five (5) years, renewable at the request of the beneficiary, upon decision of the Commission. If the beneficiary company in a given month does not reach the committed production increase it will have to make up for such volumes not produced. On May 23, 2013 the Commission approved the project submitted by YPF.

Natural gas export administration and domestic supply priorities

In March 2004, the Argentine Secretariat of Energy issued Resolution S.E. No. 265/04 adopting measures intended to ensure the adequate supply of natural gas to the domestic market and regulate its consequences on electricity wholesale prices. Among the measures adopted were:

 

    the suspension of all exports of surplus of natural gas;

 

    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 Argentine Secretariat of Energy; and

 

    the authorization to the Undersecretariat of Fuels to create a rationalization plan of gas exports and transportation capacity.

In March 2004, the Undersecretariat of Fuels, pursuant to the authority given to it under Resolution S.E. No. 265/04, issued Regulation S.S.C. 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 export authorizations, which, absent an express authorization by the Undersecretariat of Fuels, may not be executed for volumes exceeding exports registered during 2003.

In June 2004, the Argentine Secretariat of Energy issued Resolution S.E. No. 659/04, which established a new program to assure natural gas supply to the domestic market (which substitutes for program created by Regulation No. S.S.C. 27/04). Under Resolution S.E. No. 659/04 (amended by Resolution S.E. No. 1,681/04), natural gas exports may be restricted due to shortages of natural gas in the domestic market, because exporting producers may be required to supply additional volumes of natural gas to the domestic market beyond those that they are contractually committed to supply. The export of natural gas under current export permits is conditioned on the fulfillment of additional supply requirements imposed on exporting producers by governmental authorities.

This program was further amended and supplemented by Resolution S.E. No. 752/05 issued by the Argentine Secretariat of Energy in May 2005, which further reduced the ability of producers to export natural gas, and created a mechanism under which the Argentine Secretariat of Energy may require exporting producers to supply additional volumes to domestic consumers during a seasonal period (Permanent Additional Supply), which volumes of natural gas are also not committed by the exporting producers. Based on the provisions of Rule No. 27/04, Resolution S.E. No. 659/04 and Resolution S.E. No. 752/05, the Argentine Secretariat of Energy and/or the Undersecretariat of Fuels have instructed us to re direct natural gas export volumes to the internal market, thereby affecting natural gas export commitments. We have challenged the validity of the aforementioned regulations and resolutions, and have invoked the occurrence of a force majeure event under the corresponding natural gas export purchase and sale agreements. The counterparties to such agreements have rejected our position. See “Item 8. Financial Information—Legal Proceedings.”

Resolution S.E. No. 752/05 also establishes (i) a special market, open and anonymous, for compressed natural gas stations to purchase natural gas under regulated commercial conditions, with the demand being ensured by the Argentine Secretariat of Energy through Permanent Additional Supply required of 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, with the demand being ensured by the Argentine Secretariat of Energy through the issuance of the Permanent Additional Supply mentioned above.

Pursuant to the standardized irrevocable offers procedure mentioned above, which operates at the MEG, any direct consumer may bid for a term gas purchase at the export average gas price net of withholdings by basin. The volume necessary to satisfy the standardized irrevocable offers which have not been satisfied will be required as a Permanent Additional Supply only until the end of the seasonal period during which the unsatisfied requests should be made (October–April or May–September). Such Permanent Additional Supply will be requested from the producers that export gas and that inject the natural gas from the basins that are able to supply those unsatisfied irrevocable offers. Resolution of the Argentine Secretariat of Energy S.E. No. 1886/06, published on January 4, 2007, extended the term of effectiveness of this mechanism of standardized irrevocable offers until 2016, and empowered the Undersecretariat of Fuels to suspend its effectiveness subject to the satisfaction of internal demand of natural gas achieved by means of regulations, agreements or due to the discovery of reserves.

 

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By means of Resolution S.E. No. 1329/06, later supplemented by Note SSC No. 1011/07, the Argentine Secretariat of Energy forced producers to give first priority in their injections of natural gas into the gas pipelines to certain preferential consumers and obligated transportation companies to guarantee these priorities through the allocation of transportation capacity. In general, these regulations subordinate all exports of natural gas to the prior delivery of natural gas volumes that are sufficient to satisfy domestic market demand.

Also, beginning during the severe Argentine winter in 2007 and continuing thereafter, we and most gas producers, as well as the transportation companies in Argentina, received instructions from the government to decrease exports, except for certain volumes addressed to satisfy Chilean residential consumptions and other specific consumptions.

Liquefied petroleum gas

Law No. 26,020 enacted on March 9, 2005 sets forth the regulatory framework for the industry and commercialization of LPG. This law regulates the activities of production, bottling, transportation, storage, distribution, and commercialization of LPG in Argentina and declares such activities to be of public interest. Among other things, the law:

 

    creates the registry of LPG bottlers, obliging LPG bottlers to register the bottles of their property;

 

    protects the trademarks of LPG bottlers;

 

    creates a reference price system, pursuant to which, the Argentine Secretariat of Energy shall periodically publish reference prices for LPG sold in bottles of 45 kilograms or less;

 

    required the Argentine Secretariat of Energy to comply with the following tasks: (i) create LPG transfer mechanisms, in order to guarantee access to the product to all the agents of the supply chain; (ii) establish mechanisms for the stabilization of LPG prices charged to local LPG bottlers; and (iii) together with the CNDC, analyze the composition of the LPG market and its behavior, in order to establish limitations on market concentration in each phase, or limitations to the vertical integration throughout the chain of the LPG industry (such limitations apply to affiliates, subsidiaries and controlled companies);

 

    grants open access to LPG storage facilities; and

 

    creates a fiduciary fund to finance bottled LPG consumption for low-income communities in Argentina and the extension of the natural gas distribution network to new areas, where technically possible and economically feasible. The fiduciary fund is funded through the following mechanisms: (i) penalties established by Law No. 26,020, (ii) assignments from the General State Budget, (iii) funds from special credit programs that may be arranged with national or international institutions, and (iv) funds that may be assessed by the Argentine Secretariat of Energy on participants in the LPG industry.

The Argentine Secretariat of Energy established, through several subsequent resolutions, reference prices applicable to sales of LPG bottles of less than 45 kilograms, and to sales of bulk LPG exclusively to LPG bottlers. Also, the Argentine Secretariat of Energy approved the method for calculating the LPG export parity to be updated monthly by the Undersecretariat of Fuels. In 2007, the Argentine Secretariat of Energy increased the LPG volumes to be sold to bottlers at the reference prices set forth in the above-mentioned resolutions.

Disposition 168/05 of the Undersecretariat of Fuels requires companies intending to export LPG to first obtain an authorization from the Argentine Secretariat of Energy. Companies seeking to export LPG must first demonstrate that the local demand is satisfied or that an offer to sell LPG to local demand has been made and rejected.

On September 19, 2008, the Secretariat of Energy and Argentine LPG producers entered into the Complementary Agreement which, among other objectives, seeks to stabilize the price of LPG in the domestic market. The Complementary Agreement applies only to LPG sold to bottlers that declare their intention to bottle such LPG in LPG bottles of 10, 12 or 15 kilograms. The Complementary Agreement requires LPG producers to supply LPG bottlers with the same volume of LPG supplied the prior year and to accept the price per ton set forth in the Complementary Agreement. The Complementary Agreement was extended until December 31, 2010, pursuant to an addendum entered into on October 23, 2009 by YPF and Repsol YPF Gas S.A., which required LPG producers to supply LPG bottlers in 2010 with the same volume provided during 2009 plus an additional 5%.

On December 29, 2010, LPG producers signed a second addendum to the Complementary Agreement which extended the Complementary Agreement until December 31, 2011 and required LPG producers to supply LPG bottlers in 2011 with the same volume provided during 2010.

On March 16, 2012, the Official Gazette published Resolution No. 77 of the Argentine Secretariat of Energy, which ratified the execution of the extension of the Complementary Agreement for 2012 regarding the provision of LPG bottles of 10, 12 and 15 kilograms for residential users. This Resolution also provides that all LPG producers, whether they are parties or not to the

 

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Complementary Agreement, must provide the volumes of LPG to be determined by the Argentine Secretariat of Energy at the reference prices established in the Complementary Agreement. The failure to comply with such obligations may result in the application of the penalties established in the Resolution, including the prohibition to export LPG and the limitation of LPG sales in the domestic market. On April 19, 2012, YPF signed the 2012 extension of the Complementary Agreement. On December 21, 2012 YPF signed the 2013 extension of the Complementary Agreement.

On July 5, 2013, Resolution No. 429 of the Argentine Secretariat of Energy was published in the Official Gazette, approving the extension of the Complementary Agreement for the provision of LPG bottles of 10, 12 and 15 kilograms for residential users for year. Similar terms to those of the 2012 extension (Resolution No. 77 dated March 16, 2012) were included in the 2013 extension.

Argentine Environmental Regulations

The enactment of Articles 41 and 43 in the National Constitution, as amended in 1994, as well as new federal, provincial and municipal legislation, has strengthened the legal framework dealing with damage to the environment. Legislative and government agencies have become more vigilant in enforcing the laws and regulations regarding the environment, increasing sanctions for environmental violations.

Under the amended Articles 41 and 43 of the National Constitution, all Argentine inhabitants have both the right to an undamaged environment and a duty to protect it. The primary obligation of any person held liable for environmental damage is to rectify such damage according to and within the scope of applicable law. The federal government sets forth the minimum standards for the protection of the environment and the provinces and municipalities establish specific standards and implementing regulations.

Federal, provincial and municipal laws and regulations relating to environmental quality in Argentina affect our operations. These laws and regulations set standards for certain aspects of environmental quality, provide for penalties and other liabilities for the violation of such standards, and establish remedial obligations in certain circumstances.

In general, we are subject to the requirements of the following federal environmental regulations (including the regulations issued thereunder):

 

    National Constitution (Articles 41 and 43);

 

    Law No. 25,675 on National Environmental Policy;

 

    Law No. 25,612 on Integrated Management of Industrial and Service Industry Waste;

 

    Law No. 24,051 on Hazardous Waste;

 

    Law No. 20,284 on Clean Air;

 

    Law No. 25,688 on Environmental Management of Waters;

 

    Law No. 25,670 on the Management and Elimination of Polychlorinated Biphenyls;

 

    Criminal Code; and

 

    Civil Code, which sets forth the general rules of tort law.

These laws address environmental issues, including limits on the discharge of waste associated with oil and gas operations, investigation and cleanup of hazardous substances, workplace safety and health, natural resource damages claims and toxic tort liabilities. Furthermore, these laws typically require compliance with associated regulations and permits and provide for the imposition of penalties in case of non-compliance.

In addition, we are subject to various other provincial and municipal regulations, including those relating to gas venting, oil spills and well abandonment, among other matters.

By Resolution No. 404/94, the Argentine Secretariat of Energy amended Resolution No. 419/93, and created the Registry of Independent Professionals and Safety Auditing Companies (Registro de Profesionales Independientes y Empresas Auditoras de Seguridad), which may act with respect to areas of hydrocarbons storage, oil refineries, gas stations, fuel commercialization plants and plants for fractionation of LPG in containers or cylinders. The Resolution provides that external audits of oil refineries, gas stations and all fuel storage plants must be carried out by professionals registered in the Registry. Domestic fuel manufacturing companies and companies that sell fuels are prohibited from supplying these products to any station failing to comply with its obligations. Penalties for failure to perform the audits and remedial or safety tasks include the disqualification of plants or gas stations. In addition, a set of obligations is established in relation to underground fuel storage systems, including a mechanism for instant notification in cases of loss or suspicion of loss from the storage facilities.

On July 19, 2001, the Secretariat of Environmental Policy of the province of Buenos Aires issued Resolution No. 1037/01 ordering us to clean up certain areas adjacent to the La Plata refinery. The resolution was appealed through an administrative procedure which has not yet been resolved. Nevertheless, we have commenced certain works in order to identify potential technical

 

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solutions for the treatment of the historical contamination, while reserving that the remediation must be made by the parties responsible for the environmental damage. Under current law, the Argentine government has the obligation to indemnify us against any liability and hold us harmless for events and claims arising prior to January 1, 1991, according to Law No. 24,145.

During 2005, the Argentine Secretariat of Energy, by means of Resolution No. 785/05, created the National Program of Hydrocarbons Warehousing Aerial Tank Loss Control, a measure aimed at reducing and correcting environmental pollution caused by hydrocarbons warehousing-aerial tanks. We have commenced the development and implementation of a technical and environmental audit plan as required by this Resolution.

The above description of the material Argentine environmental regulations is only a summary and does not purport to be a comprehensive description of the Argentine environmental regulatory framework. The summary is based upon Argentine regulations related to environmental issues as in effect on the date of this annual report, and such regulations are subject to change.

U.S. Environmental Regulations

Federal, state and local laws and regulations relating to health, safety and environmental quality in the United States, where YPF Holdings operates, affect the operations of this subsidiary. YPF Holdings’ U.S. operations, conducted primarily through Maxus Energy Corporation (“Maxus”), are subject to the requirements of the following U.S. environmental laws:

 

    Safe Drinking Water Act;

 

    Clean Water Act;

 

    Oil Pollution Act;

 

    Clean Air Act;

 

    Resource Conservation and Recovery Act;

 

    National Environmental Policy Act;

 

    Occupational Safety and Health Act;

 

    Comprehensive Environmental Response, Compensation and Liability Act; and

 

    various other federal, state and local laws.

These laws and regulations set various standards for many aspects of health, safety and environmental quality (including limits on discharges associated with oil and gas operations), provide for fines and criminal penalties and other consequences (including limits on operations and loss of applicable permits) for the violation of such standards, establish procedures affecting location of facilities and other operations, and in certain circumstances impose obligations concerning reporting, investigation and remediation, as well as liability for natural resource damages and toxic tort claims.

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, except in the case of a general increase in taxes.

Pursuant to Sections 57 and 58 of the Hydrocarbons Law, holders of exploration permits and production concessions must pay an annual surface fee that is based on acreage of each block and which varies depending on the phase of the operation, i.e., exploration or production, and in the case of the former, depending on the relevant period of the exploration permit. On October 17, 2007, the Official Gazette published Executive Decree No. 1,454/07, which significantly increased the amount of exploration and production surface fees expressed in Argentine pesos that are payable to the different jurisdictions where the hydrocarbon fields are located. See “—Exploration and Production.”

In addition, “net profit” (as defined in the Hydrocarbons Law) of holders of permits or concessions accruing from activity as such holders might be subject to the application of a special 55% income tax. This tax has never been applied. Each permit or concession granted to an entity other than us has provided that the holder thereof is subject instead to the general Argentine tax regime, and a decree of the National Executive Office provides that we are also 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 regime, which 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 the old fixed value as the minimum tax.

 

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Export taxes

In 2002, the Argentine government began to implement customs duties on the export of hydrocarbons. Export tax rates were increased on crude oil to 20%, on butane, methane and LPG to 20% and gasoline and diesel oil to 5%. In May 2004, Resolution No. 337/04 of the Ministry of Economy increased export duties on crude oil to 25%. These export tax rates were increased again in 2004, when the Ministry of Economy issued Resolution No. 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. In addition, in May 2004, pursuant to Resolution No. 645/04 of the Ministry of Economy, an export duty on natural gas and natural gas liquids was established at a rate of 20%. The export duty on natural gas was increased again in July 2006, when the Ministry of Economy increased the rate to 45% and instructed the Customs General Administration to apply the price fixed by the Framework Agreement between Argentina and Bolivia as the base price to which to apply the new tax rate, irrespective of the actual sales price. In addition, on October 10, 2006, the Ministry of Economy imposed prevalent export duties on exports from the Tierra del Fuego province, which were previously exempted from taxes. Moreover, in May 2007 the Ministry of Economy increased to 25% the export duty on butane, propane and LPG.

Resolution No. 394/07 of the Ministry of Economy, effective as of November 16, 2007, increased export duties on Argentine oil exports (as defined by the regulator) on crude oil and other crude derivatives products. The new regime provides that when the WTI international price exceeds the reference price, which was fixed at U.S.$60.9/barrel, the producer should be allowed to collect at U.S.$42/barrel, with the remainder being withheld by the Argentine government as an export tax. If the WTI international price is under the reference price but over U.S.$45/barrel, a 45% withholding rate would apply. If such price was under U.S.$45/barrel, the applicable export tax was to be determined by the Argentine government within a term of 90 business days. By Resolution No. 1/2013 of the Ministry of Economy and Public Finances, Resolution No. 394/07 was amended, increasing cutoff values from 42 U.S.$/barrel to U.S.$70/barrel, and reference price from U.S.$60.9 to U.S.$80 for crude oil. This means that when the international price of crude oil is over U.S.$80/barrel, the local producer shall be allowed to collect at U.S.$70/barrel, with the remainder being withheld by the Argentine government.

Resolution No. 127/08 of the Ministry of Economy increased export duties applicable to natural gas exports from 45% to 100%, mandating a valuation basis for the calculation of the duty as the highest price established in any contract of any Argentine importer for the import of gas (abandoning the previously applicable reference price set by the Framework Agreement between Argentina and Bolivia mentioned above). Resolution No. 127/08 provides with respect to LPG products (including butane, propane and blends thereof) that if the international price of the relevant LPG product, as notified daily by the Argentine Secretariat of Energy, is under the reference price established for such product in the Resolution (U.S.$338/cm for propane, U.S.$393/cm for butane and U.S.$363/cm for blends of the two), the applicable export duty for such product will be 45%. If the international price exceeds the reference price, the producer shall be allowed to collect the maximum amount established by the Resolution for the relevant product (U.S.$233/cm for propane, U.S.$271/cm for butane and U.S.$250/cm for blends of the two), with the remainder being withheld by the Argentine government as an export tax.

In addition, the calculation procedure described above also applies to other petroleum products and lubricants based upon different withholding rates, reference prices and prices allowed to producers.

There can be no assurances as to future levels of export taxes.

Repatriation of Foreign Currency

Executive Decree No. 1,589/89, relating to the deregulation of the upstream oil industry, allowed us and other companies engaged in oil and gas production activities in Argentina to freely sell and dispose of the hydrocarbons we produce. Additionally, under Decree No. 1,589/89, we and other oil producers were entitled to keep outside of Argentina up to 70% of foreign currency proceeds we received from crude oil and gas export sales, but were required to repatriate the remaining 30% through the exchange markets of Argentina.

In July 2002, Argentina’s Attorney General issued an opinion which would have effectively required us to liquidate 100% of our export receivables in Argentina, instead of the 30% provided in Decree No. 1,589/89 based on the assumption that Decree No. 1,589/89 had been superseded by other decrees (Decree No. 530/91 and 1,606/01) issued by the government. Subsequent to this opinion, however, the government issued Decree No. 1,912/02 ordering the Central Bank to apply the 70%/30% regime set out in Decree No. 1,589/89. Nevertheless, the uncertainty generated by the opinion of Argentina’s Attorney General resulted in a legal proceeding described under “Item 8. Financial Information—Legal proceedings—Argentina—Non-accrued, remote contingencies—Proceedings related to foreign currency proceeds.”

Decree No. 1722/2011, of October 26, 2011, re-established Decree No. 2581/64 and requires all oil and gas companies (including YPF), among other entities, to repatriate 100% of their foreign currency export receivables.

 

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ITEM 4A. Unresolved Staff Comments.

YPF does not have any unresolved Staff comments.

ITEM 5. Operating and Financial Review and Prospects

The following discussion should be read in conjunction with our Audited Consolidated Financial Statements included in this annual report.

Overview

We are Argentina’s leading energy company, operating a fully integrated oil and gas chain with leading market positions across the domestic upstream and downstream segments. Our upstream operations consist of the exploration, development and production of crude oil, natural gas and liquefied petroleum gas. Our downstream operations include the refining, marketing, transportation and distribution of oil and a wide range of petroleum products, petroleum derivatives, petrochemicals, LPG and bio-fuels. Additionally, we are active in the gas separation and natural gas distribution sectors both directly and through our investments in several affiliated companies. In 2013, we had consolidated revenues of Ps.90,113 million (U.S.$13,825 million) and consolidated net income of Ps.5,079 million (U.S.$779 million).

Presentation of Financial Information

Our Audited Consolidated Financial Statements are prepared in accordance with IFRS as issued by the IASB. Our Audited Consolidated Financial Statements are fully compliant with IFRS.

We fully consolidate the results of subsidiaries in which we have a sufficient number of voting shares to control corporate decisions. Interest in joint operations and other agreements which give the Company a percentage contractually established over the rights of the assets and obligations that emerge from the contract (“joint operations”), have been consolidated line by line on the basis of the mentioned participation over the assets, liabilities, income and expenses related to each contract.

On March 20, 2009, the Argentine Federation of Professional Councils in Economic Sciences (“FACPCE”) approved Technical Resolution No. 26 on the “Adoption of the International Financial Reporting Standards (IFRS) of the International Accounting Standards Board (IASB).” Such resolution was approved by the CNV through General Resolution No. 562/09 on December 29, 2009 (modified by General Resolution No. 576/10 on July 1, 2010), with respect to certain publicly-traded entities subject to Law No. 17,811. Compliance with such rules was mandatory for YPF for the fiscal year which begun on January 1, 2012, with transition date of January 1, 2011.

The financial data contained in this annual report as of December 31, 2013, 2012 and 2011 and for the years then ended has been derived from our Audited Consolidated Financial Statements included in this annual report. See Note 14to the Audited Consolidated Financial Statements.

Finally, certain oil and gas disclosures are included in this annual report under the heading “Supplemental information on oil and gas producing activities (unaudited).”

Segment Reporting

We report our business into the following segments: (i) exploration and production, which includes exploration and production activities, natural gas and crude oil purchases, sales of natural gas, and to a lesser extent crude oil, to third parties and intersegment sales of crude oil, natural gas and its byproducts (“Exploration and Production”); (ii) the refining, transport, purchase of crude oil and natural gas to third parties and intersegment sales, and marketing of crude oil, natural gas, refined products, petrochemicals, electric power generation and natural gas distribution (“Downstream”). Other activities not falling into the previously described categories are reported under a separate segment (“Corporate and Other”), principally including corporate administration costs and assets, environmental matters related to YPF Holdings (see Note 3 to our Audited Consolidated Financial Statements) and construction activities. See “Item 4. Information on the Company—Business Organization.”

Sales between business segments are made at internal transfer prices established by us, which generally seek to approximate market prices.

 

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Summarized Income Statement

 

     For the Year Ended December 31,  
     2013     2012     2011  
     (in millions of pesos)  

Revenues

     90,113        67,174        56,211   

Cost of sales

     (68,571     (50,267     (41,143
  

 

 

   

 

 

   

 

 

 

Gross profit

     21,542        16,907        15,068   

Administrative expenses

     (2,686     (2,232     (1,822

Selling expenses

     (7,571     (5,662     (5,438

Exploration expenses

     (829     (582     (574

(Expense)/Other income, net

     704        (528     (46

Operating income

     11,160        7,903        7,188   

Income (Loss) on investments in companies

     353        114        685   

Financial income (expense), net

     2,835        548        (287
  

 

 

   

 

 

   

 

 

 

Net income before income tax

     14,348        8,565        7,586   

Income tax

     (2,844     (2,720     (2,495

Deferred tax

     (6,425     (1,943     (646
  

 

 

   

 

 

   

 

 

 

Net income

     5,079        3,902        4,445   

Total other comprehensive income

     12,031        4,241        1,852   
  

 

 

   

 

 

   

 

 

 

Total comprehensive income

     17,110        8,143        6,297   
  

 

 

   

 

 

   

 

 

 

Factors Affecting Our Operations

Our operations are affected by a number of factors, including:

 

    the volume of crude oil, oil byproducts and natural gas we produce and sell;

 

    regulation on domestic pricing;

 

    export administration by the Argentine government and domestic supply requirements;

 

    international prices of crude oil and oil products;

 

    our capital expenditures and financing availability for the Company;

 

    cost increases;

 

    domestic market demand for hydrocarbon products;

 

    operational risks, labor strikes and other forms of public protest in the country;

 

    taxes, including export taxes;

 

    regulations of capital flows;

 

    the Argentine peso/U.S. dollar exchange rate;

 

    the revocation of our concessions in case of noncompliance with certain provisions as set by laws and agreements with provinces in Argentina;

 

    dependence on the infrastructure and logistics network used to deliver our products;

 

    laws and regulations affecting our operations, such us import regulations; and

 

    interest rates.

Our business is inherently volatile due to the influence of exogenous factors such as internal demand, market prices, financial availability for our business plan and the corresponding cost, and government regulations. Consequently, our past financial condition, results of operations and the trends indicated by such results and financial condition may not be indicative of future financial condition, results of operations or trends in future periods. See additionally “Item 4. Information on the Company—Regulatory Framework and Relationship with the Argentine Government—The Expropriation Law.”

        Our operating income in 2013 increased by approximately 41 % compared to 2012. This increase was attributable to, among other things, the increased in diesel oil and gasoline domestic prices and the increase in volumes sold of gasoline and fuel oil. The aforementioned effects were partially offset by an increase in depreciation of fixed assets, increased prices of crude oil purchased from third parties, increased volumes of refined products (principally diesel and gasoline) purchased from third parties mainly as a consequence of the incident suffered by our La Plata refinery (see below), increased royalties (driven mainly by higher prices of crude oil at the wellhead), higher costs of sales and general cost increases (mainly preservation, repair and maintenance costs, salaries and social security costs and costs of services rendered by third parties). This increase in costs is attributable mainly to our increased activity and price increases in Argentina.

 

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On April 2, 2013 our facilities in the La Plata refinery were hit by a severe and unprecedented storm, recording over 400 mm of rainfall (which was the maximum ever recorded in the area). The heavy rainfall disrupted refinery systems and caused a fire that affected the Coke A and Topping C units in the refinery. This incident temporarily affected the crude processing capacity of the refinery, which had to be stopped entirely. The Coke A unit has been shut down permanently since the storm, and, after a significant restoration effort, the Topping C unit resumed operations up to its full nominal capacity in late May 2013. The industrial complex is insured for damage and loss of profits caused by the incident under our insurance policy. As of December 31, 2013 we have recognized in our result of operations U.S.$ 300 million relating to the partial compensation of Coke A damages and operational losses for 2013 from our insurance coverage. (See “Item 4. Information on the Company—Insurance—Argentine Operations”).

In addition, on March 21, 2014, a fire occurred at the Cerro Divisadero crude oil treatment plant, located 20 kilometers from the town of Bardas Blancas in the province of Mendoza. The Cerro Divisadero plant, which has 6 tanks, 4 of which are for processing and 2 are for dispatch of treated crude oil, concentrates the production of 10 fields in the Malargue area, which constitutes a daily production of approximately 9,200 barrels of oil and represents 3.8% of the oil production of YPF. As of the date of this annual report, the fire has been completely extinguished and maintenance works have commenced to