20-F 1 d863353d20f.htm FORM 20-F Form 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, 2014

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) 5441-3500

Facsimile Number: (011-54-11) 5441-3726

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, 2014 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   

 

 

 


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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

 

 

 

 

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TABLE OF CONTENTS

 

     Page  

Conversion Table

     6   

References

     6   

Disclosure of Certain Information

     6   

Forward-Looking Statements

     6   

Oil and Gas Terms

     7   

PART I

     9   

ITEM 1.       Identity of Directors, Senior Managers and Advisers

     9  

ITEM 2.       Offer Statistics and Expected Timetable

     9  

ITEM 3.       Key Information

     9  

Selected Financial Data

     9   

Exchange Regulations

     11   

Risk Factors

     12   

ITEM 4.       Information on the Company

     26  

History and Development of YPF

     26   

The Argentine Market

     29   

History of YPF

     30   

Business Organization

     32   

Exploration and Production Overview

     33   

Downstream

     67   

Seasonality

     80   

Research and Development

     80   

Competition

     81   

Environmental Matters

     83   

Property, Plant and Equipment

     87   

Insurance

     88   

Regulatory Framework and Relationship with the Argentine Government

     90   

ITEM 4A.    Unresolved Staff Comments.

     116  

ITEM 5.       Operating and Financial Review and Prospects

     116  

Overview

     116   

Presentation of Financial Information

     116   

Segment Reporting

     117   

Summarized Statement of Comprehensive Income

     117   

Factors Affecting Our Operations

     117   

Critical Accounting Policies

     125   

Principal Income Statement Line Items

     126   

Liquidity and Capital Resources

     139   

Quantitative and Qualitative Disclosures about Market Risk

     143   

Off-Balance Sheet Arrangements

     143   

Research and Development, Patents and Licenses, etc.

     143   

ITEM 6.       Directors, Senior Management and Employees

     143  

 

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Management of the Company

  143   

Board of Directors

  143   

Senior Management

  150   

The Audit Committee

  151   

Disclosure Committee

  153   

Compliance with New York Stock Exchange Listing Standards on Corporate Governance

  154   

Compensation of members of our Board of Directors and Supervisory Committee

  155   

Supervisory Committee

  156   

Employee Matters

  157   

ITEM 7.       Major Shareholders and Related Party Transactions

  159  

Related Party Transactions

  159   

Argentine Law Concerning Related Party Transactions

  160   

ITEM 8.       Financial Information

  160  

Financial Statements

  160   

Legal Proceedings

  160   

Dividend Policy

  178   

Significant Changes

  178   

ITEM 9.       The Offer and Listing

  178  

Shares and ADSs

  178   

Argentine Securities Market

  181   

ITEM 10.     Additional Information

  184  

Capital Stock

  184   

Memorandum and Articles of Association

  185   

Shareholders’ Meetings

  186   

Directors

  187   

Foreign Investment Legislation

  188   

Dividends

  188   

Amount Available for Distribution

  189   

Preemptive and Accretion Rights

  190   

Voting of the Underlying Class D Shares

  190   

Certain Provisions Relating to Acquisitions of Shares

  191   

Material Contracts

  193   

Exchange Regulations

  193   

Taxation

  193   

Argentine Tax Considerations

  193   

United States Federal Income Tax Considerations

  195   

Available Information

  198   

ITEM 11.     Quantitative and Qualitative Disclosures about Market Risk

  198  

ITEM 12.     Description of Securities Other than Equity Securities

  200  

PART II

  201   

 

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ITEM 13.     Defaults, Dividend Arrearages and Delinquencies

  201  

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

  201  

ITEM 15.     Controls and Procedures

  201  

ITEM 16.     

  202  

ITEM 16A.  Audit Committee Financial Expert

  202  

ITEM 16B.  Code of Ethics

  202  

ITEM 16C.  Principal Accountant Fees and Services

  203  

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

  203  

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

  203  

ITEM 16F.  Change in Registrant’s Certifying Accountant

  204  

ITEM 16G.  Corporate Governance

  204  

PART III

  204   

ITEM 17.     Financial Statements

  204  

ITEM 18.     Financial Statements

  204  

ITEM 19.     Exhibits

  205  

SIGNATURES

  206   

 

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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, 2014, 2013 and 2012, YPF’s audited consolidated statements of comprehensive income for the years ended December 31, 2014, 2013 and 2012, YPF’s audited consolidated statements of cash flows for the years ended December 31, 2014, 2013 and 2012, YPF’s audited consolidated statements of changes in shareholders’ equity for the years ended December 31, 2014, 2013 and 2012 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

 

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petroleum products, the domestic and international prices for crude oil, 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” 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.

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.

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, natural gas liquids 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.
“bbl/d” Barrels per day.
“bcf” Billion cubic feet.
“bcf/d” Billion cubic feet per day.
“bcm” Billion cubic meters.
“bcm/d” Billion cubic meters per day.

 

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“boe” Barrels of oil equivalent.
“boe/d” Barrels of oil equivalent per day.
“cm” Cubic meter.
“cm/d” Cubic meters per day.
“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.
“mbbl” Thousand barrels.
“mbbl/d” Thousand barrels per day.
“mcf” Thousand cubic feet.
“mcf/d” Thousand cubic feet per day.
“mcm” Thousand cubic meters.
“mcm/d” Thousand cubic meters per day.
“mboe” Thousand barrels of oil equivalent.
“mboe/d” Thousand barrels of oil equivalent per day.
“mm” Million.
“mmbbl” Million barrels.
“mmbbl/d” Million barrels per day.
“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” Million cubic meters.
“mmcm/d” Million cubic meters per day.
“mtn” Thousand tons.
“MW” Megawatts.
“NGL” Natural gas liquids.
“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, 2014 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, 2014 of Ps. 8.55 to U.S.$ 1.00, unless otherwise specified. The exchange rate quoted by the Central Bank on March 20, 2015 was Ps. 8.80 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.”

The financial data contained in this annual report as of and for the years ended December 31, 2014, 2013 and 2012 has been derived from our Audited Consolidated Financial Statements included in this annual report. See Note 15 to the Audited Consolidated Financial Statements. The financial data contained in this annual report as of December 31, 2011 and for the year ended December 31, 2011 have been derived from our Audited Consolidated Financial Statements as of December 31, 2011 not included in this annual report.

 

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     As of and for the year ended December 31,  
     2014     2013     2012     2011  
     (in millions of pesos, except for per share
and per ADS data)
 

Consolidated Statement of Comprehensive Income Data(1) :

        

Revenues(2)

     141,942        90,113        67,174        56,211   

Gross profit

     37,450        22,019        16,907        15,068   

Administrative expenses

     (4,530     (2,686     (2,232     (1,822

Selling expenses

     (10,114     (7,571     (5,662     (5,438

Exploration expenses

     (2,034     (829     (582     (574

Other (expense) income, net

     (1,030     227        (528     (46

Operating income

     19,742        11,160        7,903        7,188   

Income on long-term investments

     558        353        114        685   

Interest expense

     (7,336     (3,833     (1,557     (1,045

Other financial income (expense), net

     9,108        6,668        2,105        758   

Income from sale of long-term investments

     —          —          —          —     

Reversal (impairment) of other current assets

     —          —          —          —     

Income before income tax

     22,072        14,348        8,565        7,586   

Income tax

     (7,323     (2,844     (2,720     (2,495

Deferred tax

     (5,900     (6,425     (1,943     (646

Net income

     8,849        5,079        3,902        4,445   

Total other Comprehensive income

     16,276        12,031        4,241        1,852   

Total comprehensive income

     25,125        17,110        8,143        6,297   

Earnings per share and per ADS(4)

     22.95        13.05        9.92        11.30   

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

     1.18        0.83        0.77        14.15   

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

     0.14        0.13        0.16        3.39   

Consolidated Balance Sheet Data

        

Cash

     9,758        10,713        4,747        1,112   

Working capital(3)

     (11,266     1,706        (2,582     (7,750

Total assets

     208,554        135,595        79,949        60,990   

Total debt(6)

     49,305        31,890        17,104        12,198   

Shareholders’ equity(7)

     72,781        48,240        31,260        23,420   

Other Consolidated Financial Data

        

Fixed assets depreciation and intangible assets amortization

     20,405        11,433        8,281        6,499   

Cash used in fixed asset acquisitions and intangible assets

     50,213        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 of 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, 2014, 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. 36,030 million, Ps. 23,076 million, Ps. 12,100 million and Ps. 4,435 million as of December 31, 2014, 2013,2012 and 2011, respectively, and current loans of Ps. 13,275 million, Ps. 8,814 million, Ps. 5,004 million and Ps. 7,763 million as of December 31, 2014, 2013, 2012 and 2011, respectively. See “Financial Risk Management—Liquidity Risk” in Note 1.d) to the Audited Consolidated Financial Statements.
(7) Our subscribed capital as of December 31, 2014 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 “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.

 

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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. Notwithstanding the annual rate of devaluation being approximately 31.1% considering the period-end exchange rates for U.S. dollars as of December 31, 2014 and 2013, the Argentine peso was subject to a devaluation of approximately 23% during January 2014. See “—Risk 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,

          

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   

2014

     6.54         8.56         8.23 (1)      8.55   

Month

          

September 2014

     8.40         8.46         8.42 (1)      8.46   

October 2014

     8.45         8.50         8.48 (1)      8.50   

November 2014

     8.51         8.53         8.51 (1)      8.53   

December 2014

     8.53         8.56         8.55 (1)      8.55   

January 2015

     8.55         8.64         8.60 (1)      8.64   

February 2015

     8.65         8.73         8.69 (1)      8.72   

March 2015(2)

     8.73         8.80         8.77 (1)      8.80   

Source: Central Bank

(1) Represents the average of the exchange rates on the last day of each month during the period.
(2) Through March 20, 2015.

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.

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

 

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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 those known by us at the date of this report. However, such risks and uncertainties may not be the only ones that we could face. Additional risks and uncertainties that are unknown to us or that we currently think are immaterial also may impair our business operations.

Risks Relating to Argentina

The Argentine federal government will control the Company according to domestic energy policies in accordance with Law No. 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 according to the methodology of calculation prevailing until March 2014. 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 2.9%. As of the date of this annual report, the provisional figures of the Argentina’s estimated GDP for 2014 published by the National Statistics Institute (Instituto Nacional de Estadística y Censos) (“INDEC”) is 0.5%. 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. 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

 

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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. In addition, Argentina has confronted inflationary pressures. According to inflation data published by 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. In 2014, the INDEC 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 INDEC, the IPCNU for 2014 was 23.9% and the wholesale price index was 28.3%. In addition, the IPCNU for January 2015 and February 2015 was 1.1% and 0.9% 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 is significantly higher than that reflected by INDEC. 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.

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 economy is also particularly sensitive to local political developments. Argentina’s national election for president and vice-president will take place in October 2015, and other relevant local and federal elections will also take place in 2015. We cannot guarantee that current programs and policies that apply to the oil and gas sector will continue in place in the future. See “—Limitations on local pricing in Argentina may adversely affect our results of operations” and “—Oil and gas prices, including the recent decline in global prices for oil and gas, could affect our business”.

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 completed the restructuring of a substantial portion of its bond indebtedness and settled all of its debt with the IMF. Additionally, in June 2010, Argentina completed the renegotiation of approximately 70% of defaulted bonds that were not swapped in 2005. As a result of the 2005 and 2010 debt swaps, over 91% of the country’s bond indebtedness on which Argentina defaulted in 2002 has now been restructured.

Certain bondholders did not participate in the restructuring and instead sued Argentina for payment (“Holdout Bondholders”) in a litigation to which YPF is not a party. 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.$1.33 billion 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 of 2014, the U.S. Supreme Court agreed to hear the appeal filed by Argentina regarding the extent of discovery permitted concerning its assets, but eventually ruled on June 16, 2014 that the District Court had the authority to allow creditors of Argentine debt to seek discovery about all of Argentina’s assets worldwide.

 

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Additionally, also on June 16, 2014, the U.S. Supreme Court denied Argentina’s appeal for certiorari of the Second Circuit Court of Appeals’ ruling affirming the District Court judgment, which held that Argentina had violated the pari passu clause with respect to the bondholders that had not participated in the sovereign debt swaps in 2005 and 2010, and as a consequence was required pursuant to the judge’s ruling to pay 100% of the amounts due to the plaintiffs together with the payment of the amounts due on the next maturity date to bondholders who had participated in the debt swaps (ratable payment). With the appeals of the District Court’s order exhausted, the Second Circuit Court of Appeals on June 18, 2014 lifted its stay of that order. On June 23, 2014, Argentina requested that Judge Griesa of the District Court issue a new stay to allow for a reasonable period of negotiations to settle the dispute with the plaintiffs.

On June 26, 2014, Argentina proceeded to deposit the amount applicable to the payment of service of principal and interest that matured on June 30, 2014 due to holders of restructured bonds under foreign law who had voluntarily agreed to the debt swaps during the period 2005-2010, which was equivalent to U.S.$832 million, of which U.S.$539 million was deposited in accounts of The Bank of New York Mellon (“BONY”), as trustee, in the Central Bank of Argentina. On that same date, Judge Griesa rejected the request for a stay made by Argentina on June 23, 2014.

On June 27, 2014, in a hearing in the District Court, Judge Griesa ruled that the aforementioned funds should not be delivered to the holders of restructured debt in the absence of a prior agreement with the Holdout Bondholders. As of the date of this annual report, the parties have not arrived at an agreement and BONY has invoked the decision of the District Court judge to not deliver the funds deposited by Argentina to the holders of restructured bonds under foreign law. Argentina has asserted that it has complied with its obligation to the holders of the restructured bonds by making said deposit, and that BONY, as indenture trustee, has the obligation to deliver those funds to their beneficiaries.

On September 11, 2014, Argentina promulgated Law No. 26,984 concerning sovereign payment, which provides for various mechanisms to pay 100% of the outstanding creditors under the terms of the 2005 and 2010 debt swaps, authorizing for that purpose, among other things, the Minister of Economy and Public Finance to replace BONY as the indenture trustee with Nación Fideicomisos S.A. and to provide for a voluntary exchange of the outstanding bonds for new bonds that would have identical financial terms but be governed by Argentine law and subject to Argentine jurisdiction.

On September 29, 2014, the District Court judge declared Argentina in contempt of court but did not impose sanctions on the country. On October 3, 2014, the District Court judge ordered Argentina to repair its relations with BONY, remove Nación Fideicomisos as indenture trustee for the restructured debt and resolve the situation with the Holdout Bondholder plaintiffs.

On October 22, 2014, the Second Circuit Court of Appeals dismissed for lack of jurisdiction Argentina’s appeal with respect to the freezing of the funds deposited with BONY.

On October 28, 2014, the District Court judge rejected a motion to attach the funds deposited by Argentina and frozen at BONY.

At the request of Citibank, as trustee, the District Court judge has authorized the payment of U.S. dollar-denominated bonds under Argentine law to the extent that payments have become due, deferring a definitive decision on this question. At the request of Citibank, as agent, the District Court judge has authorized on an extraordinary basis on three occasions the payment of interest on U.S. dollar-denominated bonds under Argentine Law to the extent that payments became due, deferring a definitive decision on this question. However, the District Court judge, on March 12, 2015, entered an order in which he finally determined that the Argentine Law Bonds constitute external indebtedness, rank equally (pari passu) with the bonds issued under the 1994 FAA, and, therefore, are covered by the amended injunction dated November 21, 2012.

The actions initiated by the Holdout Bondholders against Argentina could result in attachments or preliminary injunctions of assets belonging to, or alleged to belong to, Argentina.

In connection with the Holdout Bondholder litigation, the bondholders had served subpoenas on various financial institutions in New York seeking the production of documents concerning the accounts and transfers of hundreds of entities allegedly owned or controlled, in whole or in part, by the Republic of Argentina, including YPF. At a hearing on September 3, 2013, the District Court judge ruled that this discovery from those institutions can go forward as to, among others, the accounts of YPF, in order for the bondholders to determine if those documents might support an argument that YPF is the alter ego of the Republic of Argentina. Notably, the New York courts previously held that Banco de la Nación Argentina is not an alter ego of Argentina, and a California magistrate judge has recently ruled that bondholders’ factual allegations made in support of asset discovery were insufficient to find YPF to be an alter ego of Argentina. YPF is not a recipient of any such subpoenas and, as such, has no obligation to produce discovery or otherwise participate in discovery.

 

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After the pari passu injunction became effective, litigation continued regarding Argentina’s efforts to make payments to exchange bondholders. These payments have been made, however the chain of payments has been interrupted as a consequence of judicial orders, and various exchange bondholders have sought release of such funds through litigation before the District Court and in various jurisdictions. Additionally Argentina’s Congress has passed the Sovereign Debt Payment Act, No. 26,984 in which it was allowed to remove the Bank of New York Mellon as trustee and appointed Nación Fideicomisos S.A. in its place and authorized to make payments of the sovereign bonds in two accounts in Argentina in order to guarantee that the bondholders receive the payment made. As of the date hereof, litigation initiated by the Holdout Bondholders seeking payments from Argentina continues in the U.S. and in courts in other jurisdictions. The consequences of potentially inconsistent rulings from different courts are unclear. There can be no assurances that the outcome of this continued and potential future litigation, or the efforts of the bondholders to obtain payment from Argentina through other means, such as alter ego theories, will not have a material adverse effect on Argentina’s economy, YPF’s assets, and/or YPF’s ability to access international financing to repay its obligations.

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

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.

In particular, we continue to actively manage our schedule of work, contracting, procurement and supply-chain activities to effectively manage costs. However, price levels for capital and exploratory costs and operating expenses associated with the production of crude oil and natural gas can be subject to external factors beyond our control including, among other things, the general level of inflation, commodity prices and prices charged by the industry’s material and service providers, which can be affected by the volatility of the industry’s own supply and demand for such materials and services. In recent years, we and the oil and gas industry generally experienced an increase in certain costs that exceeded the general trend of inflation. We cannot guarantee that these cost pressures will lessen as result of the decline in prices of crude oil and other commodities in 2014.

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.

 

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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. See “Item 4. Information on the Company—Regulatory Framework and Relationship with the Argentine Government—Market Regulation.”

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 that 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.

To address recent declining international crude oil prices, as of December 30, 2014 the Argentine government reduced certain export taxes to the minimum allowed by law, so that exporting producers of certain hydrocarbon products, including crude oil, could also partially compensate for the decrease in the price of such products. See “Item 4. Information on the Company—Regulatory Framework and Relationship with the Argentine Government—Market Regulation.”

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, such as in January 2014 when the Argentine peso was subject to devaluation of approximately 23%, and may do so in the future. 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, 2014 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.”

 

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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.

Moreover, recent regulatory and policy developments in Argentina, including the enactment of the Expropriation Law, as well as the litigation of the Argentine government with Holdout Bondholders have led to considerable volatility in the market price of our shares and ADSs. See “—Our business is largely dependent upon economic conditions in Argentina.” 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 increase local prices or to reflect the effects from higher domestic taxes, increases in production costs, or increases in international prices of crude oil and other hydrocarbon fuels and exchange rate fluctuations on our domestic prices. See “Limitations on local pricing in Argentina may adversely affect our results of operations;”

 

    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 unconventional 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

 

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government will control the Company according to domestic energy policies in accordance with Law No. 26,741 (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.”

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 in the past lagged substantially behind prevailing international and regional market prices for such products, and our ability to increase prices has been limited. In addition, revenues we obtain as a result of selling natural gas in Argentina (including amounts received through the Natural Gas Additional Injection Stimulus Program; see “Item 5. Operating and Financial Review and Prospects—Market Regulation—Natural gas”) are subject to government regulations and could be negatively affected, principally in case the Natural Gas Additional Injection Stimulus Program is cancelled or not extended past its current expiration date. 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 and not extended any longer), 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 guarantee that we will be able to increase the domestic prices of our products, mainly to reflect the effects of increased production costs, domestic taxes, and exchange rate fluctuations, 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 National Hydrocarbons Investments Registry (Registro Nacional de Inversiones Hidrocarburíferas) 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 No. 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.

 

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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.

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, including the recent decline in global prices for oil and gas, could affect our business.

We budget capital expenditures related to exploration, development, refining and distribution activities by taking into account, among other things, local and international market prices for our hydrocarbon products.

The international price of crude oil has fluctuated significantly in the past and may continue to do so the future. In recent months, the international price of a barrel of Brent crude oil fell below U.S.$ 55. This is a decrease of approximately U.S.$ 50 per barrel, representing an approximately 50% decrease from the 2014 average of U.S.$ 98.97 per barrel. While in the past domestic oil prices in Argentina have not reflected increases or decreases in international oil prices, the significant decline discussed above resulted in an approximately U.S.$7 reduction to the domestic price per barrel compared to the price in effect on December 31, 2014. This change stemmed from negotiations between producers and refiners to reduce the domestic price of Medanito and Escalante crude during January 2015 to U.S.$ 77 and U.S.$ 63 per barrel, respectively, and during February 2015 to U.S.$ 76 and U.S.$ 62 per barrel, respectively . If international crude prices remain at current levels or continue to drop for an extended period of time and this is reflected in the domestic price of oil, which we cannot control, it could cause the economic viability of drilling projects to be reduced, the loss of proved reserves as a result of the new economic conditions and proved undeveloped reserves as a result of changes to our development plans. It could also affect our assumptions and estimates and, as a result, affect the recovery value of certain assets. Furthermore, if these conditions are reflected in the domestic prices of our refined products, which as of the date of this annual report are in general above international prices, our ability to generate cash and our results of operations could be adversely affected.

In addition, on February 4, 2015 the Commission issued Resolution 14/2015 creating the Crude Oil Production Stimulus Program (Programa de Estímulo a la Producción de Petróleo Crudo) which will be in force from January 1, 2015 through December 31, 2015 and through which the Argentine federal government, subject to certain requirements, will pay an export stimulus and/or a production stimulus for companies registered under that program. The program aims to offset significantly the potential impact international crude oil prices have on the local industry which might, in turn, create a comparatively more attractive oil and gas market for Argentina during 2015. We cannot assure you that we will achieve the qualifications necessary to obtain the incentive set by Resolution 14/2015, including the relevant level of production, which could negatively affect our financial conditions and results of operations. Furthermore, we cannot guarantee that the incentive program will be extended beyond December 2015 in the event international prices remain at current or lower levels. “See “Item 4. Information on the Company—Regulatory Framework and Relationship with the Argentine Government—Market Regulation —Resolution No. 14/2015.”

In light of the above and assuming 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 unconventional resources, and also with evolution of the economy, our ability to improve our hydrocarbon recovery rates, find new reserves, develop unconventional resources 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. For more information on recent declines in the international Brent crude oil prices, domestic crude oil prices and domestic gasoline prices, see “Item 3. Operating and Financial Review and Prospects–Macroeconomic Conditions.”

 

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Our reserves and production are likely to decline.

Most of our existing 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. However, as a result of increased development and exploration activity in 2013 and 2014, including the production that came from our aquired properties, our production increased by approximately 1.7% and 13.5%, respectively, on a boe/d basis. In addition, the reserves replacement ratio (increases in reserves in the year, net divided by the production of the year) was 154% in 2013 and 163% in 2014.

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 unconventional 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 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.

Information on net proved reserves as of December 31, 2014, 2013 and 2012 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 us. We 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, we considered the unweighted average price of the first-day-of-the-month for each month within the twelve-month period ended December 31, 2014, 2013 and 2012, respectively, which refers to the WTI prices adjusted by each different quality produced by us. Commodity prices declined significantly in the fourth quarter of 2014. If such prices do not increase significantly, and domestic prices for crude oil were reduced to similar levels to those prevailing in the international market, our future calculations of estimated proved reserves would be based on lower commodity prices which could result in our having to remove non-economic reserves from our proved reserves in future periods. Holding all other factors constant, if commodity reference prices used in our year-end reserve estimates were decreased for crude oil, thereby approximating the pricing environment existing as of the most recent practicable date in the international market (approximately U.S.$ 51 dollars per barrel for WTI), and considering such prices since January 1, 2015, our total proved reserves at December 31, 2014 could decrease by approximately 22%. Holding all other factors constant, if commodity reference prices used in our year-end reserve estimates were decreased for crude oil, thereby approximating the realized prices for crude oil in the domestic market since January 1, 2015 (approximately U.S.$ 77 dollars per barrel for WTI equivalent quality), and considering such prices since January 1, 2015, our total proved reserves at December 31, 2014 could decrease by approximately 5%. In addition, as a result of the prices used to calculate the present value of future net revenues

 

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from our proved reserves, in accordance with the SEC rules, which are similar to previously described for calculation of proved reserves, the present value of future net revenues from our proved reserves will not necessarily be the same as the current market value of our estimated crude oil and natural gas reserves and, in particular, may be reduced due to the recent significant decline in commodity prices if such prices do not increase significantly and domestic prices were reduced to similar levels as those prevailing in the international market.

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 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 unconventional 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 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 and resources (mainly those related to our unconventional oil and gas business plan). 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.

 

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

As modified by Law No. 27,007 the Hydrocarbons Law provides for oil and gas concessions to remain in effect for 25 years as from the date of their award, 35 years for unconventional concessions and 30 years for offshore concessions. It further provides that concession terms may be extended for periods of up to 10 years each. 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 an extension of a concession, under the modifications of Law No. 27,007, concessionaires must (i) have complied with their obligations, (ii) be producing hydrocarbons in the concession under consideration and (iii) submit an investment plan for the development of such areas as requested by the competent authorities up to a year prior to the termination of each term of the concession. Under the Hydrocarbons Law, non-compliance with the obligations and standards set out therein 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.

We cannot provide assurances that any of our concessions will be extended as a result of the consideration by the relevant authorities of the investment plans the Company would submit in the future for the development of the areas as of the date of requesting the extension periods for the relevant areas for the Company, or other requirements will not be imposed on us in order to obtain extensions as of the date of expiration. Additional royalty payments of 3% up to a maximum of 18% are provided for in extensions under Law No. 27,007. 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, especially those areas with the most attractive crude oil and natural gas reserves. 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.”

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 may incur significant costs and liabilities depending on the final remedy selection proposed and approved by the U.S. Environmental Protection Agency (“EPA”) regarding the Focused Feasibility Study for remedial action with respect to environmental contamination of the lower eight miles of the Passaic River in New Jersey.

As previously mentioned, YPF Holdings, a wholly-owned subsidiary of YPF, is subject to certain environmental liabilities. In particular, in June 2007, the EPA released a draft Focused Feasibility Study (“FFS”) that outlined several alternatives for remedial

 

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action in the lower eight miles of the Passaic River. Tierra, in conjunction with the other parties of the CPG, submitted comments on the draft FFS to the EPA, as did a number of other interested parties. As a result of the comments received, the EPA withdrew the FFS for revision and further consideration in light of the comments. On November 14, 2013, at a Community Advisory Group (“CAG”) meeting, the EPA described the alternatives it was considering in the revised FFS. The EPA stated that the FFS would set forth four alternatives: (i) no action, (ii) deep dredging with backfill of 9.7 million cubic yards over 12 years, which it estimated would cost U.S.$1.4 billion to U.S.$3.5 billion, depending on whether the dredged sediment is disposed of in a confined aquatic disposal facility (“CAD”) at the bottom of Newark Bay, at an off-site disposal facility or locally decontaminated and put to beneficial use; (iii) capping with dredging of 4.3 million cubic yards over six years, which it estimated would cost U.S.$1.0 billion to U.S.$1.8 billion, depending on whether there is a CAD, off-site disposal or local decontamination and beneficial use; and (iv) focused dredging and capping of 0.9 million cubic yards over three years, which it estimated would cost U.S.$0.4 billion to U.S.$0.6 billion, depending on whether there is a CAD, off-site disposal or local decontamination and beneficial use. The EPA has indicated that it has discarded alternative (iv) and it favors alternative (iii). On April 11, 2014, the EPA published the revised FFS for the lower eight miles of the Passaic River in final. Among the various measures considered in the final FFS, the EPA recommended as its preferred remedial action for this area that approximately 4.3 million cubic yards of sediment be removed through bank-to-bank dredging, which sediments would then be dehydrated locally and transported by train for their incineration or disposal at an off-site disposal facility. An engineering cap (a physical barrier mainly consisting of sand and stone) would then be placed over the bank-to-bank dredged area. In its final FFS, the EPA estimated the cost of the preferred measure for the lower eight miles of Passaic River to be U.S.$1,731 million (present value estimated with a 7% discount rate). On August 20, 2014, Maxus and Tierra, on behalf of Occidental Chemical Corporation (“OCC”), submitted extensive comments on the final FFS to the EPA. The main comments offered by Maxus, Tierra and OCC on the final FFS were:

 

    The FFS is not a process legally authorized to select the type and size of remediation proposed by the EPA for the lower eight miles of the Passaic River;

 

    The FFS is based on a flawed site design;

 

    The FFS overstates the human health and ecological risk issues; and

 

    The proposed remediation plan is not executable or economically reasonable in terms of cost-benefit.

In addition to the comments received from Maxus and Tierra, the EPA also received comments from approximately 400 other companies, institutions, government agencies, non-governmental organizations and individuals, including the CPG, Amtrak (the federal railway company), NJ Transit, the American Army Corps of Engineers, the Passaic Valley Sewerage Commission, yacht clubs, public officials and others. In addition to commenting on the final FFS, Maxus and Tierra have proposed a preliminary project called In-ECO, which is an ecological and sustainable bio-remediation alternative, as a substitute for the remediation chosen by the EPA in its final FFS. Maxus and Tierra presented In-ECO to the EPA in May 2014. The EPA provided comments in September 2014, and Maxus and Tierra presented a revised version in November 2014. Currently, the EPA is considering these comments and will issue a response before it makes its final decision regarding the remediation plan for the area. The EPA’s decision on the remedy will likely be published in a “Record of Decision” sometime during 2015 or 2016. Based on the information available to us as of the issuance date of this annual report, considering the uncertainties related to the different remedial alternatives and those that may be incorporated in the Record of Decision and their associated costs, the results of the studies and discoveries to be produced, the amounts previously incurred by YPF Holdings in remediation activities in the area covered by the FFS, the many potentially responsible parties involved in the matter, the uncertainties related with potential allocation of removal and remediation costs, and also considering the opinion of external counsel, it is not possible to reasonably estimate a loss or range of losses on these outstanding matters. Therefore, no amount has been accrued for this litigation by YPF Holdings. Depending on the final remedy selection proposed 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 be affected negatively. In addition, taking into account YPF Holdings’ economic and financial situation, we cannot assure you that as a result of the final costs of the FFS and the EPA’s Record of Decision, YPF Holdings would not fail to make payments related thereto. See “Item 8. Financial Information—Legal Proceedings—YPF Holdings.”

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 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.

 

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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.

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 as of the date of the incident. As of the date of this annual report, the production of the affected fields have almost returned to their previous levels, and the engineering of the new oil treatment plant has advanced as planned.

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 Shareholders approved a dividend of Ps.303 million (Ps. 0.77 per share or ADS) which was paid during November 2012. On April 30, 2013, our Shareholders approved a dividend of Ps. 326 million (Ps. 0.83 per share or ADS) which was paid during August 2013. On April 30, 2014, our Shareholders approved a dividend of Ps. 464 million (Ps. 1.18 per share or ADS), which was paid during July 2014. 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.

Our performance is largely dependent on recruiting and retaining key personnel

Our current and future performance and the operation of our business are dependent upon the contributions of our senior management and our highly skilled team of engineers and other employees. It is dependent on our ability to attract, train, motivate and retain key management and commercial and technical personnel with the necessary skills and experience. There is no guarantee that we will be successful in retaining and attracting key personnel and the replacement of any key personnel who were to leave could be difficult and time consuming. The loss of the experience and services of key personnel or the inability to recruit suitable replacements or additional staff could have a material adverse effect on our business, financial condition and/or results of operations.

The Argentine government controls our company and has the majority of votes which allows to appoint the majority of members of our board of directors at the General Shareholder’s meeting. See “—The Argentine federal government will control the Company according to domestic energy policies in accordance with Law No. 26,741 (the “Expropriation Law”)” and “—Our business is largely dependent upon economic conditions in Argentina”.

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, as well as the litigation of the Argentine government with Holdout Bondholders (see “—Our business is largely dependent upon economic conditions in Argentina”), have led to considerable volatility

 

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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. The price recovered to a high closing price of U.S.$36.99 on July 1, 2014 but subsequently fell to U.S.$22.19 on January 2, 2015. 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.

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.

Sales of a substantial number of Class D shares or ADSs by any present or future relevant 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

 

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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.

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 2014, we had consolidated revenues of Ps. 141,942 million and consolidated net income of Ps. 8,849 million. Due to decreased export volumes, the portion of our revenues derived from exports has decreased steadily in recent years. Exports accounted for 17.1%, 13.3% and 11.5% of our consolidated net sales revenues in 2014, 2013 and 2012, 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

 

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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 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 Law No. 26,741 (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, on February 25, 2014, the Republic of Argentina and Repsol reached an agreement (the “Repsol Agreement”) in relation to compensation for the expropriation of 200,589,525 of YPF’s Class “D” shares pursuant to the Expropriation Law under the Repsol Agreement. Repsol accepted U.S.$5.0 billion in sovereign bonds from the Republic of Argentina and withdrew judicial and arbitral claims it had filed, including claims against YPF, and waived additional claims. YPF and Repsol also executed a separate agreement (“the Repsol Arrangement”) on February 27, 2014, pursuant to which YPF and Repsol each withdrew, subject to certain exclusions, all present and future actions and/or claims based on causes occurring prior to the date of execution of Repsol Arrangement arising from the expropriation of the YPF shares owned by Repsol pursuant to the Expropriation Law, including the intervention and temporary possession for public purposes of YPF’s shares. YPF and Repsol 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, which at the time were subject to certain conditions precedent. The Repsol Arrangement entered into force the day after Repsol notified YPF that the Repsol Agreement had entered into force. The Repsol Agreement was ratified on March 28, 2014 at a Repsol general shareholders’ meeting and approved by the Argentine Congress by Law No. 26,932 enacted by Decree No. 600/2014. On May 8, 2014, YPF was notified of the entry into force of the Repsol Agreement. As of that date, the expropriation pursuant to the Expropriation Law was concluded, and as a result the Republic of Argentina is definitively the owner of 51% of the capital stock of each of YPF S.A. and YPF GAS S.A.

The financial data contained in this annual report as of and for the years ended December 31, 2014, 2013, 2012 and 2011 has been derived from our Audited Consolidated Financial Statements included in this annual report. See Note 15 to the Audited Consolidated Financial Statements.

Upstream Operations

 

    As of December 31, 2014, we held interests in more than 110 oil and gas fields in Argentina. According to the Argentine Secretariat of Energy, in 2014 these assets accounted for approximately 46.9% of the country’s total production of crude oil, excluding NGLs, and approximately 44.1% of its total natural gas production, including NGLs, in 2014, according to information provided by the Argentine Secretariat of Energy.

 

    We had proved reserves, as estimated as of December 31, 2014, of approximately 674 mmbbl of oil, including condensates and NGLs, and approximately 3,016 bcf of gas, representing aggregate reserves of approximately 1,212 mmboe as of such date, compared to approximately 628 mmbbl of oil, including condensates and NGLs, and approximately 2,558 bcf of gas, representing aggregate reserves of approximately 1,083 mmboe as of December 31, 2013.

 

    In 2014, we produced approximately 89 mmbbl of oil (approximately 245 mbbl/d), including condensates, approximately 18 mmbbl of NGLs (approximately 49 mbbl/d), and approximately 547 bcf of gas (approximately 1,498 mmcf/d), representing a total production of approximately 204 mmboe (approximately 560 mboe/d), compared to approximately 85 mmbbl of oil (232 mbbl/d), including condensates, approximately 18 mmbbl of NGLs (approximately 48 mbbl/d), and approximately 437 bcf of gas (1,197 mmcf/d) in 2013.

 

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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 “—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, 2014 consisted of 1,534 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 34.8% 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.

 

LOGO

 

  (1) Includes the directly and indirectly controlled companies acquired on March 12, 2014 of the Apache Group.

See Note 11.c “—Investment Project Agreements” to the Audited Consolidated Financial Statements for a description of the transaction we entered into with Chevron and Apache Group.

 

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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, 2014.

 

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 2013 production, according to the 2014 edition of the BP Statistical Review of World Energy, published in June 2014.

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.

 

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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 1.9% on an annualized basis compared to the preceding year according to the methodology of calculation prevailing until March 2014. 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 2.9%. As of the date of this annual report, the provisional figures of the Argentina’s estimated GDP for 2014 published by the National Statistics Institute (Instituto Nacional de Estadística y Censos) (“INDEC”) is 0.5%. 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, prior to the recent decline in international oil prices, 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 Argentinean 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.

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

 

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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 that 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.” See “Item 3. Key Information—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.”

For a discussion of the Repsol Agreement which concluded the expropriation of 51% of the capital stock of YPF S.A. and YPF GAS S.A. pursuant to the Expropriate Law and the related Repsol Arrangement, see “—History and Development of YPF—Overview”.

Our strategy 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

 

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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 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 (including those related to the recent incentives to production as set by Resolution 14/2015 of the Commission for Planning and Strategic Coordination of the National Plan of Hydrocarbons Investments, considering the current international market prices of oil and refined products), 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 mainly transferred from Exploration and Production to Refining and Marketing at transfer prices established by us, which generally seek to approximate Argentine market prices.

In 2013, we 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 2012 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, petrochemical 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”) and certain construction activities, mainly related to the oil and gas industry, through our subsidiary A-Evangelista S.A. and its subsidiaries. See Note 3 to our Audited Consolidated Financial Statements.

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 Chile. See “—Exploration and Production Overview—Main 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, 2014, 2013 and 2012:

 

     For the year ended December 31,  
     2014      2013      2012  
     (in millions of pesos)  

Revenues (1)

        

Exploration and production

        

Revenues

     8,853         3,851         1,135   

Revenue from intersegment sales (3)

     61,844         38,846         30,179   
  

 

 

    

 

 

    

 

 

 

Total exploration and production

  70,697      42,697      31,314   
  

 

 

    

 

 

    

 

 

 

Downstream

Revenues

  132,254      85,624      65,047   

Revenue from intersegment sales

  1,489      1,147      1,069   
  

 

 

    

 

 

    

 

 

 

Total refining and marketing

  133,743      86,771      66,116   
  

 

 

    

 

 

    

 

 

 

Corporate and other

Revenues

  835      638      992   

Revenue from intersegment sales

  5,212      2,285      1,243   
  

 

 

    

 

 

    

 

 

 

Total corporate and other

  6,047      2,923      2,235   
  

 

 

    

 

 

    

 

 

 

Less inter-segment sales and fees

  (68,545   (42,278   (32,491
  

 

 

    

 

 

    

 

 

 

Total revenues

  141,942      90,113      67,174   
  

 

 

    

 

 

    

 

 

 

Operating income (Loss) (2)

Exploration and production

  12,353      6,324      5,730   

Downstream

  10,978      6,721      4,095   

Corporate and other

  (3,343   (1,522   (2,492

Consolidation adjustments

  (246   (363   570   
  

 

 

    

 

 

    

 

 

 

Total operating income

  19,742      11,160      7,903   
  

 

 

    

 

 

    

 

 

 

 

(1) Revenues are net of 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.
(2) Includes exploration costs in Argentina and the United States and production operations in Argentina and the United States.
(3) Intersegment revenues of crude oil to Downstream are recorded at transfer prices that reflect our estimate of Argentine market prices.

Exploration and Production Overview

Our 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 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 “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 2014, our oil production in Argentina increased by 5.40% and our gas production in Argentina increased by 25.26%, compared to our production in 2013. Moreover, our average oil and gas production in Argentina for the month of December 2014 from areas we operated (without considering production related to assets incorporated through the acquisition of the Apache Group in March 2014, for purposes of comparison) increased by 4.72% and 12.07%, respectively, compared to the average production for the month of December 2013. This increase reflects the intensive work we performed in the conventional and unconventional fields we operate.

 

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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, requiring 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 infill wells, and extension of secondary recovery and tertiary recovery testing. We are focused on 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 waterflooding in mature reservoirs in both the Golfo de San Jorge and Neuquén Basins.

Continuous 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 have already reached in other regions of the world, 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 “Item 3. Key Information—Risk Factors.”

Staying the Path of Unconventional Resources

During 2014, we extended our leadership in this area. We reaffirmed our commitment to the objective of growing our production and reserves through the development of unconventional resource, which started in 2013. More than 185 wells were drilled with Vaca Muerta shale as the target, mostly in the Loma Campana field, continuing the massive development we started in 2013. The remaining wells were targeted to continue the pilot project in El Orejano block, in association with Dow Chemical, and to delineate the potential of Vaca Muerta shale gas formation.

In Loma Campana we drilled horizontal wells with good levels of productivity. Therefore, field development will gradually migrate to a higher percentage of horizontal wells.

Also during 2014, we finalized the agreement with Petronas to jointly start a new 3-year pilot project in the La Amarga Chica concession, located northeast of Loma Campana. See “—Main properties.”

Like the previous agreements with Chevron and Dow Chemical, this new agreement with Petronas constitutes a significant step towards the development of our vast unconventional resources, although this still represents only a fraction of our unconventional acreage. See “–Main properties.”

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 a better understanding of the subsurface.

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 “Item 3. Key Information—Risk Factors.”

Tight sands also contributed to the increase of production and reserves in 2014, as was the case in the Mulichinco formation in the Rincón del Mangrullo concession. More than 25 wells were drilled in these marine tight sands, increasing gas production to 1.4 mmcm through a new gas pipeline that transports the gas produced to the Loma La Lata facilities. This new gas pipeline could even permit other operators to develop their fields.

 

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Vaca Muerta Formation

 

LOGO

 

  “Loma Campana” Area: 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”) (4,942 acres) of the 395 km2 (97,607 acres) corresponding to the area dedicated to the Pilot Project. This first Pilot Project included the drilling of more than 100 wells. Together with what has already been invested by YPF in the area, this new investment would result in a total investment of U.S.$ 1,500 million in the Pilot Project. In the second phase, which started during 2014 after completion of the Pilot Project, both companies will 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.

 

  “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 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. In 2014, 8 wells were completed with an investment of U.S.$ 123 million (including wells and facilities). As of December 31, 2014 the Company has received the first payment of the aforementioned transaction, amounting to U.S.$ 90 million, which has been recorded in the “Loans” account in the Company’s Balance Sheet.

 

 

“La Amarga Chica” Area: On December 10, 2014, YPF and PETRONAS E&P ARGENTINA S.A. (“PEPASA”), an affiliate of PETRONAS E&P Overseas Ventures Sdn. Bhd (“PEPOV”) of Malaysia executed a Project Investment Agreement (the “Investment Agreement”) aiming to perform joint exploitation of unconventional hydrocarbons in the La Amarga Chica area in

 

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the province of Neuquén. The Investment Agreement provides for the joint development of a shale oil pilot project (the “Pilot Plan”) in three annual phases with a total investment of U.S.$550 million plus VAT, of which PEPASA will provide U.S.$475 million and YPF will provide U.S.$75 million. YPF will assign 50% of the La Amarga Chica concession to PEPASA and be the operator of the area. The concession rights will, in turn, be collaterally assigned by PEPASA in favor of YPF as security for, and until PEPASA has complied with all its obligations under the Investment Agreement. Additionally, PEPOV has executed a payment guaranty of certain of PEPASA’s financial obligations under the Investment Agreement. The Pilot Plan will begin once conditions precedent to the effectiveness of the Investment Agreement and the related supplemental agreements are fulfilled, which are required to be met before March 31, 2015 and which relate primarily to the granting of the exploitation concession for the project area with a 35-year term by the province of Neuquén and certain provisions with respect to the project’s tax structure, including promotional, tax and royalty commitments in accordance with Law No. 27,007 and the agreement executed with the province of Neuquén on December 5, 2014. See “Main properties.”

 

  “Chihuido de la Sierra Negra Sudeste—Narambuena” Area: During April 2014, YPF and subsidiaries of Chevron Corporation executed a new agreement with the objective of the joint exploration of unconventional hydrocarbons in the province of Neuquén, within the area Chihuido de la Sierra Negra Sudeste—Narambuena. The investment will be undertaken exclusively by, and at the sole risk of, Chevron. See “—Main properties.”

Main properties

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

In 2014, we finalized agreements related to the acquisition and development 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 Puesto Hernández area is an exploitation concession located in the Provinces of Neuquén and Mendoza. YPF is the holder of the concession until 2027, now owning 100% of the participation in the Puesto Hernández area and 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 Puesto Hernández area, we expect we will be able to accelerate our investment plans to optimize the area’s production potential until 2027.

 

    On February 7, 2014, we 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 Colorado S.A. for the exploitation of the Lajas formation concession area. The Lajas formation 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 Lajas formation 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 owns 100% of the interest in the Lajas formation area. The consideration for the transaction was U.S.$ 25 million.

 

    On March 12, 2014, we acquired 100% of the interests 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, have an important infrastructure of pipelines and facilities. In addition, certain assets have potential for exploration and development in the Vaca Muerta formation.

 

    On March 12, 2014, YPF completed a transfer of assets transaction under an agreement with Pluspetrol S.A. (“Pluspetrol”) whereby Pluspetrol transferred, in exchange for U.S.$217 million, an interest 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.

 

    During April 2014, YPF and subsidiaries of Chevron Corporation executed a new agreement with the objective of the joint exploration of unconventional hydrocarbons in the province of Neuquén, within the area Chihuido de la Sierra Negra Sudeste—Narambuena. The investment will be undertaken exclusively by, and at the sole risk of, Chevron. For more information, see Note 11 c) to the Audited Consolidated Financial Statements.

 

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  On December 5, 2014, YPF S.A., YSUR and the Province of Neuquén and Gas y Petroleo del Neuquen S.A. signed a Memorandum of Investment Agreement (the “Memorandum Agreement”) pursuant to which the parties have agreed to convert the joint ventures and respective joint operating agreements relating to La Amarga Chica and Bajada de Añelo areas into unconventional hydrocarbon extraction concession agreements under Articles 27 and 35(b) of the Hydrocarbons Law (Law No. 17,319) (as amended by Law No. 27,007). The Memorandum Agreement was also approved by the Executive Branch and the Legislature of the Province of Neuquén.

 

  As part of the conversion of these agreements to unconventional hydrocarbon extraction concession agreements, the Company agreed to make a cash payment and assign all of its interests in the following areas: i) Puesto Cortadera, ii) Loma Negra NI, iii) Cutral Co Sur, iv) Neuquén del Medio, v) Collon Cura Bloque I and vi) Bajo Baguales. These areas represent approximately 0.7% of YPF’s total production as of September 30, 2014.

 

  Under the Memorandum Agreement, the conditions for carrying out the pilot projects on the new La Amarga Chica and Bajada de Añelo concessions are set forth, with a term of 36 and 42 months, respectively, as required by Article 35(b) of the Hydrocarbons Law as amended by Law No. 27,007. On December 19, 2014, the Company reported that the Executive Branch and the Legislature of the Province of Neuquén approved the Investment Agreement contemplated by the Memorandum Agreement.

 

  On December 10, 2014, YPF and PEPASA, an affiliate of PEPOV executed a Project Investment Agreement (the “Investment Agreement”) aiming to perform joint exploitation of unconventional hydrocarbons in the La Amarga Chica area in the province of Neuquén. The parties have signed the following supplementary agreements to the Investment Agreement (the “Supplemental Agreements”): a) the Assignment Agreement for 50% of the concession for the La Amarga Chica area; b) a Joint Venture Agreement (JV); c) the Joint Operating Agreement (“Joint Operating Agreement”); d) the Guaranty Assignment Agreement; e) the Right of First Offer Agreement for the sale of crude oil and f) an Assignment Agreement for hydrocarbons export rights. The Investment Agreement provides for the joint development of a shale oil pilot project (the “Pilot Plan”) in three annual phases with a total investment of U.S.$550 million plus VAT, of which PEPASA will provide U.S.$475 million and YPF will provide U.S.$75 million. YPF will assign 50% of the La Amarga Chica concession to PEPASA and will be the operator of the area. The concession rights will, in turn, be collaterally assigned by PEPASA in favor of YPF as security for, and until PEPASA has complied with all its obligations under the Investment Agreement. Additionally, PEPOV has executed a payment guaranty of certain of PEPASA’s financial obligations under the Investment Agreement. The Pilot Plan will begin once conditions precedent to the effectiveness of the Investment Agreement and the Supplemental Agreements are fulfilled, which are required to be met before March 31, 2015 and which relate primarily to the granting of the exploitation concession for the project area with a 35-year term by the province of Neuquén and certain provisions with respect to the project’s tax structure, including promotional, tax and royalty commitments in accordance with Law No. 27,007 and the agreement executed with the province of Neuquén on December 5, 2014. When the full contributions to each of the annual phases of the Pilot Plan have been made, PEPASA will have the option to withdraw from the plan by transferring its participation in the concession and paying liabilities accrued prior to its withdrawal (without the right to 50% of the value of net production from wells drilled prior to the exercise of its right to withdraw). After the parties’ total commitments have been met during the Pilot Plan, each party will be responsible for and contribute 50% of the work program and budget to develop the area as provided for by the Joint Operating Agreement. The Investment Agreement provides that over the three phases of the Pilot Plan, the parties will be required to perform a 3D seismic acquisition and processing program covering the entire concession area, drill 35 wells targeting the Vaca Muerta formation (including vertical and horizontal wells) and install facilities to transport the hydrocarbon production from this area.

The following table sets forth information with regard to our developed and undeveloped acreage by geographic area as of December 31, 2014:

 

     As of December 31, 2014  
     Developed(1)      Undeveloped(2)  
     Gross(3)      Net(4)      Gross(3)      Net(4)  
     (thousands of acres)  

South America

     1,620         1,161         47,618         27,330   

Argentina

     1,620         1,161         45,588         26,437   

Rest of South America(5)

     —           —           2,030         893   

North America(6)

     172         25.8         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

  1,792      1,186.8      47,618      27,330   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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(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, and Chile. In the case of Uruguay, YPF’s undeveloped acreage includes an area of 1,359 thousand acres. The block expired on October 6, 2014 and an extension of the permit for 120 days was requested from and approved by the application authority. As of the date of this annual report, we are evaluating next steps to take. In 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 of the decision to relinquish COR 14 block. In Chile, YPF’s undeveloped surface acreage totaled of 288 thousand acres.
(6) Relates only to the United States’ Gulf of Mexico.

As of December 31, 2014, none of our exploratory undeveloped acreage was subject to exploration permits that will expire in 2015 in accordance with the Hyrocarbons Law and complementary provincial laws. In addition, according to Law No. 27,007 that amended the Hydrocarbons Law, all national offshore permits and offshore hydrocarbon production concessions for which association agreements with ENARSA have not been signed as of the date of the new law will revert to and be transferred to the Argentine Secretariat of Energy. Permits and concessions granted prior to Law No. 25,943 will be exempt from this provision. The National Executive Office may negotiate the conversion of association agreements signed with ENARSA to permits or production concessions for 180 days following the enactment of the new law. YPF currently participates in three offshore blocks in association with ENARSA, which represent approximately 31% of the undeveloped acreage. Within the 180 day period, we plan to initiate negotiation of the new terms and conditions. We cannot guarantee that as a result of such negotiations we would not decide to relinquish to the Argentine Secretariat of Energy part or all of the acreage included in our current association with ENARSA. With the exception of the above, none of our exploration permits are regulated by Law No. 27,007. See “—Regulatory Framework and Relationship with the Argentine Government—Law No. 27,007, amending the Hydrocarbons Law—Exploration and Production.”

However, as a result of the expiration in 2015 of the first, second or third exploration terms of certain of our exploration permits (according to the original terms of the Hydrocarbons Law, which applied to our existing exploration permits), we would be required to relinquish a fixed portion of the acreage related to each such expiring permit, as set forth in the Hydrocarbons Law, 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). Additionally, and depending on the circumstances that could arise in each case (for instance, the state of exploratory activity in a certain area), we could request an extension of the expiration of the exploration permit, which would be subject to the approval of the respective governing authority. As a result, if no discoveries are made in 2015, we would be required to relinquish approximately 15,800 km2 of exploratory undeveloped acreage (approximately 21% of our 75,000 km2 of net exploratory undeveloped acreage as of December 31, 2014) during 2015.

Additionally, based on information available as of the date of this annual report, if we fail to make any discoveries or to engage in new activity that could extend the expirations of the exploration permits, we could be required or could decide to relinquish a maximum of approximately 1,600 km2 of exploratory undeveloped acreage (approximately 2% of our 75,000 km2 of net exploratory undeveloped acreage as of December 31, 2014) during 2016 and 2017.

According to the Hydrocarbons Law, we are entitled to decide, according to our best interest, which acreage related to each exploration permit to keep if we remain within the required relinquishment percentage. Therefore, the areas to be relinquished consist usually of acreage where drilling has not been successful and 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.

See “—Regulatory Framework and Relationship with the Argentine Government—Law No. 27,007, amending the Hydrocarbons Law” for a description of new terms that apply to new production concessions or exploration permits.

 

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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 2014 edition of the BP Statistical Review of World Energy, published in June 2014. 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 the line with (Plan Exploratorio Argentina). The total surface area of the continent represents approximately 408 million acres and the total offshore surface area includes 194 million acres on the South Atlantic shelf within the 200 meter 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, 2014:

 

     Wells(1)(2)  
     Oil      Gas  

Basin

   Gross      Net      Gross      Net  

Onshore

     13,163         11,823         1,435         1,104   

Neuquina

     4,498         4,116         1,221         975   

Golfo San Jorge

     7,573         6,826         52         52   

Cuyana

     820         745         —           —     

Noroeste

     19         7         47         17   

Austral

     253         129         115         60   

Offshore

     —           —           17         9   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

  13,163      11,823      1,452      1,113   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) In addition to productive oil and gas wells located in Argentina, we have interests in oil wells located in the United States (seven gross wells and approximately one net well, as of December 31, 2014).
(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, 2014, we held 167 exploration permits and production concessions in Argentina. We directly operate 129 of them, including 47 exploration permits and 82 production concessions.

 

  Exploration permits. As of December 31, 2014, we held 52 exploration permits in Argentina, 48 of which were onshore exploration permits and four of which were offshore exploration permits. We had 100% ownership of four onshore permits, and our participating interests in the remainder varied between 30% 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, 2014, we had 115 production concessions in Argentina. We had a 100% ownership interest in 69 production concessions, and our participating interests in the remaining 46 production concessions varied between 7% and 98%.

In addition, we have 31 crude oil treatment plants and seven 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 “Item 3. Key Information—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.”

 

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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, 2014, most of which are mature:

 

            Production 2014      Proved Reserves as
of December 31,
2014
           

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         9,009         122,876         35,165         635,238         148,297       Neuquina    Mature Field

Los Perales

     100         5,455         13,207         64,028         72,339         76,911       Golfo San Jorge    Mature Field

Aguada Toledo - Sierra Barrosa

     100         2,448         69,244         12,108         320,750         69,232       Neuquina    Mature Field

Estación Fernández Oro

     94         687         18,091         10,812         246,735         54,754       Neuquina    Mature Field

Seco León

     100         4,260         4,347         43,454         21,547         47,292       Golfo San Jorge    Mature Field

Barranca Baya

     100         5,460         1,033         36,077         6,360         37,210       Golfo San Jorge    Mature Field

Loma La Lata Norte (3)

     67         4,072         15,903         19,941         83,812         34,868       Neuquina    Mature/New Field

Chihuido Sierra Negra

     100         4,598         1,262         32,980         8,969         34,577       Neuquina    Mature Field

Manantiales Behr

     100         7,397         5,844         29,151         26,903         33,942       Golfo San Jorge    Mature Field

Rincón del Mangrullo

     100         313         5,485         7,966         141,880         33,234       Neuquina    New Field

El Portón

     100         3,185         26,328         12,872         113,355         33,060       Neuquina    Mature Field

Magallanes (4)

     50         880         14,391         4,925         155,690         32,653       Austral    Mature Field

Puesto Hernández

     100         3,610         678         26,419         6,040         27,494       Neuquina    Mature Field

Tierra del Fuego - Fracción B (YSUR)

     100         155         5,946         3,716         133,029         27,408       Austral    Mature Field

San Roque (4)

     34         1,852         24,930         7,404         108,713         26,766       Neuquina    Mature Field

El Trébol

     100         2,337         539         22,489         3,632         23,136       Golfo San Jorge    Mature Field

Lomas del Cuy

     100         2,594         1,218         19,785         8,343         21,271       Golfo San Jorge    Mature Field

Vizcacheras

     100         2,919         304         20,120         1,938         20,465       Cuyana    Mature Field

Acambuco (4)

     23         234         9,984         2,437         96,174         19,565       Noroeste    Mature Field

Chihuido La Salina

     100         3,863         29,123         8,922         53,794         18,503       Neuquina    Mature Field

CNQ 7A (4)

     50         4,587         1,281         17,349         682         17,470       Neuquina    Mature Field

Desfiladero Bayo

     100         2,422         277         16,794         1,467         17,055       Neuquina    Mature Field

Al Norte de la Dorsal

     100         530         8,504         3,946         69,279         16,284       Neuquina    Mature Field

Señal Picada

     100         2,097         210         15,752         1,540         16,026       Neuquina    Mature Field

Aguada Pichana (4)

     27         1,473         25,703         3,593         66,239         15,390       Neuquina    Mature Field

 

(1) Exploitation areas.
(2) Includes condensate and NGL.
(3) Working interest is 100% in the Sierras Blancas formation (mature field) and 50% in the Vaca Muerta and Quintuco Formations (new field).
(4) Non-operated fields.

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 (66.5%), Austral (14.7%) and Noroeste (11%) Basins.

Joint ventures and contractual arrangements in Argentina

As of December 31, 2014, we participated in 42 exploration and 34 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 7% 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, 2014, see Annex II 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.

Information on net proved reserves as of December 31, 2014, 2013 and 2012 was calculated in accordance with the SEC rules and Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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

 

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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, 2014, 2013 and 2012, 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.

Notwithstanding the foregoing, commodity prices declined significantly in the fourth quarter of 2014. See “Item 3. Key Information—Risk Factors—Risks Relating to the Argentine Oil and Gas Business and Our Business—Our oil and natural gas reserves are estimates,”

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 NGLs.

Technology used in establishing proved reserves additions

YPF’s estimated proved reserves as of December 31, 2014 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, geological outcrop information was also utilized. The tools used to interpret and integrate all this 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, 2014

The following table sets forth our estimated net proved developed and undeveloped reserves of crude oil, NGLs and natural gas at December 31, 2014.

 

Proved Developed Reserves

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

Consolidated Entities

           

South America

           

Argentina

     446         53         2,262         903   

North America

           

United States

     1         —           5         2   

Total Consolidated Entities

     447         53         2,267         905   

Equity-Accounted Entities

           

South America

           

Argentina

     —           —           —           —     

North America

           

United States

     —           —           —           —     

Total Equity-Accounted Entities

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Proved Developed Reserves

  447      53      2,267      905   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Proved Undeveloped Reserves

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

Consolidated Entities

           

South America

           

Argentina

     154         20         749         307   

North America

           

United States

     —           —           —           —     

Total Consolidated Entities

     154         20         749         307   

Equity-Accounted Entities

           

South America

           

Argentina

     —           —           —           —     

North America

           

United States

     —           —           —           —     

Total Equity-Accounted Entities

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Proved Undeveloped Reserves

  154      20      749      307   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Total Proved Reserves(2)(3)

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

Consolidated Entities

           

Developed Reserves

     447         53         2,267         905   

Undeveloped Reserves

     154         20         749         307   

Total Consolidated Entities

     601         73         3,016         1,212   

Equity-accounted entities

           

Developed Reserves

     —           —           —           —     

Undeveloped Reserves

     —           —           —           —     

Total Equity-Accounted Entities

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Proved Reserves

  601      73      3,016      1,212   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes crude oil (oil and condensate).
(2) Volumes of natural gas in the table above and elsewhere in this annual report have been converted to barrels of oil-equivalent at 5,615 cubic feet per barrel.
(3) Proved crude oil and NGLs reserves of consolidated entities include an estimated approximately 91 mmbbl of crude oil and 11 mmbl of NGLs in respect of royalty payments which, as described above, are a financial obligation or are substantially equivalent to a production or similar tax. Proved natural gas reserves of consolidated entities include an estimated approximately 324 bcf in respect of such payments. Equity-accounted entities reserves in respect of royalty payments that are a financial obligation or are substantially equivalent to a production or similar tax are not material.

For information regarding changes in our estimated proved reserves during 2014, 2013 and 2012, see Note 15 to the Audited Consolidated Financial Statements.

The paragraphs below explain in further detail the most significant changes in our proved undeveloped reserves during 2014, 2013 and 2012.

Changes in our proved undeveloped reserves during 2014

YPF had estimated a volume of net proved undeveloped reserves of 307 mmboe at December 31, 2014, which represented approximately 25% of the 1,212 mmboe total reported proved reserves as of such date. This compares to estimated net proved undeveloped reserves of 261 mmboe as of December 31, 2013 (approximately 24% of the 1,083 mmboe total reported proved reserves as of such date).

The 18% total net increase in net proved undeveloped reserves in 2014 is mainly attributable to:

 

    Ongoing successful development activities related to proved undeveloped reserves projects, which allowed a transfer of approximately 88.1 mmboe (26.3 mmbbl of crude oil, 8.3 mmbbl of NGL and 300.6 bcf of natural gas) to proved developed reserves. Main contributions are related to development wells (58 mmboe), gas compression projects (14 mmboe) and improved recovery projects (10 mmboe).

 

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    Extensions and discoveries, which added 79.3 mmboe (19.6 mmbbl of crude oil, 9.6 mmbbl of NGL and 291.3 bcf of natural gas) of proved reserves mainly from the Rincón del Mangrullo, Aguada Toledo-Sierra Barrosa, Loma La Lata Norte, Manantiales Behr and Chachahuen fields.

 

    Negotiation of the extension of exploitation concessions in the provinces of Tierra del Fuego and Río Negro which added 15.5 mmboe (4.7 mmbbl of crude oil, 0.8 mmbbl of NGL and 56.3 bcf of natural gas) of proved undeveloped reserves. See “Item 4. Information on the Company-Regulatory Framework and Relationship with the Argentine Government Exploration and Production.

 

    New project studies and revision of gas and oil development projects, which added approximately 28 mmboe (17.7 mmbbl of crude oil, a decrease of 1.3 mmbbl of NGL, and 64.8 bcf of natural gas) of proved undeveloped reserves. The main contributions came from the Volcán Auca Mahuida, Aguada Toledo-Sierra Barrosa, Seco León and Los Perales fields.

 

    New improved recovery projects, which added approximately 10 mmbbl of proved undeveloped secondary recovery reserves. The most important additions are related to the Manantiales Behr, El Trébol, Escalante, Barranca Baya and Los Perales fields.

YPF’s total capital expenditure to advance the development of reserves was approximately U.S.$ 4,260 million during 2014, of which U.S.$ 758 million was allocated to projects related to proved undeveloped reserves.

As of December 31, 2014, we estimate our proved undeveloped reserves related to gas wells and to primary and secondary oil recovery projects, which account for approximately 96% 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 Central and Loma La Lata Norte Fields, which account for the remaining approximately 4% of our proved undeveloped reserves as of December 31, 2014, continue their scheduled development. We estimate that the last compression stage (representing approximately 1% of our proved reserves as of such date) will be developed within approximately seven years from its booking date according to expected compression needs based on current (and consequently expected) reservoir behavior.

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 natural gas and oil development projects, which added approximately 83 mmboe of proved undeveloped reserves, mainly 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) which added 8 mmboe of proved undeveloped reserves, mainly due to scheduled proved undeveloped projects and which will not require additional investment.

 

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    New improved recovery projects, which added 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 seven years from its booking date according to expected compression needs based on current (and consequently expected) reservoir behavior.

Changes in our proved undeveloped reserves during 2012

YPF had estimated a volume of net proved undeveloped reserves of 203 mmboe at December 31, 2012, which represented approximately 21% of the 979 mmboe total reported proved reserves as of such date. This compares to estimated net proved undeveloped reserves of 254 mmboe at December 31, 2011 (approximately 25% of the 1,005 mmboe total reported proved reserves as of such date).

The 20% total reduction in net proved undeveloped reserves in 2012 is mainly attributable to:

 

    Successful development activities related to proved undeveloped reserves projects, which allowed a transfer of approximately 43 mmboe to proved developed reserves.

 

    Negotiation of the extention of exploitation concessions in the provinces of Santa Cruz, Salta and Tierra del Fuego (See “Item 4. Information on the Company—Regulatory Framework and Relationship with the Argentine Government Exploration and Production) which added 30 mmboe of proved undeveloped reserves, mainly due to scheduled proved undeveloped projects.

 

    Downward revision of approximately 24 mmboe of unconventional reserves.

YPF’s total capital expenditure to advance the development of reserves was approximately U.S.$1,738 million during 2012, of which U.S.$391 million was allocated to projects related to proved undeveloped reserves.

As of December 31, 2012, we estimate our proved undeveloped reserves related to gas wells and to primary and secondary oil recovery projects, which account for approximately 81% 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 19% of our proved undeveloped reserves as of December 31, 2012, 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 9% of our proved undeveloped reserves as of December 31, 2012 (representing approximately 2% of our proved reserves as of such date), will be developed within approximately seven 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 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, NGLs, 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, who has headed the RCD since January 2013, is responsible for overseeing the preparation of the reserves estimates and reserves audits conducted by third party engineers. The current director has over 18 years of experience in geology and geophysics, reserves estimates, project development, finance and general accounting regulation. In the six years prior to becoming the Reserves Audit Director, he was Regional Director responsible for the operation and development of YPF’s operated fields at the Cuyana and North of Neuquina Basins, in western Argentina. He holds a degree in geology from the National University of Tucumán, and postgraduate courses at IAE Austral University. 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 units and associated with properties where technical, operational or commercial issues have arisen.

 

(d) A Quality Reserve Coordinator (“QRC”) is assigned to 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.

 

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(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.

 

(f) Our internal audit team examines the effectiveness of YPF’s financial controls, which are designed to ensure the reliability of reporting and safeguarding of all the assets and examines 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 a 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.

YPF has adopted the above-mentioned procedure by approving the corresponding internal policy (the “Policy”). The Policy establishes an annual close of reserves in the third quarter (that is, September 30 of each year) for an auditing process. As a result, YPF is able to have the information prepared by the time the Company must report to the markets. YPF only audits reserves in the fourth quarter in exceptional cases that could materially modify YPF’s reserve volumes. Examples of these cases include changes as a result of projects, changes in planned activities, well performance and ongoing negotiations.

In 2014, DeGolyer and MacNaughton audited certain YPF operated and non-operated areas in the Austral, Neuquina, Golfo San Jorge, Noroeste, Cuyana, Anadarko and Gulf of Mexico Basins. These audits were performed as of September 30, 2014, with the exception of areas corresponding to YSUR group, Maxus group, and Lindero Atravesado, Señal Picada, Magallanes and Cañadón Yatel areas, all of which were audited as of December 31, 2014, as a result of term of concession extension and joint ventures negotiations, and changes in planned activities, which occurred after September 30, 2014, and due to the volumes of reserves involved. See “—Exploration and Production Overview—Main Properties.”

Audited fields as of September 30, 2014 contain in aggregate, according to our estimates, 330 mmboe proved reserves (35 mmboe of which were proved undeveloped reserves) as of such date, which represented approximately 28% of our proved reserves and 13.4% of our proved undeveloped reserves as of September 30, 2014. There were no changes in reserves associated with any subsequent events relating to well performance or the results of wells drilled which resulted in a material change in the reserves not otherwise audited as of September 30, 2014 but subsequently disclosed as of December 31, 2014. A copy of the related reserves audit report is filed as an exhibit to this annual report.

In addition, fields that were subject to audits or evaluations, as the case may be, as of December 31, 2014, contain an estimated aggregate 221.6 mmboe of proved reserves (58.6 mmboe of which were proved undeveloped reserves), which represented approximately 18.3% of our proved reserves and 19.1% of our proved undeveloped reserves as of December 31, 2014. Copies of the related reserves audit reports and reserves estimate report are filed as an exhibit 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 that are not included in this annual report, which are different from estimates of proved reserves consistent with the SEC’s guidance contained in this annual report; 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.

 

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Oil and gas production, production prices and production costs

The following table shows our crude oil (including oil and condensate), NGL, and gas production on an as sold and annual 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 and Condensate Production(1)

   2014      2013      2012  
     (mmbbl)  

Consolidated Entities

        

South America

        

Argentina

     89         84         82   

North America

        

United States

     *         *         1   
  

 

 

    

 

 

    

 

 

 

Total Consolidated Entities

  89      84      83   

Equity-Accounted Entities

South America

Argentina

  —        —        —     

North America

United States

  —        —        —     
  

 

 

    

 

 

    

 

 

 

Total Equity-Accounted Entities

  —        —        —     

Total Oil Production(2)

  89      84      83   
  

 

 

    

 

 

    

 

 

 

NGL Production(1)

   2014      2013      2012  
     (mmbbl)  

Consolidated Entities

        

South America

        

Argentina

     18         18         17   

North America

        

United States

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total Consolidated Entities

  18      18      17   

Equity-Accounted Entities

South America

Argentina

  —        *      *   

North America

United States

  —        —        —     
  

 

 

    

 

 

    

 

 

 

Total Equity-Accounted Entities

  —        *      *   

Total NGL Production(3)

  18      18      17   
  

 

 

    

 

 

    

 

 

 

Natural Gas Production(1)

   2014      2013      2012  
     (bcf)  

Consolidated Entities

        

South America

        

Argentina

     470         372         366   

North America

        

United States

     1         1         1   
  

 

 

    

 

 

    

 

 

 

Total Consolidated Entities

  471      373      367   

 

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Equity-Accounted Entities

South America

Argentina

  —        5      10   

North America

United States

  —        —        —     

Total Equity-Accounted Entities

  —        5      10   
  

 

 

    

 

 

    

 

 

 

Total Natural Gas Production(4)(5)

  471      378      377   
  

 

 

    

 

 

    

 

 

 

Oil Equivalent Production(1)(6)

   2014      2013      2012  
     (mmboe)  

Consolidated Entities

        

Oil and Condensate

     89         84         83   

NGL

     18         18         17   

Natural Gas

     84         66         65   

Equity-Accounted Entities

        

Oil and Condensate

     —           —           —     

NGL

     —           *         *   

Natural Gas

     —           1         2   
  

 

 

    

 

 

    

 

 

 

Total Oil Equivalent Production

  191      169      167   
  

 

 

    

 

 

    

 

 

 

 

* Not material (less than 1).
(1) Loma La Lata Central and Loma La Lata Norte (southern and northern parts of the Loma La Lata field) in Argentina contain approximately 15% of our total proved reserves expressed on an oil equivalent barrel basis. Oil and condensate production in these fields was approximately 5, 5, and 5 mmbbl for the years ended December 31, 2014, 2013 and 2012, respectively. NGL production in these fields was approximately 8, 9 and 10 mmbbl for the years ended December 31, 2014, 2013 and 2012, respectively. Natural gas production in the Loma La Lata field was 138, 110 and 159 bcf for the years ended December 31, 2014, 2013 and 2012, respectively.
(2) Crude oil production for the years ended in December 31, 2014, 2013 and 2012 includes an estimated approximately 13, 12 and 11 mmbbl, respectively, 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 in respect of royalty payments which are a financial obligation, or are substantially equivalent to a production or similar tax is not material.
(3) NGL production for the years ended in December 31, 2014, 2013 and 2012 includes an estimated approximately 2, 3 and 2 mmbbl, respectively, 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 NGL in respect of royalty payments 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 December 31, 2014, 2013 and 2012 includes an estimated approximately 60, 47 and 48 bcf, respectively, 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 operations (whereas sale volumes shown in the reserves table included in Note 15 to the Audited Consolidated Financial Statements “Supplemental information on oil and gas exploration and production activities (unaudited)—Oil and Gas Reserves” include volumes consumed in operations).
(6) Volumes of natural gas have been converted to barrels of oil equivalent at 5,615 cubic feet 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 2014, 2013, and 2012:

 

Production costs and sales price

   Total      Argentina      United States  
     (Ps./boe)  

Year ended December 31, 2014

        

Lifting costs

     122.44         122.26         235.99   

Local taxes and similar payments(1)

     11.43         11.44         —     

Transportation and other costs

     15.06         15.03         31   
  

 

 

    

 

 

    

 

 

 

Average production costs

  148.93      148.74      266.99   
  

 

 

    

 

 

    

 

 

 

Average oil sales price

  594.02      593.34      724.77   

Average NGL sales price

  188.87      187.70      364.23   

Average natural gas sales price

  111.08      111.03      192.58   

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 NGL sales price

  114.05      112.90      252.27   

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 NGL sales price

  110.29      108.12      379.60   

Average natural gas sales price

  54.78      60.33      92.12   

 

(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. 45.51 per mmboe, Ps.32.77 per boe and Ps. 25.10 per boe for the years ended December 31, 2014, 2013 and 2012, 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

   For the Year Ended December 31,  
     2014      2013      2012  

Gross wells drilled(1)

        

Exploratory Productive

     35         38         33   

Oil

     20         30         27   

Gas

     15         8         6   

Dry

     8         3         5   
  

 

 

    

 

 

    

 

 

 

Total

  43      41      38   
  

 

 

    

 

 

    

 

 

 

Development Productive

  861      728      468   

Oil

  725      664      455   

Gas

  136      64      13   

Dry

  4      2      2   
  

 

 

    

 

 

    

 

 

 

Total

  865      730      470   
  

 

 

    

 

 

    

 

 

 

Net wells drilled(2)

Exploratory Productive

  30      29      24   

Oil

  17      25      21   

Gas

  13      4      3   

 

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Dry

  5      3      4   
  

 

 

    

 

 

    

 

 

 

Total

  44      32      28   
  

 

 

    

 

 

    

 

 

 

Development Productive

  708      679      441   

Oil

  592      624      430   

Gas

  116      55      11   

Dry

  4      2      1   
  

 

 

    

 

 

    

 

 

 

Total

  712      681      442   
  

 

 

    

 

 

    

 

 

 

 

(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 development oil well in 2014 with positive result, which belongs to the Neptune off shore project GOM (first oil January 2015). 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.
(2) “Net” wells equals gross wells after deducting third-party interests. In addition to wells drilled in Argentina, “net” wells were not drilled in North America.

Exploration & Production Activity in Argentina

During 2014, our main exploratory and development activities in Argentina have had the following principal focus:

 

  1. Operated Areas - Exploratory Activities

During 2014, our main exploratory activities in Argentina were principally focused on:

1.1 Onshore:

 

    Unconventional activities:

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.

Having completed the exploration phase, we obtained 35-year exploitation permits for the La Amarga Chica and Bajada de Añelo blocks. See “Exploration and Production—Main Properties”.

 

    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 Joint Operation Agreements (“JOAs”) of the second and third bidding rounds in the province of Neuquén.

We obtained positive results in wells drilled in the Cerro Avispa, Bajada de Añelo and El Manzano Oeste blocks. These wells confirmed the productivity of the Vaca Muerta formation at various points of the basin.

Continuing the exploration of different source rocks, the Filo Morado xp-40 well was completed. It is the first YPF well in the Agrio formation, as a shale oil reservoir.

Golfo San Jorge Basin. During 2014, the El Trebol xp-914 well was completed with positive results as an unconventional resource play in the D-129 formation.

 

    Shale gas:

Neuquina Basin. During 2014, we focused on the regional definition of the shale gas strip area obtaining positive results in the Cerro Partido (operated by YPF SA) block. Data integration is in progress to define sweet spot distribution.

 

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    Conventional activities:

 

    Neuquina Basin:

Tight gas: Exploration of the Basin Center Gas System started with the Lajas Este.x-1 well in the Loma La Lata—Sierra Barrosa block, with positive exploratory results. We also completed well RDMS x-1 in the Rincón de Mangrullo block in the Mulichinco formation.

Positive results were obtained in eleven exploration wells targeting conventional reservoirs in the following blocks:

 

  ¡    Los Caldenes (oil)
  ¡    Paso de las Bardas Norte (oil)
  ¡    Bajo del Piche (gas / oil)
  ¡    Llancanelo R (oil)
  ¡    Cañadon Amarillo (oil)
  ¡    Loma la Lata - Sierra Barrosa (gas)
  ¡    Señal Cerro Bayo (gas)
  ¡    Chachahuen Sur (oil)

 

    Golfo San Jorge Basin:

We continued exploration activity targeting conventional oil and gas reservoirs in the Golfo San Jorge Basin. Positive results were obtained in seven exploration wells in the following blocks:

 

  ¡    Restinga Alí (gas)
  ¡    Cerro Piedra - Cerro Guadal Norte (oil)
  ¡    Los Perales-Las Mesetas (oil)
  ¡    Manantiales Behr (gas)

 

    Cuyana Basin:

We restarted the exploration activity in Cuyana Basin with positive results in the Vizcacheras block.

 

    Bordering areas:

Los Tordillos Oeste block (located in the province of Mendoza): Starting with the analysis of the 3D seismic data obtained during the last quarter of 2010, we established the location of two exploratory wells, 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 2014, the Los Retoños x-1 well was drilled, and completion is scheduled for first quarter of 2015. Drilling of the second well, Chañar Brea x-1, began in January 2015.

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 joint venture. We decided not to continue with the second exploratory period and, as a result, the block was relinquished to the province of Chubut.

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. During 2014, the block was relinquished to the province.

1.2 Offshore:

 

    According to the amendments to the Hydrocarbons Law adopted by Law No. 27,007, all exploration permits owned by ENARSA will be transferred to the Secretariat of Energy. YPF currently participates in three offshore blocks in association with ENARSA (E1 block: YPF 35%, E2 block: YPF 33% and E3 block: YPF 30%) with a total acreage of 23,700 km2. Within six months after the Law No. 27,007 was published, we plan to initiate negotiation of the new terms and conditions. As of December 31, 2014, we do not have registered assets in these blocks. See “—Regulatory Framework and Relationship with the Argentine Government—Law No. 27,007, amending the Hydrocarbons Law” for a description of new terms which applied to new production concessions or exploitation permits.

 

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  2. Operated Areas - Development activities

During 2014, our development activities in Argentina were mainly focused on the following regions:

 

  2.1 Neuquén—Río Negro

 

    Neuquén YPF Concession:

Aguada Toledo—Sierra Barrosa area: As part of our strategy to maximize oil production, we continued working on secondary recovery efforts drilling 36 production wells, eight water injectors and 21 injector conversion wells. We built and refurbished facilities to increase the injection and production evacuation capacity of the field. These efforts were reflected in the fourth quarter of 2014, when the average water injection reached 9,600 cm/d, (compared to 7,920 cm/d in the first quarter of 2014). Water injection is expected to reach 16,000 cm/d in 2015. Also, for the next year certain studies based on increased waterflooding of the reservoir area, considering a water injection volume of 2,200 cm/d, would potentially allow the recovery of an additional 3.2 mmboe of oil.

In 2014, petroleum tests yielded positive results in a calcareous horizon along the entire Aguada Toledo-Sierra Barrosa field. YPF plans to continue the delineation of this play through six horizontal and vertical delineation wells in 2015.

Regarding tight gas, development of Segment 5 in the Lajas formation continued in the Aguada Toledo field. In this area, 44 drilled wells allowed an increase of gas production from 2.4 mmcm/d to 4.1 mmcm/d. We expect to begin an additional stage of development through infill and horizontal wells, which would allow us to substantially increase the reservoir area.

To confirm the potential of the Lajas formation in the Aguada Toledo-Sierra Barrosa field, we drilled tight gas appraisal wells in Segment 2 over the North Barrosa structure confirming gas along all drilled Lajas sections.

Octógono block: nine development wells were completed. The average production in this area was approximately 2,312 bbl/d as of December 31, 2014.

El Cordón field: regarding conventional gas formations we continued drilling through five delineation and development wells. As of December 2014, the gas production rate was 250,000 cm/d, an increase of 150% compared to December 2013.

To confirm the potential of the Lajas formation in this field we drilled tight gas appraisal wells in Segment 3 confirming gas along all drilled Lajas sections.

Bardita Zapala area: three development wells were drilled targeting the Tordillo formation, two of which were completed during 2014 with average oil production of 270 bbl/d by the end of 2014. The third well was completed during January 2015. Besides drilling activities, during 2014 we drilled a workover at the BZ-18 well, which opened a new faulted area and allowed us to test oil in the Tordillo formation. As a result, we drilled a step out well in 2014.

Barda Gonzales area: during the second half of 2014 five wells were drilled (BG-1077, BG-1080, BG-1083, BG-1065 and BG-1078). The target for the first three wells were the Quintuco/Mulichinco formations and as a secondary objective the lower member of the Centenario formation. The wells were completed during 2014 with an average oil production 37.5 bbl/d by December 2014 per well. The BG-1065 and BG-1078 wells were drilled targeting the Mulichinco and upper and lower Centenario formations, and were completed in January 2015. The development in 2015 will continue studying the extension of this area.

Guanaco area: three wells were drilled during 2014, up to 3,350 meters in the Guanaco Deep area, targeting the Precuyano and Basamento formations as primary objectives, and the Lotena and Lajas formations as secondary objectives. Two of them, GU-1185 and GU-1196, were completed in 2014 with an average oil production of 9 bbl/d by the end of December 2014. The Guanaco Deep area has 26 wells drilled up to date. Due to the results of the current drilling campaign, several actions are being taken in order to improve the production in this zone. During 2015, we expect to drill one more development well in Guanaco Deep and one step out well in the North zone of Guanaco Centro.

 

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Anticlinal Campamento area: one well was drilled to the Precuyo formation and because of its structural position, we will not continue drilling in this zone. The results were not as expected, and the average gas production was 5,500 mcm/d.

Ranquil Co area: two wells were drilled targeting the Precuyo formation. In the RCO-1054 well we obtained an average gas production of 80,000 mcm/d and in the RCO-1053 well we obtained an average gas production of 5,500 mcm/d. In the east part of the area, we are planning to develop new drilling opportunities in 2015.

Neuquen YPF Concession

 

LOGO

1 Aguada de Castro; 2 Aguada Pichana; 3 Aguada Villanueva; 4 Al Norte de La Dorsal; 5 Al Sur de La Dorsal I; 6 Al Sur de La Dorsal Ii; 7 Al Sur de La Dorsal Iii; 8 Al Sur de La Dorsal Iv; 9 Al Sur De La Dorsal V; 10 Al Sur De La Dorsal Vi; 11 Al Sur de La Dorsal Vii; 12 Anticlinal Campamento; 13 Apon; 14 Bajada de Añelo; 15 Bajo Del Toro; 16 Bandurria; 17 Buta Ranquil I; 18 Buta Ranquil Ii; 19 Cerro Arena; 20 Cerro Avispa; 21 Cerro Bandera; 22 Cerro Hamaca; 23 Cerro Las Minas; 24 Cerro Partido; 25 Chapua Este; 26 Chasquivil; 27 Chihuido de La Salina Sur; 28 Chihuido de La Sierra Negra; 29 Corralera; 30 Cortadera; 31 Dadín—Lote I; 32 Dadín—Lote Ii; 33 Dadín—Lote Iii; 34 Don Ruíz; 35 Dos Hermanas; 36 El Orejano; 37 El Portón; 38 El Santiagueño; 39 Filo Morado; 40 Huacalera; 41 La Amarga Chica; 42 La Banda; 43 La Calera; 44 La Ribera I; 45 La Ribera Ii; 46 Las Manadas (Calandria Mora); 47 Las Tacanas; 48 Lindero Atravesado; 49 Loma Amarilla; 50 Loma Campana; 51 Loma del Mojón; 52 Loma Del Molle; 53 Loma La Lata—Sierra Barrosa; 54 Los Candeleros; 55 Mata Mora; 56 Meseta Buena Esperanza; 57 Octogono; 58 Ojo De Agua; 59 Pampa de Las Yeguas I; 60 Pampa de Las Yeguas Ii; 61 Paso de Las Bardas Norte; 62 Puesto Hernandez; 63 Rincón Del Mangrullo; 64 Río Barrancas; 65 Salinas del Huitrin; 66 San Roque; 67 Santo Domingo I; 68 Santo Domingo Ii; 69 Señal Cerro Bayo; 70 Señal Picada—Punta Barda; 71 Volcán Auca Mahuida

 

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Loma de la Lata area: our main gas producing field. We continued with four infill wells, plunger lift and wellhead compressions aiming at declines below 10% per year (compared to an average of 13% per year in the 2011/12 period). During 2014 and 2013, the average production rate was 11.4 million cm/d and 12.0 million cm/d respectively, showing decline rates of 8.8% and 4.0% respectively.

To confirm the potential of the Lajas formation in this field we drilled one tight gas appraisal well in Segment 7 that confirmed gas in this formation with a low rate, which is currently under evaluation.

Puesto Hernandez block: During January 2014 YPF acquired the remaining 38.45% interest in the Puesto Hernandez block from Petrobras, and became the sole owner of the block. Previously YPF had a 61.55% interest. Since April 1, 2014 YPF has been the operator of the block. Puesto Hernandez is located in the provinces of Neuquén and Mendoza, and covers an area of 147 km2, its operations began in 1967 and as of December 31, 2014, it produces 9,700 bbl/d of Medanito crude.

On January 1, 2015, as a result of a transaction with Gas y Petróleo del Neuquén (“G&PN”) (see “—Exploration and Production Overview—Main properties”) the following hydrocarbon concessions were transferred to G&PN: Bajo Baguales, Neuquen del Medio, Cutral Co Sur, Loma Negra NI, Collon Cura Block I and Puesto Cortadera. In return, YPF received a 100% working interest participation, in the Bajada de Añelo block. The combined production of the concessions transferred by YSUR was 254 bbl/d and 534 mcm/d. For more information, see “—Main properties”.Additionally, as a result of the transaction between YPF and Pluspetrol S.A. executed on March 12, 2014, the following hydrocarbon concessions were transferred to Pluspetrol: La Calera (100% working interest), Aguada Villanueva (100% working interest) and the Meseta Buena Esperanza (75% working interest). In addition, the following participations in exploration blocks were also transferred to Pluspetrol S.A.: Chasquivil Sur (45% working interest), Las Tacanas Sur (45% working interest), Salinas del Huitrin (45% working interest) and Cerro Arena (20% working interest). For more information, see “—Main properties”.

 

    Rio Negro YPF Concession:

In December 2014 YPF and Río Negro province signed an agreement to extend some of the Company’s concessions in such province for ten additional years. See “Item 4. Information on the Company—Exploration and Production.” The agreement includes the following eight blocks: Señal Picada-Punta Barda, Barranca de los Loros, El Medanito, Bajo del Piche, Los Caldenes, Estación Fernández Oro and El Santiagueño. They produce nearly 12.5 mbbl/d of oil and 1.83 mmcm/d of gas as of December 31, 2014.

Chihuido de la Sierra Negra block: during 2014 the activities related to enhanced oil recovery projects continued. An integrated reservoir study and laboratory tests were completed during 2013 and a single well chemical tracer test is scheduled to be performed during first quarter of 2015. If the test is positive, a pilot well will be drilled in 2016.

Volcán Auca Mahuida and Las Manadas blocks: we continued with the appraisal and development of the Centenario and Mulichinco formations. Six new wells were completed during 2014. We had one dry gas well and five oil wells, with an average oil production of 135 bbl/d per well as of December 2014. Further appraisal and development wells are scheduled to be drilled in 2015.

Los Caldenes block: we drilled and completed in March 2014 one exploration well with an initial oil production of 191 bbl/d (32° API) from the Sierras Blancas formation. It was the first well drilled in the block since 1999. The block covers an area of 115.3 km2 and its last production date was February 2011. Considering this highly successful well, we initiated an appraisal campaign in the block with two appraisal wells drilled and completed between August and November 2014. The block oil production average was 151 bbl/d as of December 31, 2014. Further drilling activity is scheduled for 2015.

Cerro Hamaca Noroeste block: the northwest area was discovered in late 2012 and during 2014 we continued with the appraisal and development campaign of the Rayoso formation. Thirteen wells were drilled and ten of them completed in 2014. As of December 2014, the field average oil production was 390 bbl/d, approximately 50% higher than previous year (December 2013). Fifteen wells are scheduled for 2015. Water injection is also scheduled to begin in 2015.

Estación Fernandez Oro block: four development gas wells were drilled targeting the Lajas formation, with an average gas production of 55 mmcm/d and an average oil production of 100 bbl/d per well as of December 2014. The development of the gas field will continue during 2015, focusing on drilling activity. Four drilling rigs are planned for development during the second half of 2015.

 

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Los Ramblones area: two oil wells were drilled at the last quarter of 2014, one of which had average oil production of 148 bbl/d as of December 2014 while the other had no production.

Señal Picada-Punta Barda block: during 2014 we continued with the optimization of existing waterflooding projects in the Señal Picada area. Twenty-three new wells were drilled and workovers in existing wells were also performed. In the Punta Barda area we started an appraisal campaign to extend the proved reserves area. Four wells were drilled in the Loma Montosa formation. As a result of these encouraging results , four new appraisal wells will be drilled in 2015.

Rio Negro YPF Concession

 

LOGO

 

  2.2 Mendoza

 

    Mendoza Norte YPF Concession:

During 2014 we continued drilling wells and workovers, focused on the development of new areas and performing primary and secondary recovery in mature oil fields. The most important activities are described below:

Barrancas block: We performed optimizing waterflooding activities, including workovers of production and injector wells. Appraisal well B.a-508 located in northwest zone of the field delivered a positive result. This result creates new opportunities in this zone of the field notwithstanding poorer petrophysical properties regarding Barrancas CRI main field.

Ugarteche area: After 13 years, drilling activity has been revitalized with appraisal well drilling U.a-140. This well is producing from the Rio Blanco formation.

Estructura Cruz de Piedra area: We continued the field development plan, including five workovers and three new development wells. The good results obtained support the proposed activity for 2015.

La Ventana block: We renegotiated the La Ventana consortium with Sinopec, extending the concession through 2027 and changing the ownership percentages. As of November 1, 2014 YPF´s participation in this area increased from 60% to 70% and Sinopec now holds a 30% working interest. After reaching this new Joint Operating Agreement (JOA), we re-started the drilling of infill and replacement wells and the appraisal and development of the Punta de las Bardas Sur field. These two projects combined resulted in six new wells drilled and five workovers during 2014.

 

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Vizcacheras Oeste field—Papagayos formation: We continued the optimization and infill drilling projects during 2014. Under these two projects we drilled 13 new wells and performed 13 workovers, almost completing the primary production development of Vizcacheras Oeste field.

Llancanelo block: Four horizontal wells were drilled involving two production formation targets. This successful activity should allow us to drill six new wells during 2015.

Valle del Río Grande block: We performed appraisal and development activities in fractured reservoirs during 2014. Appraisal well LVo.-9 (Los Volcanes) from the Pre Cuyo formation demonstrated positive results.

Cerro Fortunoso block: A water treatment plant was installed to treat a maximum rate of 4,500 m3/d of injection water. We continued the waterflooding development plan including seven conversions of producers to injectors and one new injector well.

Mendoza Norte YPF Concession

 

LOGO

 

    Mendoza Sur YPF Concession:

During 2014 we remained focused on the development of new areas and on the secondary recovery in mature oil fields. We have described the most important activities below:

Desfiladero Bayo area: We drilled twelve development wells and two appraisal wells in the Rayoso, Troncoso and Agrio formations in line with the development plan. We began a polymer injection pilot, drilled one producer and two injector wells, in addition to completing six workovers. Furthermore, pilot facilities are under construction with the objective of beginning polymer injection in June 2015.

 

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Chachahuen Sur block: We drilled 15 development wells and six appraisal wells in the Rayoso formation. Additionally, we obtained positive results from appraisal wells drilled in the northeast and southwest zones of the block.

Cañadón Amarillo block: We drilled four development wells and three appraisal wells in certain deep formations (Grupo Cuyo, Barda Negra and Tordillo) to continue the development of the north area in the Cañadón Amarillo block. We received positive results from appraisal wells drilled in the southwest zones of the north area.

El Portón block: We drilled two development wells in the Troncoso formation and an appraisal well in the Quintuco, Vaca Muerta and Mulichinco formations. Additionally, we received positive results from an appraisal well drilled in the north area of the block.

Mendoza Sur YPF Concession

 

LOGO

 

  2.3 Chubut

The oil production of the blocks operated by YPF in the Chubut province surpassed historic levels, achieving a 7% increase in total oil production in 2014 compared to 2013. In addition, wellhead gas production increased 15% in 2014 compared to 2013.

 

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Manantiales Behr block: we drilled 41 wells in 2014 among three main oil fields, La Carolina, El Alba and Grimbeek, with mainly positive results. Additionally, we completed 54 workovers for primary oil also with positive results.

The polymer injection pilot project at the Grimbeek field started in 2013 with a standard water flooding approach and is currently at an advanced stage, with good production results. We expect to initiate polymer injection when secondary oil recovery is stabilized, during the first quarter of 2015.

The medium-term focus on the Manantiales Behr block is to extend water flooding projects along the field in order to sustain production growth, starting with facilities developments during 2015.

As a result of the activities described oil production from the Manantiales Behr concession increased by nearly 7% compared to 2013.

Chubut YPF Concession

 

LOGO

El Trébol—Escalante block: oil production increased by approximately 11% during 2014 compared to 2013 based on 48 new wells drilled and 57 workovers, within waterflooding optimization projects and delineation of deeper structures.

Zona Central—Cañadón Perdido block: located around the urban area of Comodoro Rivadavia, maintained the 2013 oil production level, due to the Bella Vista Sur project, one of the most productive structures in the basin.

Restinga Alí block, located on the coast between the urban area and the sea, was reactivated, producing more than 625 bbl/d oil production in December 2014, with very promising development prospects in shallow water off-shore projects.

 

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  2.4 Santa Cruz

During 2014, we implemented 21 integral development projects across five major development areas in the province of Santa Cruz (Las Heras, El Guadal, Los Perales, Pico Truncado and Cañadon Seco), comprising a total portfolio of thirty-one projects. The main projects include the following reserve areas: Cañadón Escondida, Cerro Grande, Seco León, Los Perales, Cañadon Yatel and El Guadal, with 269 wells drilled (221 oil wells, 46 injectors and two advanced wells), 430 workovers and associated facilities.

The main objectives of these integral projects are:

 

  ¡    Comprehensively developing 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 water injection to improve the sweep efficiency.

 

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

 

  ¡    Providing development support through the appropriate surface facilities.

Santa Cruz YPF Concession

 

LOGO

 

  2.5 Tierra del Fuego

On October 10, 2014, the extension of concessions of the CA7, Los Chorrillos, Lago Fuego and Tierra del Fuego areas was finally approved pursuant to Provincial Law No. 997 and 998.

The Tierra del Fuego block (100% working interest) was extended until November 14, 2027, Los Chorrillos block (100% working interest) until April 18, 2026 and Lago Fuego block (100% working interest) until November 6, 2027.

 

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During 2014, no drilling activity was performed in the Tierra del Fuego province. Base production was maintained through workover activity. Additionally , we improved our facilities to reduce the gas back pressure at the gathering system and improved wells productivity mainly through the installation of plunger lift system at San Sebastian field.

In the Tierra del Fuego province, 22 recompletions were executed during 2014, 12 of which were executed at the San Sebastian field, focused mainly on gas production. The rest of the activity was focused on oil production at the north and south. In both cases, the Springhill formation was the target area.

Tierra del Fuego YPF Concession

 

LOGO

 

  3. Non-operated areas

 

    Exploration activities:

We obtained positive results in unconventional exploration wells drilled in San Roque and Aguada Pichana (operated by Total S.A.) blocks, confirming the productivity of Vaca Muerta formation in these areas.

Also positive results were obtained in exploration wells targeting conventional oil reservoirs in the CNQ7/A and CNQ7 blocks, both operated by Pluspetrol.

 

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    Development activities:

El Tordillo and La Tapera-Puesto Quiroga blocks: Beginning in January 2014, under an agreement that YPF signed with Chubut as part of the negotiation of the extension of YPF concessions in that province, YPF transferred 41% of its working interest in the JV’s ET/LT-PQ to Petrominera Chubut S.E. As a result, the new participation of YPF in the JV is 7.196%.

Magallanes block: On November 17, 2014, we agreed to extend the joint venture contract with ENAP Sipetrol Argentina S.A. in the Magallanes block. The objective of this agreement was to extend the rights and obligations of ENAP in the original joint venture agreement and confirm its role as operator, maintaining its 50% share until the end of concession. This agreement was subject to ENAP’s decision to continue with the incremental project and make additional investments to increase production in September 2015.

Aguada Pichana block: operated by Total S.A. and in which YPF holds a 27.23% working interest.

Tight gas projects: during 2014, we continued tight gas development in different areas of the block and ten wells were drilled. Six of them are in production or waiting to put into production, two are completed and two of them were abandoned.

Production improvements: we continued to maintain or improve field daily production and continuing the campaign initiated during the first half of 2013, under which seven velocity strings and twelve capillary strings were stated, five wells were refractured and three workovers were conducted. Likewise, production in the northern area of Aguada Pichana was changed to low pressure operation mode with the objective to increase production and ultimate recovery.

Unconventional: we completed drilling the pilot of unconventional development in which the consisted of six horizontal wells. In the second half, the completion stage began, which consists of ten fractures by well and treatment facilities. During the last quarter of 2014, we began the second stage of the unconventional development pilot drilling.

San Roque block: operated by Total S.A. and in which YPF holds a 34.1% working interest:

Conventional: the BdT.e-1 well was drilled with positive results.

Production improvements: three workovers, one capillary string, one acidification and three other wells were repaired. In addition, 2.6 kilometers of uptake natural gas pipelines were tended.

Unconventional: the SR.e-1005 horizontal well began production during 2014.

Lindero Atravesado block: operated by Pan American Energy LLC and in which YPF holds a 37.5% working interest. Drilling of eighteen wells were completed and all are in production. This is a tight gas reservoir project targeting the Lajas formation and includes 104 wells. The project also includes building the corresponding field facilities.

Acambuco block—Macueta field: the Mac.e-1004 (d) well was drilled with positive results. This project began in September 2013 and was finished in November 2014. This is a multi-horizontal well with two targets: one deeper in the Icla formation, (5,499 meters total depth) and the second in the Huamampampa formation (5,173 meters total depth). The well was tested in both levels, and produced gas and condensate with some water in Huamampampa. This well was the first in Argentina equipped with intelligent well control (“IWC”), which is composed of four control lines, one fiber optic line and bottom sensors.

Properties and E&P activities in rest of the world

 

  1. United States

During 2014, Maxus relinquished a total of seven blocks in the Green Canyon area, including three to the U.S. federal government and four to Murphy Oil.

As of December 31, 2014, we had mineral rights in 20 blocks in the United States territorial waters in the Gulf of Mexico, comprised of 17 exploratory blocks, with a gross surface area of 396 km2 (222 net to Maxus), and three development blocks, with a gross surface area of 69.93 km2 (10.48 net to Maxus ). Our U.S. subsidiaries’ net proved reserves in these areas as of December 31, 2014 was 2.253 mmboe. Our U.S. subsidiaries’ net hydrocarbon production in these areas for 2014 was 0.559 mmboe.

 

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The Neptune field is located approximately 120 miles off the Louisiana coast in the deepwater region of the Central Gulf of Mexico. The field area is made up of the Atwater Valley 574, 575 and 618 blocks. 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 W&T Offshore (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 (“TLP”) located in the Green Canyon 613 block within 4,230 feet of water. Production began on July 8, 2008. The platform supports seven sub-sea development wells that 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. These 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. Between 2013 and 2014, 679 km2 of 3D seismic data were registered. Exploratory wells are expected to be drilled in 2015.

 

  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. As of the date of this annual report, we have requested approval from the ANH to farm out our working interest in the COR 12 and COR 33 blocks. YPF and its partners informed the ANH of their 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 unconventional 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 January 2015, the extension period expired and YPF informed the Ministry of its decision to relinquish the block.

 

  5. Uruguay

4.1 Deep Water Offshore—Punta del Este Basin:

 

    Area 3: We own a 40% working interest in this area and act as operator, in partnership with Shell, which has a 40% working interest and took over Petrobras Uruguay’s participation and GALP, which has a 20% working interest. The permit expired on October 6, 2014 and an extension of the permit for 120 days was submitted to the application authority. As of the date of this annual report, the consortium is analyzing the option to access a second exploration period.

 

    Area 4: YPF and Petrobras Uruguay as the operator, and GALP completely relinquished this area in April 2014.

4.2 Onshore:

In March 2012, we were awarded the entire Arapey exploration permit. The block has a surface area of 9,700 km2. Our main goal in this project is to explore unconventional resources. In March 2014, the permit expired and the block was relinquished.

 

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  6. Ecuador

In October 2014, we signed a service contract with Petroamazonas, the national oil company of Ecuador, to optimize production in Yuralpa field. The 15-year agreement involves the drilling of at least ten wells, application of technologies for enhanced oil recovery (EOR) and performing activities to increase oil production in this field, located in Block 21 in the Amazonian province of Napo.

Additional information on our present activities

The following table shows the number of wells in the process of being drilled as of December 31, 2014.

 

     As of December 31, 2014  
Number of wells in the process of being drilled    Gross      Net  

Argentina

     67         56.4   

Rest of South America

     —           —     

North America

     0         0   

Total

     67         56.4   
  

 

 

    

 

 

 

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, 2014, we were not contractually committed to deliver material quantities of crude oil to third parties in the future.

As of December 31, 2014, we were contractually committed to deliver 15,037 mmcm (or 531 bcf) of natural gas in the future, without considering export interruptible supply contracts, of which approximately 9,017 mmcm (or 318 bcf) will have to be delivered in the period from 2015 through 2017. According to our estimates as of December 31, 2014, 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 domestic 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. 52 million, Ps. 174 million and Ps. 212 million have been recorded in 2014, 2013 and 2012, 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, pursuant 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, 2014, supply requirements under the Agreement 2007-2011 (which we were compelled to enter into and which was approved by a resolution 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 approved the “Procedure for Applications, Confirmations and Control of 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.”

 

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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 the Argentine 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. Our strategy intends to reaffirm our commitment to creating a new model of the Company in Argentina that 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 focus on: (i) the development of unconventional resources, which we see as a unique opportunity because a) the potential 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). These 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. See “Item 3. Key Information—Risk Factors—Risks Relating to Argentina.”

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 through 2018 and has agreed to make investments, export gas and temporarily import certain final products, subject to approval by the relevant government authorities, which have been 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 mmcm/d) (designed capacity with compression plants)), including:

 

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

 

    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.

 

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The contracts with Colbun and Gas Valpo were modified to become 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 in Neuquén, Argentina with Chile. The contract was modified reducing its deliver or pay obligation to 7.1 mmcf/d (or 0.2 mmcm/d).

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 were modified to become 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, 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 “—The Argentine natural gas market” and “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,” during recent years we have been forced to reduce the export volumes authorized to be provided under the relevant agreements and permits.

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 1,744 bcf (or 48.601 bcm) in 2014. We estimate that the number of users connected to distribution systems throughout Argentina amounted to approximately 8.0 million as of October 31, 2014.

In 2014, we sold approximately 41% of our natural gas to local residential distribution companies, approximately 9% to Compressed Natural Gas end users, approximately 43% 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 to August). During 2014, approximately 83% of our natural gas sales were produced in the Neuquina Basin. In 2014, our domestic natural gas sales volumes were 4% lower than those in 2013.

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 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.

 

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Argentine natural gas supplies

Most of our proved natural gas reserves in Argentina (approximately 66.5% as of December 31, 2014) are situated in the Neuquina Basin, 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 expired on May 1, 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). The contract expired in May 2014 and was not renewed. ENARSA now sells such gas directly to the domestic market in the winter.

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 regasification vessel has converted liquefied natural gas (LNG) into its gaseous state (natural gas) in an approximate amount of 14.4 bcm (or 508.1 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 2014, natural gas injected into the network amounted to approximately 3.3 bcm (or 115.3 bcf).

YPF is the operator of UTE Escobar (a joint venture formed by YPF and ENARSA), which operates an LNG Regasification Terminal (“LNG Escobar”) 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 9.21 bcm (or 325.3 bcf). In 2014 natural gas injected into the network amounted to approximately 2.7 bcm (or 93.8 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.

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.

 

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Downstream

During 2014, 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

 

    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 bbl/d. The refineries are strategically located along our crude oil pipeline and product pipeline distribution systems. In 2014, our crude oil production, substantially all of which was destined to our refineries, represented approximately 84.5% of the total crude oil processed by our refineries, while in 2013 it was 80.4%. 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, 2014, 2013 and 2012:

 

     For the Year Ended December 31,  
     2014      2013      2012  
     (mmboe)  

Throughput crude

     106.0         101.4         105.5   

Throughput Feedstock

     4.2         4.1         3.0   

Throughput crude and Feedstock

     110.2         105.5         108.5   

Production

        

Diesel fuel

     40.3         38.8         41.5   

Motor gasoline

     22.4         23.1         23.1   

Petrochemical naphtha

     6.5         5.7         6.9   

Jet fuel

     6.1         6.1         6.6   

Base oils

     1.4         1.0         1.3   

 

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     For the Year Ended December 31,  
     2014      2013      2012  
     (thousands of tons)  

Fuel oil

     1715         1338         1295   

Coke

     746         803         916   

LPG

     638         607         589   

Asphalt

     185         198         195   

During 2014, our global refinery utilization reached 90.9%, compared to 86.9% in 2013, 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 La Plata refinery during 2013 which limited our processing capacity utilization during that year.

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 fluid catalytic cracking units, a coking unit, a coker naphtha hydrotreater unit, a platforming unit, two diesel fuel hydrofinishing units, a gasoline hydrotreater, an isomerization unit, an FCC (fluid cracking catalysts) naphtha splitter and desulfuration unit and a lubricants complex, in addition to a petrochemical complex that generates MTBE, TAME and aromatics compounds used for blending gasoline, and other chemical products for sale. 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 2014, the refinery processed approximately 163.3 mbbl/d. The capacity utilization rate at the La Plata refinery for 2014 was 86.4%. As discussed below, in 2013 capacity utilization was affected by the shut down of the Coke A unit and the average volume processed was approximately 147 mbbl/d, leading to a capacity utilization rate of 77.6%. The crude oil processed at the La Plata refinery, 87.6% of which was YPF-produced in 2014, comes mainly from the Neuquina and San Jorge Basins. Its crude oil supplies come from the Neuquina Basin by pipeline and from the 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 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. 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 results of operations in connection with our insurance coverage in 2014 and 2013.

In order to increase the conversion capacity, a new Coke A facility is under construction and is expected to be commissioned by 2016. The capacity of the new unit will be 1,160 bbl/h of fresh feed pumped from the bottoms of the Topping and Vacuum Units, providing the refinery with an increase in crude processing capacity utilization of 23.800 bbl/d, representing an increase of almost 12% in the capacity utilization rate. The production of the new facility will be a component for the blend to be used in the generation of diesel fuel, motor gasoline; and coke.

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 fluid catalytic cracking unit (FCCU), a platforming unit, a MTBE unit, an isomerization unit, an alkylation unit, a naphtha splitter, a hydrocracking unit, a naphtha hydrotreater unit and two gasoil hydrotreating units. During 2014, the refinery processed approximately 103.2 mbbl/d, with a capacity utilization rate of 97.8%. In 2013, the refinery processed 106.4 mbbl/d with a capacity utilization rate of more than 100%. The lower capacity utilization during 2014 was due to several planned maintenance shut-downs of units: Topping IV from March to April, vacuum distillation from March to April, Coke II from March to April and fluid catalytic cracking (October to November), all of which were executed successfully on time.

Due to 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 to the central and northwest provinces of Argentina with petroleum products for domestic consumption. The Luján de Cuyo refinery receives crude supplies from the Neuquina and

 

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Cuyana Basins by pipeline directly into the facility. Approximately 77.9% of the crude oil processed at the Luján de Cuyo refinery in 2014 (and 79.1% of the crude oil processed in this refinery in 2013) 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.

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 in the province of Neuquén, has an installed capacity of 25,000 bbl/d. During 2014, the refinery processed approximately 24.0 mbbl/d, with a capacity utilization rate of 95.9%, slightly below the 24.6 mbbl/d processed in 2013 at a higher capacity utilization rate of 98.3%. 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 our facilities in La Plata for further processing. The Plaza Huincul refinery receives its crude supplies from the Neuquina Basin by pipeline. The crude supplies are mostly produced by us. In 2014, 0.3% of the refinery’s crude supplies were purchased from other companies, while in 2013, such purchases were 22.6% of the refinery’s crude supplies.

Our refineries are operated with the goal of maximizing profits in compliance with local laws. In 2014, the Argentine Secretariat of Energy decided to increase the required content level of bioethanol in gasoline and FAME in diesel fuel, setting them at 10%.

With the objective of replacing imported products with those produced locally led us to buy Bonny Light crude oil, a high performance crude that allowed us to fully supply the La Plata refinery and achieve higher production of diesel fuel and gasoline instead of buying expensive imported finished fuels.

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.

Logistics 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 operates the Argentine portion of the pipeline, and a 18% interest in Oleoducto Transandino Chile S.A., which operates the Chilean portion of the pipeline.
(3) This pipeline ceased operating on December 29, 2005.

 

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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.

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 logistics 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. In 2014, our trucking activities were certified under ISO 39001 (road traffic safety management system).

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 to different countries, principally in South America, as well as Africa. Sales to international customers for 2014 and 2013 totaled Ps. 4,081 million and Ps.3,792 million, respectively, 8% and 10% of which, respectively, represented sales of refined products and 77% and 57% of which, respectively, represented sales of marine fuels. On a volume basis, in 2014 and 2013 sales to international customers consisted of 0.89 mmbbl and 0.9 mmbbl of refined products, respectively, and 4.29 mmbbl and 4.11 mmbbl of marine fuels, respectively. Domestic sales of crude oil totaled Ps. 914 million and Ps. 1,020 million or 1.4 mmbbl and 2.5 mmbbl in 2014 and 2013, respectively. Domestic sales of marine fuels totaled Ps. 1,352 million and Ps. 771 million or 1.4 mmbbl and 1.2 mmbbl in 2014 and 2013, respectively. In addition, imports of high and low sulfur diesel in 2014 remained at the same level as in 2013, at 7.8 mmbbl.

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 2014, 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 61.3% and 56.9% as of December 31, 2014 (compared with 58.7% and 54.3% in 2013), respectively. Our sales volume for N-Premium was 1,160 mcm in 2014 (1.2% higher than in 2013) and 3,506 mcm for Super in 2014 (6.0% higher than in 2013).

 

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In November 2014, YPF launched Infinia, a new premium gasoline with a new formulation. The release plan included an ambitious campaign in mass media and at points of sale and a strong internal training to our salesforce. Infinia’s new attributes allowed us to achieve preliminary positive results in December 2014 compared to December 2013. We increased, according to our estimates, 7.4 percentage points market share (to 63.7% from 56.3%, respectively), and increased 3.0 percentage points of sales of Infinia compared to total gasoline sales (to 29.6% from 26.6%, respectively).

In March 2014, YPF relaunched the Serviclub Program. The new version of the loyalty program, among other things, actively promotes tourism in the country. The number of active members reached approximately one million active members (measured in the last quarter of 2014). Also, it actively promotes cross-selling in convenience stores and lubricants.

With respect to diesel fuel, according to our own estimates, as of December 2014 our market share was 60.1% (57.7% in 2013), with an increase in our share of low sulfur content products. Along with D-Euro (10 ppm), for which sales volume was 1,015 mcm in 2014, our product D-500 (500 ppm) reached a volume of 1,974 mcm compared to approximately 1,887 mcm in 2013, both fuels representing 39.5% of the total diesel fuel sales of the division.

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, Audi, MAN Truck, GM, Porsche and Scania).

With respect to 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 that are used in the manufacturing of aerosols.

With regard to the international market, we market lubricants in Brazil and Chile, where we have subsidiaries. During 2014 we exported a volume of 6.3 mcm to Brazil, a decline of 12% compared to 2013, which corresponds to the increased local production, and 8.2 mcm to Chile, an increase of 2.2% compared to 2013. Additionally, through exclusive distributors we sell lubricants in four countries outside Argentina (Uruguay, Paraguay, Bolivia and Ecuador).

Retail Division

As of December 31, 2014, the Retail Division’s sales network in Argentina included 1,534 retail service stations (compared to 1,542 at December 31, 2013), of which 111 are directly owned by us, and the remaining 1,423 are affiliated service stations. OPESSA, our wholly-owned subsidiary, operates actively 173 of our retail service stations, (89 are directly owned by us, 26 are leased to ACA (Automóvil Club Argentino), and 58 are leased to independent owners). Additionally, we own 50% of Refinor, a company dedicated to refining, gas processing and operating 58 service stations.

According to our latest internal estimates, as of December 31, 2014, we were the main retailer in Argentina, with 34.8% of the country’s gasoline service stations, followed by Shell, Axion, Petrobras and Oil with shares of 14.6%, 11.2%, 6.3% and 6.0%, respectively. During 2014, our market share in diesel fuel and gasoline, marketed in all segments, increased slightly from 56.5% to 59.2%, from December 31, 2013 to December 31, 2014, 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 performance data for each active and on-line station, which connects most of our network of service stations. As of December 31, 2014, 1,283 service stations were linked to the Red XXI network system, three service stations more than 2013.

Our convenience stores, “YPF Full” and “YPF Full Express”, included 387 and 104 points of sale as of December 31, 2014, respectively. Additionally, fuel sales are complemented by a modern oil change service, provided by our “YPF Boxes,” with 254 points of sale.

During 2014, the Service Station Operation Manual was implemented in 460 service stations. The main purpose of this model is to promote self-management of our service stations.

 

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A total of 15 modular systems called Social Supply Modules (MAS) have been installed in remote locations. These MAS have minimal environmental impact and an innovative and technological appearance, using alternative energy and requiring a minimum investment with low operating costs.

In 2014, we reinforced our market leadership with the launch of Infinia product; which is an “intelligent” gasoline designed with the latest technology. Its improvements focus on performance, efficiencies and engine care.

During 2014, we conducted meetings throughout Argentina called “Experiencias en Red” during which over 80 operators shared their experiences with YPF to be useful to others.

Agriculture Division

Through the Agriculture Division we sell diesel fuel, fertilizers, lubricants, agrochemicals, and ensiling bags (“silobolsa”), among other products, directly or through a network of 100 wholesaler bases (nine owned by YPF), offering an extensive portfolio to the agriculture producer that includes delivering products to the consumption site. As an option for the customer, we accept as payment different types of grains, mainly 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 2014, revenue from such exports amounted to U.S.$373 million. Although we faced irregular market conditions in 2014, with a fall of international commodities prices and climatic changes in the main production areas of Argentina affecting demand for fertilizers and agrochemicals, we received approximately 1,218,000 tons of grains (oilseed and cereal), primarily soy, a 30% increase compared to 2013. 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. Oil produced from processing soybeans, which we receive as payment, provides approximately 10% of YPF’s FAME needs, in accordance with local regulations.

Industry Division

This division supplies the entire national industry and transportation (ground and air) sectors, which requires a broad portfolio of products and services that meet to the needs of customers. The division develops tailor-made solutions for the mining, oil & gas, aviation, transport, and infrastructure and construction sectors. We supply products such as fuels (diesel, gasoline, fuel oil, Jet A-1), lubricants, coal, asphalts, paraffin and derivatives (sulfur, CO2, decanted oil, aromatic extract), either directly from our refineries to the point of consumption (more than 5,000 direct customers) through an own ground and waterway network, or through a network of 37 industrial distributors with national coverage. In this respect, we opened two of our own bases in 2014, completing the mining supply network with strategic positions.

Our mission is to promote efficiency in the value chains of the industries we serve with energy solutions through supplies and services. In line with this, our strategy is based on the closeness and relationship with the client and the development of innovative solutions focused on creating value for YPF and the region’s industry.

Lubricants and Specialties Division

During 2014, our lubricants sales were almost the same as 2013. Sales to domestic markets increased by 3%, while sales to export markets decreased by 17% from 24.2 mcm in 2013 to 20.0 mcm in 2014. Sales of asphalts and paraffins increased by 1% and 7%, respectively, compared to 2013.

We export to two main groups. First, to our wholly owned companies in Brazil and Chile, where sales volume decreased by 12% in Brazil and increased by 2% in Chile, compared to the previous year. However, in both countries the local production of YPF brand lubricants increased. On the other hand, we export to our distributor network located in Bolivia, Uruguay, Paraguay and Ecuador, in which sales volume decreased by 38% compared to 2013. This decrease was primarily due to import restrictions imposed in Ecuador and the beginning of local production in that country.

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, 2014 was approximately 41.3%, compared to 39.2% as of December 31, 2013, 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).

 

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With respect to lubricants, the sales of the high-end light and heavy products, represented by “Elaion” and “Extravida” respectively, were 43.1 mcm in 2014, which represents an increase of 5% compared 40.8 mcm in 2013.

Our Elaion brand reached sales volumes of 14.0 mcm in 2014, which represents an increase of 8% compared to 12.9 mcm in 2013. And the Extravida brand achieved sales volumes of 29.1 mcm, which represents an increase of 5% compared to 27.8 mcm in 2013.

Sales of the Elaion Moto (used for motorcycles) products increased by 12% (2.0 mcm) compared to 2013 and sales of our complementary products increased 8.3% in 2014 (4.0 mcm).

The 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 Division

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. (during 2014, we sold approximately 43% of our LPG production to YPF Gas S.A. for the domestic market), which is not a YPF company.

We are the largest LPG producer in Argentina with sales in 2014 reaching approximately 572 mtn (compared with 593 mtn in 2013), of which approximately 414 mtn were sold in the domestic market (compared to 432 mtn in 2013). 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 2014 reached approximately 159 mtn, compared to 161 mtn in 2013, 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. 1,678 million and Ps. 1,298 million in 2014 and 2013, respectively.

The LPG Division obtains LPG from natural gas processing plants and from our refineries and petrochemical plants. We produced 519 mtn of LPG in 2014 (not including LPG destined for petrochemical usage), and also purchased LPG from third parties, as detailed in the following table:

 

     Purchase (tons)
2014
 

LPG from Natural Gas Processing Plants:(1)

  

General Cerri

     26,723   

El Portón

     118,985   

San Sebastián

     197   
  

 

 

 

Total Upstream

  145,905   
  

 

 

 

LPG from Refineries and Petrochemical Plants:

La Plata Refinery

  264,372   

Luján de Cuyo Refinery

  79,125   

CIE

  30,065   
  

 

 

 

Total Refineries & Petrochemical Plants(2)

  373,562   
  

 

 

 

LPG purchased from joint ventures:(3)

  17,668   
  

 

 

 

LPG purchased from unrelated parties

  53,433   

Total

  590,568   
  

 

 

 

 

(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 2014.

 

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Chemicals Division

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 at the La Plata refinery. This close integration allows for a flexible supply of feedstock, the efficient use of by-products (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 2014 and 2013, 73.0 % and 71.1%, respectively, of our petrochemicals sales (including propylene) were made in the domestic market. Petrochemical exports are destined for Mercosur countries, the rest of Latin America, Europe and the United States.

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).

Other investments and activities

NGLs

We participated in the development of our affiliate 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 NGL fractionation plant, which produces ethane, propane, butane and natural gasoline and is located in the city of Bahía Blanca in the province of Buenos Aires.

 

    A pipeline that links both plants and that transports NGLs.

 

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

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 in the Argentine federal courts by Mega. 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, which, as of the date of this report, has not ruled on the matter. On February 25, 2013 Mega filed another action requesting that the federal courts 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. On December 11, 2014, the Argentine Supreme Court issued a judgment, ruling that the fee created pursuant to Decree No. 2067/08 is a tariff, not a tax, and for that reason is not subject to the principles of tax law. Nonetheless, the Argentine Supreme Court left open the possibility of making arguments or defenses that differ from those stated in a judgment.

 

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Electricity market—generation

The Argentine Electricity Market

Argentina´s overall power generation was 1.53% higher in 2014 than 2013 according to Compañía Administradora del Mercado Mayorísta Eléctrico S.A. (CAMMESA). In 2014, 63.5% of Argentina’s power generation came from thermal power plants, 31% from hydroelectric power plants, 4% from nuclear power plants, 1.1% from spot imports from Uruguay and Paraguay and the balance from unconventional sources such as wind and solar power.

Thermal power plants consumed 1,789,622 cm of diesel oil (a 30.9% decrease compared to 2013), 2,732,658 tons of fuel oil (a 22.4% increase compared to 2013) and 14.3 billion cm of natural gas (a 3% increase compared to 2013).

The average electricity production cost was 386.77 Ps./MWh, a 34.4% increase compared to 2013, while the annual average marginal cost of production was 1,373.62 Ps./MWh, a 69.6% increase compared to 2013.

In 2013, 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. In 2014, this rule was updated with the Resolution No. 529/14 of the Secretariat of Energy, increasing the remuneration to be received by 75%.

YPF in Power Generation

We participate in three power generation plants with an aggregate installed capacity of 1,622 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 2014, YPF EE generated 5,203 GWh with its two combined cycles. Central Térmica Tucuman’s production was 2,777.5 GWh, and Central Termica San Miguel de Tucumán’s production was 2,425.5 Gwh. Additionally, Central Dock Sud generated 4,764 GWh. The energy produced by YPF EE and Central Dock Sud (9,967 GWh in total) represented 7.6% of Argentina´s electricity generation in 2014.

Energy produced by Central Térmica Tucumán was 30.2% higher in 2014 compared to 2013 despite a hot gas path inspection in unit TG-02 in November and December 2014. A serious failure inside the TG-01 unit occurred in 2013. Maintenance to restore the plant’s availability was extended for six months.

Energy produced by Central Térmica San Miguel de Tucumán in 2014 increased by 2.4% compared to 2013.

In August 2013, 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 2014 decreased by 2.8% compared to 2013.

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).

 

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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 2014, Metrogas distributed approximately 19.2 mmcm (or 678 mmcf) of natural gas per day to 2.3 million customers in comparison to approximately 21.0 mmcm (742 mmcf) of natural gas per day to 2.3 million customers in 2013. During May 2013, the Company, through its subsidiary YPF Inversora Energética gained 100% ownership of GASA (the controlling company of Metrogas), by acquiring shares representing the remaining 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).

GASA’s debt restructuring. 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%.

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 approved 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 approved 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. GASA 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.

On March 27, 2014, GASA’s Board of Directors approved the capitalization of 100% of accrued interest to be paid on June 15, 2014 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 11, 2014 it issued Additional Negotiable Obligations Class A-L for U.S.$ 2,439,668 and Class A-U for U.S.$61,929 for the capitalization of such accrued interest.

On September 24, 2014, GASA’s Board of Directors approved the capitalization of 100% of accrued interest to be paid on December 15, 2014 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 January 8, 2015 it issued Additional Negotiable Obligations Class A-L for U.S.$ 2,547,928 and Class A-U for U.S.$ 64,675 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.

 

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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.

 

    In exchange for existing notes, classified as Reorganization liabilities originated on financial debt:

 

    Series A-L for an amount of U$S 163,003,452

 

    Series B-L for an amount of U$S 122,000,000,

 

    In exchange for non-financial debt:

 

    Series A-U for an amount of U$S 16,518,450

 

    Series B-U for an amount of U$S 13,031,550.

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.

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 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 Section 59 of the Argentine Bankruptcy Law.

 

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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 April 28, 2014, the Board of Directors of Metrogas decided by a majority of votes to pay in cash interest for up to U$S 4,750,000, capitalize the remaining amount of the portion subject to capitalization of interest due on June 30, 2014 and issue Additional Negotiable Obligations for said capitalization.

On July 17, 2014, Metrogas issued:

 

    Negotiable Obligations of Capitalization

 

    Additional Series A-L June 2014: U.S.$3,516,500

 

    Additional Series A-U June 2014: U.S.$371,044

Given the fact that no event of default has occurred prior to June 30, 2014, the Class B Notes were cancelled without any further obligation.

Metrogas tariff issues: In January 2002, pursuant to the Public Emergency Law, the tariffs that Metrogas charges to its 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 change to Argentine peso prices. In February 2002, the Argentine 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 CRC.

The Public Emergency Law, which was originally scheduled to be terminated in December 2003, has been 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, ENARGAS published Resolution No. 2,407/12 that authorizes Metrogas, following the terms of the temporary agreement discussed above, 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 must submit for approval of the Execution Committee (a regulatory committee created by Resolution No. 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”).

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

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

On January 6, 2014, the Company submitted to ENARGAS the Work Plan 2014, including information on works completed under Work Plan 2013. On such same date, Metrogas sent to Nación Fideicomiso S.A. a rendering of accounts in relation to the disbursements derived from the alternative method for the advancement of funds, all of which was approved in March 2014. On November 14, 2014, the 2015 Works Plan corresponding to Reliability, Maintenance and Expansion was introduced.

On March 26, 2014, within the process of renegotiation of utilities contracts pursuant to Law No. 25561 and supplementary rules, the Company signed a Provisional Agreement with UNIREN whereby a provisional tariff regime was agreed in order to obtain additional funds to those resulting from the enforcement of ENARGAS Resolution No. I/2407. The amounts the Company collects pursuant to the mentioned Resolution have been considered payments on account in relation with the adjustments as set forth by Provisional Agreement approved by Decree No. 234 dated March 26, 2009.

 

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The Provisional Agreement, ratified by Decree No. 445/2014 dated April 1, 2014 and published in the Official Gazette on April 7, 2014, establishes a provisional tariff regime as from April 1, 2014, consisting of readjusted prices and tariffs considering the guidelines necessary to maintain the continuity of service and also sets forth common criteria applicable to all distribution licensees, in accordance with tariff regulations in force, and including changes in the gas price at the transmission system entry point.

The Provisional Agreement also contemplates the inclusion of pass through to tariffs resulting from changes in tax rules, except for the income tax, in accordance with a currently pending resolution. It also includes clauses related to costs oversight tariff revision based on operation and investment cost structure, and price indexes representative of such costs, which under certain premises triggers a revision procedure through which ENARGAS would assess the actual scale of variations in the licensee’s operating and investment costs, and thereby determine whether a distribution tariff adjustment is applicable.

The Provisional Agreement also provides that, from the execution date to December 21, 2015 (the date on which Law No. 25561 expires), UNIREN on behalf of the Grantor and the licensee shall reach a consensus with respect to the methodology, terms and timeline for the signing of the Comprehensive Contract Renegotiation Memorandum of Understanding (“Acta Acuerdo de Renegociación Contractual Integral”).

On March 27, 2014, the National Government announced the reallocation of subsidies and on March 31, 2014 the Energy Secretariat issued ES Resolution No. 226/14 pursuant to which new natural gas prices and a plan to encourage responsible use of the natural gas were established.

Resolution ENRG 2851/2014 issued by ENARGAS on April 7, 2014 approved new applicable tariffs effective April 1, 2014, June 1, 2014 and August 1, 2014 under a price scheme whereby customers that register a decrease in consumption of over 20% will continue with the same tariff level as that which was in effect until March 31, 2014, while customers that achieve a reduction of between 5% and 20% will be charged a tariff approximately 50% lower in relation with the actual price variation, which will be applied to customers unable to reduce their consumption or whose reduction is below 5%.

On October 9, 2014, notice was served on Metrogas of an injunction ordered by the Judge of First Instance of Avellaneda, which provided for the immediate suspension within the jurisdiction of Avellaneda of the aforementioned tariff increases and further instructed that future invoices should consider tariffs effective as at March 31, 2014. Metrogas duly and timely appealed said injunction, first before the intervening judge and then before the Administrative Court of Appeals of the City of La Plata. On October 24, 2014, the Ombudsman of Avellaneda (plaintiff) submitted a document to the Court of First Instance No. 9 requesting the dismissal of the injunctive relief ordered on October 8, 2014. On November 5, 2014, notice was served upon Metrogas of the final termination of the injunction. The Company is aware of three other injunction requests filed with the Courts of Lomas de Zamora, Quilmes and City of Buenos Aires, which, at the time of the closing of the financial statements included in this annual report, have not yet been admitted.

Funds corresponding to the Letter of Understanding executed on November 21, 2012 with the ENARGAS and the Provisional Agreement executed on March  26, 2014 with the UNIREN have not permitted, up to this date, the Company to restore the financial condition of the Company.

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 2014, approximately U.S.$28.7 million was allocated to R&D activities, 28% of which corresponded to cooperation with external technology centers. In order to support these R&D activities, we invested U.S.$25.4 million in new laboratory building and equipment.

 

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Fifteen important research and development projects are being partially subsidized by a technology funding organization of the Argentine government known as ANPCYC. In addition, a sea energy resource study in Patagonia Austral, which includes the participation of YPF Tecnología S.A and the National Scientific and Technology Council, has received funds through Ministerial Order No. 666/14 of Ministry of Science, Technology and Productive Innovation. 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 2014, our R&D projects portfolio consisted of 131 projects, 57 of which are under execution, 38 have been under technical-economic feasibility evaluation and 36 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 three 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, five 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’s working interest). Completion of the work is expected in September 2015.

We expect that about 250 professionals will work in the new building, and their main goals are to acquire knowledge and work in research and development for 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.

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.” However, recent changes introduced in the Hydrocarbons Law through Law No. 27,007 limit the ability of provincial companies to possess future exclusive rights over permits and concessions, which supports competition in the Argentine oil and gas industry. See “Regulatory Framework and Relationship with the Argentine Government—Law No. 27,007, amending the Hydrocarbons Law.”

Over the past few years, several measures to promote the development of the industry 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.$7.50/mmBtu for such additional production. Initially, larger producers with diversified portfolios joined the program. Later on, the program was adapted to include mid and small sized oil and gas companies with less diversified portfolios, so as to further promote the development of indigenous natural gas resources. Currently, more than 85% of natural gas production in Argentina is included into this program. Still another measure to promote the oil and gas industry was the creation of the “Investment

 

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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. Both the natural gas pricing program and the investment promotion scheme were recently incorporated into the Hydrocarbons Law, as amended by Law No. 27,007, reinforcing their position as an instrumental part of the energy policy in Argentina. Furthermore, the investment threshold for investments funded with dollars brought to Argentina’s financial market has been reduced to U.S.$250 million. YPF believes that the new measures further help attract strategic partners for the development of its unconventional resource base. Following Chevron and Dow Chemical, YPF was able to create development projects with Pampa Energía and more recently Petronas. At the same time, other companies were able to advance their exploration projects, in some instances with new partners. We believe that increasing the number of participants in the market causes the industry to become more dynamic in the long term and that with additional critical mass it will become more efficient as well.

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 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; Although the Argentine market has its own dynamics and fundamentals, changes in the domestic and international prices of crude oil and refined products have some 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 the Argentine 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.”

During 2014 the Argentine government continued promoting the industry which, along with the competitive responses of different market participants throughout the year, has further strengthened the competitive nature of our industry and fostered a positive business environment. In October 2014, the Argentine Congress passed Law No. 27,007 which amended the Hydrocarbons Law and introduced very important changes in order to have a more modern framework that recognizes specific considerations for new petroleum companies, such as those working in unconventional resources, offshore and in enhanced oil recovery. The changes further strengthen synergies, promote investments and seek uniformity. Besides recognizing the benefits of the gas pricing scheme and the promotional regime for investments, Law No. 27,007 reflects new terms and conditions for permits and concessions according to the types of exploration projects. The 35-year concession term for unconventional exploitation is a distinctive, key feature for the development of the unconventional resources in Argentina. See “—Regulatory Framework and Relationship with the Argentine Government—Law No. 27,007, amending the Hydrocarbons Law.”

Finally, on a daily basis our business manages competitive factors that are in turn influenced by international and local variables, such as international crude oil and refining products pricing, inflation, foreign exchange rates and employment rates. YPF continually adjusts its product offerings and the costs of its operations in order to adjust to these variables. One such change relates to the agreement among industry participants and the Argentine government to address the recent decline in international crude oil prices. As of December 30, 2014, the National Executive Office decided to reduce taxes on the sale of fuels, thus partially compensating for the decrease in the price of domestic fuels. Subsequently, the National Executive Office also reduced export taxes to the minimum allowed by law, so that exporting producers of crude oil with no use in local refining could also partially compensate for the decrease in the price of international hydrocarbon products. These two measures are part of a comprehensive plan agreed to by the Argentine government, producers and the refiners. The principal Argentine producers and refiners privately negotiated a series of discounts on the prevailing local crude oil prices as a function of the decline in international prices in order to continue developing of local production as well as to secure certain refining margins. In addition, on February 4, 2015 the Commission issued Resolution 14/2015 creating the Crude Oil Production Stimulus Program (Programa de Estímulo a la Producción de Petróleo Crudo) which will be valid from January 1, 2015 through December 31, 2015 and through which the Argentine federal government, subject to certain requirements, will pay an export stimulus and/or a production stimulus for companies registered under that program. The plan aims to significantly offset the potential impact international crude oil prices have on the local industry which might, in turn, create a comparatively more attractive oil and gas market for Argentina during 2015. Producers and refiners continue to work closely to

 

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encourage contractors and unions to contribute by reducing costs and increasing productivity, thus making 2015 an opportunity to further improve the competitiveness of the industry as a whole. See “Item 3. Key Inforamtion—Risk Factors” for a description main risks and uncertainties we face.

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 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 sulfur diesel fuel desulfurization plant (HTGB) was started up during 2012. In Luján de Cuyo refinery, new HDS III (diesel desulfurization) and HTN II (gasoline desulfurization) 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. In 2014, a diesel tank was completed at Terminal Villa Mercedes (“TVM”), and engineering projects advanced at the Luján de Cuyo and La Plata refineries.

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. In 2014, a 3,000 cm FAME tank at Terminal Dock Sud (“TDS”) and a 3,000 cm FAME tank at TVM were built. Also, two 200 cm ethanol tanks at Concepción del Uruguay were built. 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 2014, 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 coke unit at La Plata refinery, which will involve an aggregate investment of approximately U.S.$790 million (the total amount disbursed as of December 31, 2014 was U.S.$646 million), replacing the one that was severely damaged in the incident that 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 2016.

 

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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, new flare in CIPH, improvement of fireproofing in existing facilities and implementation of bottom loading systems in terminals.

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;

 

    intensified the execution of internal projects to obtain 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;

 

    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 2014 the La Plata project reduced carbon dioxide emissions by 125,165 tons;

 

    obtained in December 2011 the approval of United Nations for an industrial project developed by YPF in Argentina defined as a CDM at the Luján de Cuyo refinery. During 2014 the project reduced carbon dioxide emissions by 13,897 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, five CDM projects in the world (Argentine, China, and Egypt) are being developed applying this methodology designed by YPF;

 

    undertook and verified third-party 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 2014, the verification process inventory of greenhouse gases in the La Plata complex and the Luján de Cuyo refinery was completed. A 2014 inventory check, ending in the first half of 2015, is planned;

 

    estimated the contribution that its forestry projects located in the province of Neuquén had with respect to climate change. These projects constitute approximately 6,500 hectares of trees forested under a long-term work program. Using the afforestation methodologies and tools available at the United Nations Framework Convention on Climate Change (UNFCCC)—Clean Development Mechanism (CDM) web site, it was possible to arrive to a conservative estimated amount of approximately 760,000 tons of carbon dioxide equivalents that were captured by the afforestation project activities since 1984 (when the first afforestation activity occurred) until 2013; and

 

    strengthened the relationship established with the Argentinean Environmental Authority (Secretaria de Ambiente y Desarrollo Sustentable de la Nación), in particular with its Climate Change Unit (Dirección de Cambio Climático) in order to collaborate with the development of the Third National Communication on Climate Change to the United Nations Framework Convention on Climate Change (UNFCCC).

 

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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.

The Vaca Muerta formation is 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 “Item 3. Key Information—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.”

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.

Generally, this technique uses water and sand (99.5% of the water can be recycled) and additives (0.5%). 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 (used in cosmetics), potassium carbonate (used in detergents), guar gum (used in 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, which involves much lower volumes than those used for agricultural and human consumption in the province of Neuquén.

From the beginning of unconventional operations, YPF has considered the environmental protection as one of the values of its quality, health, safety and environment policy.

In accordance with the law (Disposición 112/2011 Subsecretaría de Medio Ambiente Neuquén), the project has an Environmental Baseline Study (“EBS”). The EBS includes the current description and environmental characterization of the concession areas and specifically environmental components that may be affected significantly by the projects and activities.

YPF is currently developing a Water Management Framework, which focus on three key areas of water use: water resources (sustainability factors, measures that consider the needs of other local water users, and the net environmental effect); water use and efficiency (controls of replacing water use, reducing water consumption, and the reuse and recycling to consider the net environmental effect); and wastewater management (consider similar sustainability factors and the net environmental effect as outlined for water resources) .

In addition, YPF commissioned the following studies: (i) a hydrogeological study of confined and semi-confined aquifers of Neuquén and Rayoso Groups and hydrogeological study of the unconfined aquifer of the alluvial plain of the Neuquén River in the Loma Campana area (beginning in December 2014), (ii) an air quality and noise study in the Loma Campana area (beginning 2015) and (iii) aquatic and terrestrial environmental studies in the Loma Campana, El Mangrullo and El Orejano areas (beginning 2015).

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% owned subsidiary of YPF. See “—Regulatory Framework and Relationship with the Argentine Government—U.S. Environmental Regulations.”

 

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In 1995 YPF acquired Maxus Energy Corporation (“Maxus”), a U.S. corporation headquartered in Dallas, Texas. In connection with the sale by Maxus of Diamond Shamrock Chemicals Company (“Chemicals Company”) to a subsidiary of Occidental Petroleum Corporation (“Occidental”) in 1986, Maxus had agreed to indemnify Chemicals Company 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” for a description of environmental matters in connection with YPF Holdings.

Offshore Operations

All of the offshore blocks 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

 

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    Escape Water Craft

 

    Critical Power Systems (including electric, pneumatic, hydraulic)

 

    Emergency Communication Systems

 

    Hull Ballast Systems

 

    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, 2014, 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 Overview—Main Properites.”

 

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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, 2014, we leased 84 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.”

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 combined for downstream and upstream operations, 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) 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 willful misconduct of contractors, in which case contractor shall be liable in full or, in certain cases, up to a limited amount.

 

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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 that 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.

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%), except for (i) the drilling of well SB03, which was drilled in 2014 and is subject to a U.S.$5 million deductible and (ii) incidents related to windstorms, which are subject to a U.S.$10 million (100%) deductible. 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 firefighting 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 preventer, 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.$20 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%).

 

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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 have been, until recently, given the decline in international prices of crude oil beginning in late 2014, 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 enacted in 2007 and by Law No. 27,007 enacted in 2014, 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. See “—Law No. 27,2007, amending the Hydrocarbons Law.”

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 km2 and 50 production concessions covering approximately 32,560 km2. Limits under the Hydrocarbons Law on the number of concessions for transportation that may be held by any one entity, and the total area of exploration permits that may be granted to a single entity, were eliminated by Law No. 27,007. 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). Law No. 25,943 has been modified by Law No. 27,007, as described below, eliminating all permits and hydrocarbon production concessions where association agreements with ENARSA have not been signed and reverting them to the Argentine Secretariat of Energy (except for permits and concessions granted prior to Law No. 25,943). Additionally, Law No. 27,007 provides for a six month negotiating period to convert association agreements with ENARSA into permits or concessions.

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

 

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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, 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.

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 unconventional 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.

 

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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 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 S.A. and its controlled or controlling entities. According to the Expropriation Law, the shares subject to expropriation, which have been declared of public interest and were transferred to the Republic of Argentina, 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 provided 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 that 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 Argentine 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 made proportionately considering the holdings of the Argentine federal government and provincial governments, and one Director shall represent the employees of the Company.

In accordance with Article 16 of the Expropriation Law, the federal 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 “—Law No. 26,932” for descriptions 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 the arrangement between Repsol and YPF for the withdrawal of certain claims and actions relating to such expropriation.

 

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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 federal 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).

Law No. 26,932

On February 25, 2014, the Republic of Argentina and Repsol reached an agreement (the “Repsol Agreement”) in relation to compensation for the expropriation of 200,589,525 of YPF’s Class “D” shares pursuant to the Expropriation Law under the Repsol Agreement. Repsol accepted U.S.$5.0 billion in sovereign bonds from the Republic of Argentina and withdrew judicial and arbitral claims it had filed, including claims against YPF, and waived additional claims. YPF and Repsol executed a separate agreement (“the Repsol Arrangement”) on February 27, 2014, pursuant to which YPF and Repsol each withdrew, subject to certain exclusions, all present and future actions and/or claims based on causes occurring prior to the date of execution of Repsol Arrangement arising from the expropriation of the YPF shares owned by Repsol pursuant to the Expropriation Law, including the intervention and temporary possession for public purposes of YPF’s shares. YPF and Repsol 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, which at the time were subject to certain conditions precedent. The Repsol Arrangement entered into force the day after Repsol notified YPF that the Repsol Agreement had entered into force. The Repsol Agreement was ratified on March 28, 2014 at a Repsol general shareholders meeting and approved by the Argentine Congress by Law No. 26,932 enacted Decree No. 600/2014. On May 8, 2014, YPF was notified of the entrance into force of the Repsol Agreement. As of that date, the expropriation pursuant to the Expropriation Law has been concluded, and as a result the Republic of Argentina is definitively the owner of 51% of capital stock of each of YPF S.A. and YPF GAS S.A.

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 that 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 federal 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 federal 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.

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.

 

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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 of Decree No. 1212/89 and sections 3 and 5 of Decree No. 1589/89. Decree No. 1277/12 enacted the “Hydrocarbons Sovereignty Regime Rules”, regulating the Expropriation Law.

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.

Law No. 27,007, amending the Hydrocarbons Law

On October 31, 2014, Law No. 27,007 amending the Hydrocarbons Law was published in the Official Gazette of the Republic of Argentina. The Hydrocarbons Law would apply in certain aspects of some of the Company’s existing concessions as well as future concessions. The most relevant modifications in that law are detailed below.

 

    With respect to exploration permits, it distinguishes between those with conventional and unconventional objectives, and those in which exploration is undertaken in the territorial sea and continental shelf. Law No. 27,007 modifies the basic time periods governing such activities, from three to two periods and limiting the two basic periods to (i) three years each for exploration with conventional objectives and (ii) four years each for exploration with unconventional objectives and (iii) four years each for exploration in the territorial sea or on the continental shelf. In each of these cases, the extension period of up to five years (already established in the Hydrocarbons Law) is maintained, although it is subject to the permit holder having complied with its investment and other obligations. At the end of the first basic period and so long as the permit holder has complied with its obligations under the permit, the permit holder may continue to hold the entire area. After the second basic period ends, the permit holder may surrender the entire area or, if the holder decides to trigger the extension period, 50% of the remaining area.

 

    In relation to concessions, Law No. 27,007 provides for three types of concessions: conventional production, unconventional production and production in the territorial sea or on the continental shelf. Each of these concessions will last 25, 35, and 30 years, respectively. In addition, permit holders or production concessionaires may request unconventional production concessions on the basis of the development of a pilot plan. So long as the concessionaires (i) have complied with their obligations, (ii) are producing hydrocarbons in the areas under consideration and (iii) present an investment plan for the development of such areas as requested by the competent authorities up to a year prior to the termination of each term of the concession, they may request extension periods of ten years each.

 

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    The amounts to be paid with respect to annual surface fee pursuant to Sections 57 and 58 of the Hydrocarbons Law for the periods of exploration and production have been increased with the goal of incentivizing exploration and development of these areas. Additionally, beginning with the second basic exploration period, these may be reduced partially in light of investments actually carried out in the relevant areas. Restrictions on the number of exploration permits and/or production concessions that an individual or legal entity may hold were eliminated.

 

    The Hydrocarbons Law established a 35-year term for those concessions granted for the transportation of oil, gas and petroleum products that holders of production concessions are entitled to receive. Law No. 27,007 modified the awarded term for hydrocarbon transportation concessions, to be synchronized with the production concession periods.

 

    In connection with exploration and production offerings, tenders may be made by Argentine and foreign companies, with the goal of obtaining the highest number of tenders possible. In addition, the bidding documents must be prepared by the competent authorities on the basis of the “Model Bidding Document” which will be drafted jointly by the competent authorities of the Provinces and the Argentine Secretariat of Energy. This Model Bidding Document must be prepared within 180 days of the entry into force of Law No. 27,007. Tenders will be awarded to offerors who present the most relevant offer, in particular, the one proposing the highest amount of investments or exploratory activity.

 

    Royalties have been set at a maximum of 12% on the results of liquid hydrocarbons or natural gas production. Royalties may be reduced considering productivity of the area and the type of production. In cases of extension periods, an additional royalty of 3% will be added for each extension, up to a maximum of 18%. In addition, in case of such extensions, the competent authority may include the payment of an extension bond which maximum amount shall be equal to the result of multiplying the remaining proved reserves at the end of the concession period to be extended by 2% of the average basin price, for the two years period prior the moment when the extension is granted, applicable to the hydrocarbons at issue.

 

    Law No. 27,007 also provides that the Argentine federal government and the provinces may not establish, in the future, new areas reserved in favor of state-owned entities or companies with state participation. Further, with respect to existing reserved areas that do not have association agreements with third parties as of the date of this new law, associative schemes may be carried out so long as, during the development phase, the participation of state-owned entities or companies with state participation is proportional to the effective investments promised and carried out by them.

 

    Law No. 27,007 additionally incorporates into the Investment Promotion Regime for the Exploration of Hydrocarbons (Decree 929/2013) projects, as authorized by the Commission, that imply direct investments in foreign currency greater than U.S.$250 million to be invested during the first three years of the project. Also, it modifies the percentages of hydrocarbons that, beginning with the third year, will be subject to the benefits of the regime. For conventional and unconventional production concessions, as well as offshore concessions at depths less than or equal to 90 meters, the percentage shall be 20%; for offshore concessions at depths greater than 90 meters, the percentage shall be 60%.

 

    Within the framework of the Investment Promotion Regime for the Exploration of Hydrocarbons, Law No. 27,007 provides for contributions by companies to the provinces where the projects take place, which amount to 2.5% of the initial investment amount of the project, to be directed to “Corporate Social Responsibility” contributions. In addition, an amount to be determined by the Commission in light of the extent of the project, to finance infrastructure, have to be contributed by the Argentine federal government.

 

    Law No. 27,007 establishes that capital goods and inputs that are essential to the execution of the investment plans of companies registered in the National Registry of Hydrocarbon Investments shall pay import duties as indicated in Decree 927/13 (reduced rates). This list may be extended to other strategic products.

 

    According to Law No. 27,007, the federal government and the provinces shall attempt to establish uniform environmental legislation and the adoption of uniform fiscal treatment in this sector. The competent authorities, including the Argentine Secretariat of Energy and the Commission, will promote unification of procedures and registries.

 

    All national off shore permits and off shore hydrocarbon production concessions in which association agreements with ENARSA that have not been signed as of the date of the new law will revert to and be transferred to the Argentine Secretariat of Energy. Permits and concessions granted prior to Law No. 25,943 shall be exempted from this provision. The National Executive Office may negotiate, for 180 days following the enactment of the new law, the conversion of association agreements signed with ENARSA to permits or production concessions.

 

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Resolution 14/2015

On February 4, 2015, the Commission issued Resolution 14/2015 that created the Crude Oil Production Stimulus Program (Programa de Estímulo a la Producción de Petróleo Crudo) (the “Program”), which will be valid from January 1, 2015 through December 31, 2015 and may be extended for twelve months. This Program provides for a payment in Argentine pesos to beneficiary companies, in an amount of up to U.S. $3.00 per barrel when such company’s quarterly production of crude oil is equal to or greater than the base production level under the Program, in addition to the compliance with certain other requirements related to the level of activity of the Company as set by Resolution 33/2015. The base production level under the Program is the total production of crude oil of the beneficiary company for the fourth quarter of 2014. Those beneficiary companies that have satisfied the demand of all of the domestic refineries operating within Argentina may direct a portion of their production to the international market and receive an additional payment of U.S. $2.00 or U.S. $3.00 per barrel of crude oil exported, depending on the volume exported.

Companies that are registered under the National Hydrocarbons Investments Registry may request that the Commission include them in the Program up to April 30, 2015, providing certain information as regards to production and exports for 2014. If the Commission accepts these companies as a beneficiary company, they may receive the export and/or production stimulus described above. The payments will be made in Argentine pesos using the Reference Exchange Rate of BCRA Communication “A” 3500 of the last business day prior to the presentation of the information of the corresponding quarter to the Commission.

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 that 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 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 No. 26,732. See “—Taxation.”

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.

Under the Hydrocarbons Law, the federal and/or competent provincial authorities may grant exploration permits after submission of competitive bids. Permits were granted to third parties in connection with the deregulation and demonopolization process and permits covering areas in which our predecessor company, Yacimientos Petrolíferos Fiscales Sociedad del Estado, was operating at the date of the Privatization Law 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. Under the Hydrocarbons Law, each exploration permit may cover only unproved areas not to exceed 10,000 km2 (15,000 km2 offshore), and may have a term of up to 14 years (17 years for offshore exploration). The 14-year term is divided into three basic terms and one extension term. The first basic term is up to four years, the second basic term is up to three years, the

 

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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 surrender 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. Under Law No. 27,007, which will apply to future exploration permits, each exploration permit may have a term of up to 11 years for conventional objectives and 13 years for unconventional objectives and offshore exploration. The terms are divided into two basic terms and one extension term. The first and second basic terms are up to three years, for conventional objectives and up to four years for unconventional objectives and offshore exploration, and the extension term is up to five years, so long as the permit holder has complied with its investments and other obligations. At the expiration of the first basic term, the permit holder will have the right to continue exploring the entire area for the second basic term so long as it has complied with all its obligations under the permit. At the expiration of the second basic term, the permit holder is required to surrender all of the remaining acreage, 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, as modified by Law No. 27,007, provides that new conventional oil and gas production concessions shall remain in effect for 25 years from the date of the award of the production concession, new unconventional oil and gas production concessions shall remain in effect for 35 years from that date, and new offshore oil and gas production concessions shall remain in effect for 30 years from that date, in addition to any remaining exploration term at the date of such award. The Hydrocarbons Law, as modified by Law No. 27,007, further provides for the concession term to be extended for periods of up to 10 additional years each, subject to terms and conditions approved by the grantor at the time of the extension. Such conditions may include the payment of an extension bond with a maximum amount equal to the result of multiplying the remaining proved reserves at the end of the concession period by 2% of the average basin price, for the period two years prior to the date the extension is granted, applicable to the hydrocarbons at issue. 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, must be producing hydrocarbons in the area at issue and must present an investment plan to develop the concession. 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.”

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. As modified by Law No. 27,007, royalty rates are set at a maximum of 12% (though 3% will be added for each extension up to a maximum of 18%). They are 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 sold. These royalty rates may be reduced considering productivity and the type of production at issue. Notwithstanding the foregoing, in concessions extended prior to the entry into force of Law No. 27,007, the previous conditions adopted remain in force. In some cases, an additional 3% royalty has been added. (See “—Extension of Exploitation Concessions in the province of Neuquén, —Mendoza, —Salta, —Santa Cruz, —Chubut and —Tierra del Fuego.” In the extension of our concessions in Santa Cruz, we agreed to a 10% royalty (instead of 12%) for unconventional 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.

 

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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. In October 2014, the Ministry of Economy issued Resolution 803/2014 incorporating exhibit III to Resolution 394/07 of the Ministry of Economy, thus modifying the applicable percentages of duties of exports for certain products below certain prices.

However, on December 29, 2014 Resolution 1077/2014 repealed Resolution 394/07, as amended, and set forth a new withholding program based on the international price of crude oil (the “International Price”). The International Price is calculated based on the Brent value for the applicable month less U.S.$8 per barrel. The new program establishes a 1% general nominal withholding applicable to all products covered by the resolution, including crude oil, diesel, gasoline and lubricants as well as other petroleum products, to the extent that the International Price is below U.S.$71 per barrel. The resolution further provides an increasing variable withholding rate for crude exports oil exports to the extent the International Price exceeds U.S.$71 per barrel. As a result, the maximum a producer may charge is approximately U.S.$70 per barrel exported, depending on the quality of crude sold. The resolution also sets forth increasing withholding rates for exports of diesel, gasoline, lubricants and other petroleum when the International Price exceeds U.S.$71 per barrel at rates that allow the producer to receive a portion of the elevated price.

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 that varies depending on the phase of the operation, such as exploration or production, and in the case of the former, depending on the relevant period of the exploration permit. These amounts were updated by Law No. 27,007 and may be partially adjusted as from the second basic exploration period in light of investments actually carried out. 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 federal government in the case of reservoirs under federal jurisdiction (for instance, located on the continental shelf or beyond 12 nautical miles offshore), without compensation to the holder of the concession.

 

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Certain of our production concessions expire in 2017. See “Item 3. Key Information—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, as modified, provides that applications must be submitted at least one year 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 requiring 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 Overview—Oil and Gas Reserves.”

In March 2007, the Argentine Secretariat of Energy issued Resolution No 407/07 that 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 up to U.S.$2,000 million, to provide loans or capital contributions or to acquire financial instruments in order to implement hydrocarbons exploration, exploitation, processing and marketing projects for oil and gas companies in which the Argentine government has interest or exercises economic and political rights.

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 expire 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 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;

 

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    Exploitation concession terms, which were originally set to expire in 2017, were extended for a 10-year term to 2027; and

 

    YPF agreed:

(i) to make initial payments to the province of Mendoza in an aggregate amount of approximately U.S.$135 million; (ii) to pay the province of Mendoza an “Extraordinary Production Royalty” of 3% of the production of the areas included in the agreement; (iii) a fee for extraordinary income based on 10%, 15% or 20% of the difference between the price actually received by YPF and certain benchmarks set out 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; (iv) to contribute 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, were extended for a 25-year term to 2042; 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;

 

  (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;

 

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

 

  (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 which we acquired in 2013. The final agreement was executed by the province of Tierra del Fuego, YPF, Petrolera LF Company S.R.L. and Petrolera TDF Company S.R.L. on December 18, 2013. The agreement was ratified by the Parliament of the province of Tierra del Fuego on October 10, 2014 through the enactment of Provincial Law No. 997 and 998. The agreement grants an extension of the Tierra del Fuego concession until November 2027 and an extension of the Chorrillos concession until April 2026.

 

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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 from the original 2017 expiration. 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 would have expired in 2017 (Campamento Central – Cañadón Perdido and El Trébol – Escalante), 2015 (Restinga Alí) and 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).

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 terms of the exploitation concessions identified below, subject to the approval of the National Executive Office by decree.

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 for the following:

 

    Concessions involved: Sierras de Aguaragüe, Campo Durán-Madrejones, La Bolsa and Río Pescado.

 

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    Exploitation concession terms are extended for a 10-year term following the expiration of the original 25 year term, until November 14, 2027.

 

    YPF has agreed:

 

  (i) to conduct in Aguaragüe, the following investments: a minimum level of activity 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 pay the province a special extraordinary contribution equal to 25% of the amount corresponding to royalties of 12% referred to in Article 59 and 62 of the Hydrocarbons Law,

 

  (iii) to pay the province an additional payment, when extraordinary income the sale of crude oil and natural gas from the concessions, under conditions where 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.

Extension of Exploitation Concessions in the province of Rio Negro

In December 2014, YPF entered into an agreement with the province of Rio Negro to extend the original terms of the exploitation concessions identified below. Effectiveness of the agreement was subject to the ratification of its terms by the Parliament of the province of Rio Negro that was granted on December 30, 2014 through the enactment of Provincial Law No.5027.

The agreement was signed between YPF, YSUR Energia Argentina S.R.L. (formerly named Apache Energia Argentina S.R.L.), YSUR Petrolera Argentina S.A. (formerly named Apache Petrolera Argentina S.A.) and the province of Rio Negro and provides the following:

 

    Concessions involved: (i) El Medanito, Barranca De Los Loros, Señal Picada-Punta Barda, Bajo Del Piche and Los Caldenes, where YPF holds a 100% undivided interest; (ii) Estacion Fernandez Oro, where YSUR Energia Argentina S.R.L. holds a 100% undivided interest; and (iii) El Santiagueño, where YSUR Petrolera Argentina S.A. holds a 100% undivided interest.

 

    Exploitation concession terms are extended for a 10-year term following the expiration of the original 25 year term, until November 14, 2027, except for the exploitation concessions in (i) Los Caldenes which was extended until September 18, 2036, (ii) Estacion Fernández Oro which was extended until August 16, 2026 and (iii) El Santiagueño which was extended until September 6, 2025.

 

    YPF has agreed:

 

  (i) to make an initial payment to the Province of Rio Negro in an aggregate amount of U.S.$46 million;

 

  (ii) to make contributions to social development and institutional strengthening within the province of Rio Negro in an amount equivalent to 20% of the initial payment;

 

  (iii) to pay an “Extraordinary Production Royalty” of 3% of the monthly production;

 

  (iv) to contribute annually to training, research and development, the amount depends on the volume of production;

 

  (v) to comply with a minimum investment program; and

 

  (vi) to make disbursements and investments aimed at the conservation and protection of the environment.

 

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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, as was the case when we were controlled by Repsol 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.”

Transportation of Liquid Hydrocarbons

The Hydrocarbons Law No. 17,319 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 Hydrocarbons Law No. 27,007, which will apply to future concessions for the transportation of liquid hydrocarbons, permits the National Executive Office to award concessions for the transportation of oil, gas and petroleum products for terms equivalent to those granted for production concessions linked to those transport concessions, following submission of competitive bids. The term of a transportation concession may be extended for additional terms equivalent to those of the associated production concession. 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 Sociedad del Estado 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.

 

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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.

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, in May 2012, the Expropriation Law was passed by the Argentine Congress and became effective. 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 of Decree No. 1212/89 and sections 3 and 5 of Decree No. 1589/89. Decree No. 1277/12

 

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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 recovery of 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 and 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 Investment Project. Beneficiaries of this Promotion Regime shall enjoy the following benefits, among others: i) they shall be entitled, under the terms of the Hydrocarbons Law, 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 Investment 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) if hydrocarbon production in Argentina is not enough to cover domestic supply needs in accordance with section 6 of the Hydrocarbons Law, beneficiaries of the Promotion Regime, from the fifth anniversary of the start-up of their respective Investment the Projects, shall be entitled to obtain, in relation to the aforementioned exportable rate of liquid and gaseous hydrocarbons produced in the Investment Projects, a price not lower than the reference export price calculated without deducting any export duties that would have been applicable. Law No. 27,007, as described above, has incorporated into this regime projects submitted to the Commission of Strategic Planning and Coordination of the National Hydrocarbons Investment Plan entailing a direct investment in foreign currency of at least U.S.$250 million, calculated at the time of submission of the Investment Project, and to be invested in the first three years of the Investment Project. Further, Law 27,007 modifies the percentages of hydrocarbons to be benefitted under this regime to 20% of the production of conventional, unconventional and offshore concessions at depths less than or equal to 90 meters and 60% of the production of offshore concessions at depths greater than 90 meters. See “—Law 27,007, amending the Hydrocarbons Law.”

Additionally, the Decree created a new type of concession for the “Exploitation of Unconventional Hydrocarbons,” which has been incorporated in the Hydrocarbons Law by Law No. 27,007, 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. 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.

As noted above, Law No. 27,007 provides for contributions by companies to the provinces where the projects take place, which amount to 2.5% of the initial investment amount of the project, to be directed to “Corporate Social Responsibility” contributions. In addition, an amount to be determined by the Commission in light of the extent of the project, to finance infrastructure, have to be contributed by the Argentine federal government. Finally, Law No. 27,007 establishes that capital goods and inputs that are essential to the execution of the investment plans of companies registered in the National Registry of Hydrocarbon Investments shall pay import duties indicated in Decree 927/13 (reduced rates). This list may be extended to other strategic products.

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 notice. 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 was approved by Executive Decree No. 652/02 and assured the transportation companies their necessary supply of diesel 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.

In March 2009, Executive Decree No. 1390/09 empowered the Chief of Staff to sign annual agreements extending the diesel 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 made under the 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 to public bus transportation companies. The alleged conduct consists of selling bulk diesel 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 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 Resolution No. 6/2012 and requested a preliminary injunction against its implementation. YPF’s preliminary injunction has been granted and the effects of Resolution No. 6/2012 have been temporarily suspended. On December 9, 2014, the Federal Civil and Commercial Appeals Court issued a ruling stating that the case had become moot and that there are no actual consequences for YPF arising from the challenged Resolution, since prices of the diesel fuel to public bus transportation companies have suffered several variations since the date such Resolution entered into effect. See “Item 8. Financial Information—Legal proceedings—Argentina—Non-accrued, possible contingencies—CNDC claims.”

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 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 Resolution No. 17/2012 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 judgment regarding its legality. On August 31, 2012, the Court of Appeals declared Resolution No. 17/2012 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 in order to provide the market with information about liquid fuel prices and volumes. 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. 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 cost overruns to the refining company.

 

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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. The Disposition has not been imposed by the authorities in cases involving YPF.

Resolution S.E. No. 1679/04 reinstalled the registry of diesel 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 or crude oil to register such transaction a