Form 20-F
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 20-F

 

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2015

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, 2015 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   

 

 


Table of Contents

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

     28   

History and Development of YPF

     28   

The Argentine Market

     31   

History of YPF

     32   

Business Organization

     34   

Exploration and Production Overview

     35   

Downstream

     70   

Research and Development

     83   

Competition

     84   

Environmental Matters

     86   

Property, Plant and Equipment

     90   

Insurance

     90   

Regulatory Framework and Relationship with the Argentine Government

     93   

ITEM 4A.    Unresolved Staff Comments.

     120  

ITEM 5.       Operating and Financial Review and Prospects

     120  

Overview

     121   

Presentation of Financial Information

     121   

Segment Reporting

     121   

Summarized Statement of Comprehensive Income

     121   

Factors Affecting Our Operations

     122   

Critical Accounting Policies

     131   

Off-Balance Sheet Arrangements

     148   

Research and Development, Patents and Licenses, etc.

     148   

ITEM 6.       Directors, Senior Management and Employees

     148  

 

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Management of the Company

     148   

Board of Directors

     148   

Senior Management

     154   

The Audit Committee

     155   

Disclosure Committee

     157   

Compliance with New York Stock Exchange Listing Standards on Corporate Governance

     158   

Compensation of members of our Board of Directors and Supervisory Committee

     159   

Supervisory Committee

     159   

Employee Matters

     161   

ITEM 7.       Major Shareholders and Related Party Transactions

     162  

Related Party Transactions

     163   

Argentine Law Concerning Related Party Transactions

     164   

ITEM 8.       Financial Information

     164  

Financial Statements

     164   

Legal Proceedings

     164   

Dividend Policy

     185   

Significant Changes

     185   

ITEM 9.       The Offer and Listing

     185  

Shares and ADSs

     185   

Argentine Securities Market

     187   

ITEM 10.     Additional Information

     191  

Memorandum and Articles of Association

     192   

Directors

     193   

Dividends

     194   

Amount Available for Distribution

     195   

Preemptive and Accretion Rights

     196   

Voting of the Underlying Class D Shares

     197   

Certain Provisions Relating to Acquisitions of Shares

     198   

Material Contracts

     199   

Exchange Regulations

     200   

Taxation

     200   

Argentine Tax Considerations

     200   

United States Federal Income Tax Considerations

     202   

Available Information

     204   

ITEM 11.     Quantitative and Qualitative Disclosures about Market Risk

     204  

ITEM 12.     Description of Securities Other than Equity Securities

     206  

PART II

     207   

ITEM 13.     Defaults, Dividend Arrearages and Delinquencies

     207  

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

     207  

 

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ITEM 15.     Controls and Procedures

     207  

ITEM 16.     

     208  

ITEM 16A.  Audit Committee Financial Expert

     208  

ITEM 16B.  Code of Ethics

     208  

ITEM 16C.  Principal Accountant Fees and Services

     209  

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

     209  

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

     209  

ITEM 16F.  Change in Registrant’s Certifying Accountant

     210  

ITEM 16G.  Corporate Governance

     210  

PART III

     210   

ITEM 17.     Financial Statements

     210  

ITEM 18.     Financial Statements

     210  

ITEM 19.     Exhibits

     210  

SIGNATURES

     211  

 

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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 statement of financial position as of December 31, 2015, 2014 and 2013, YPF’s audited consolidated statements of comprehensive income for the years ended December 31, 2015, 2014 and 2013, YPF’s audited consolidated statements of cash flows for the years ended December 31, 2015, 2014 and 2013, YPF’s audited consolidated statements of changes in shareholders’ equity for the years ended December 31, 2015, 2014 and 2013 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, WACC (weighted average cost of capital) investments and ability to meet our long-term sales commitments or pay dividends or service our outstanding debt could differ materially from those expressed or implied in any such forward-looking statements. Such factors include, but are not limited to, currency fluctuations, inflation, the price of petroleum products, the 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.

 

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Oil and Gas Terms

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

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

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

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

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

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

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

crude oil”: Crude oil with respect to YPF’s production and reserves includes condensate.

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.

 

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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.
“boe”    Barrels of oil equivalent.
“boe/d”    Barrels of oil equivalent per day.
“cm”    Cubic meter.
“cm/d”    Cubic meters per day.
“dam 3”    Cubic dekameters (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”).

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, 2015 have been translated into U.S. dollars at the exchange rate quoted by the Argentine Central Bank (Banco Central de la República Argentina) (the “Central Bank”) on December 31, 2015 of Ps. 13.01 to U.S.$1.00, unless otherwise specified. The exchange rate quoted by the Central Bank on March 15, 2016 was Ps. 14.61 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, 2015, 2014 and 2013 has been derived from our Audited Consolidated Financial Statements included in this annual report. See Note 20 to the Audited Consolidated Financial Statements. The financial data contained in this annual report as of December 31, 2012 and 2011 and for the years ended December 31, 2012 and 2011 have been derived from our consolidated financial statements as of and for the years ended December 31, 2013, 2012 and 2011 included in our 2013 20-F.

 

     As of and for the year ended December 31,  
     2015     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)

     156,136        141,942        90,113        67,174        56,211   

Gross profit

     36,599        37,450        22,019        16,907        15,068   

Administrative expenses

     (5,586     (4,530     (2,686     (2,232     (1,822

Selling expenses

     (11,099     (10,114     (7,571     (5,662     (5,438

Exploration expenses

     (2,473     (2,034     (829     (582     (574

Other operating results, net

     (853     (1,030     227        (528     (46

Operating income

     16,588        19,742        11,160        7,903        7,188   

Income on long-term investments

     318        558        353        114        685   

Interest expense

     (10,605     (7,336     (3,833     (1,557     (1,045

Other financial income (expense), net

     22,762        9,108        6,668        2,105        758   

Income before income tax

     29,063        22,072        14,348        8,565        7,586   

Income tax

     (24,637     (13,223     (9,269     (4,663     (3,141

Net income

     4,426        8,849        5,079        3,902        4,445   

Total other Comprehensive income

     43,758        16,276        12,031        4,241        1,852   

Total comprehensive income

     48,184        25,125        17,110        8,143        6,297   

Earnings per share and per ADS(4)

     11.68        22.95        13.05        9.92        11.30   

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

     1.28        1.18        0.83        0.77        14.15   

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

     0.14        0.14        0.13        0.16        3.39   

Consolidated Statement of Financial Position Data

          

Cash

     15,387        9,758        10,713        4,747        1,112   

Working capital (3)

     (2,818     (11,266     1,706        (2,582     (7,750

Total assets

     363,453        208,554        135,595        79,949        60,990   

Total loans (6)

     105,751        49,305        31,890        17,104        12,198   

Shareholders’ equity (7)

     120,461        72,781        48,240        31,260        23,420   

Other Consolidated Financial Data

          

Fixed assets depreciation and intangible assets amortization

     27,008        20,405        11,433        8,281        6,499   

Cash used in fixed asset acquisitions and intangible assets

     63,774        50,213        27,639        16,403        12,156   

 

(1) The consolidated financial statements reflect the effect of the application on the functional and reporting currency. See Note 1.b.1 to the Audited Consolidated Financial Statements.
(2) Revenues are net of payments on account of fuel transfer taxes and turnover taxes. Customs duties on hydrocarbon exports are disclosed in taxes, charges and contributions, as indicated in Note 6.n 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.15 to the Audited Consolidated Financial Statements.
(3) Working capital consists of consolidated total current assets minus consolidated total current liabilities as of December 31, 2015, December 31, 2014, December 31, 2013, December 31, 2012 and December 31, 2011.
(4) Information has been calculated based on our 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 the dividend payment.
(6) Total loans include non-current loans of Ps. 77,934 million, Ps. 36,030 million, Ps. 23,076 million, Ps. 12,100 million and Ps. 4,435 million as of December 31, 2015, 2014, 2013, 2012 and 2011, respectively, and current loans of Ps. 27,817 million, Ps. 13,275 million, Ps. 8,814 million, Ps. 5,004 million and Ps. 7,763 million as of December 31, 2015, 2014, 2013, 2012 and 2011, respectively. See Note 6.j to the Audited Consolidated Financial Statements.
(7) Our subscribed share capital as of December 31, 2015 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 allocated to our employees as part 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 which required the Central Bank 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, the “Public Emergency Law”), formally putting an end to the Convertibility Law regime and abandoning over ten years of U.S. dollar-peso parity. The Public Emergency Law, which has been extended until December 31, 2017 by Law No. 27,200, grants the National Executive Office the power to set the exchange rate between the peso and foreign currencies and to issue regulations related to the foreign exchange market. Following a brief period during which the Argentine government established a temporary dual exchange rate system pursuant to the Public Emergency Law, the peso has been allowed to float freely against other currencies since February 2002, although the government has the power to intervene by buying and selling foreign currency for its own account, a practice in which it engages on a regular basis. The annual rate of devaluation of the peso was approximately 52.1% from December 31, 2014 to December 31, 2015, based on the period-end exchange rates for U.S. dollars as of December 31, 2015 and 2014, and the Argentine peso was subject to a devaluation of approximately 34.2% during December 2015. 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 (1)      Period End  
     (pesos per U.S. dollar)  

Year ended December 31,

           

2011

     3.97         4.30         4.15         4.30   

2012

     4.30         4.92         4.58         4.92   

2013

     4.92         6.52         5.54         6.52   

2014

     6.54         8.56         8.23         8.55   

2015

     8.73         13.76         9.39         13.01   

Month

           

September 2015

     9.30         9.42         9.37         9.42   

October 2015

     9.43         9.55         9.49         9.55   

November 2015

     9.56         9.69         9.63         9.69   

December 2015

     9.70         13.76         11.43         13.01   

January 2016

     13.07         13.94         13.65         13.90   

February 2016

     14.09         15.58         14.81         15.58   

March 2016 (2)

     14.61         15.92         15.30         14.61   

Source: Central Bank

(1) Represents the average of the exchange rates on the last day of each month during the period.
(2) Through March 15, 2016.

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.

 

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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. In June 2003, the Argentine government set restrictions on capital flows into Argentina, which mainly consisted of a prohibition against the transfer abroad of any funds until 180 days after their entry into the country. In June 2005, the government established new regulations on capital flows into Argentina, including increasing the period that certain incoming funds must remain in Argentina to 365 calendar days and requiring that 30% of incoming funds be deposited with a bank in Argentina in a non-assignable, non-interest-bearing account for 365 calendar days (the “Mandatory Deposit”). However, in December 2015, the Ministry of Budget and Finance reduced the period in which the incoming funds must remain in Argentina from 365 calendar days to 120 calendar days and also reduced the Mandatory Deposit from 30% to 0%. In addition, the Argentine Central Bank lifted many of the restrictions imposed on transferring funds abroad and on capital flows into Argentina. In this regard, the Argentine Central Bank’s regulation provides that Argentine individuals and legal entities do not need the Central Bank’s prior approval to acquire foreign currency used for portfolio investments abroad. This includes investment in real estate located abroad, loans to non-residents, direct investments made by Argentine residents abroad, portfolio investments made by Argentine residents abroad, other investments abroad made by Argentine residents, portfolio investments made by legal entities abroad, purchase of foreign currency in Argentina, purchase of travelers checks and donations, as long as the purchases do not exceed an aggregate amount of U.S.$2,000,000 per calendar month and all the entities are authorized to trade in foreign currency. Under the exchange regulations currently in force, restrictions exist in respect of the repatriation of funds or investments by non-Argentine residents. For instance, 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 demonstrating that the funds used to make the investment in the Class D shares were transferred to Argentina at least 120 days before the proposed repatriation and obtaining a certificate from an Argentine financial entity or Argentine stock exchange stating the date and amount of the settlement of the funds in the Argentine exchange market from the investment in Class D shares. 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. See “—Risk Factors—Risks Relating to Argentina—We are subject to exchange and capital controls.”

 

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Risk Factors

The risks and uncertainties described below are those known by us as of 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 controls 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, this 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. In addition, according to the Argentine Constitution, presidential elections take place every four years. Accordingly, changes in policy may result in changes in our management and/or our strategy. We cannot assure you if and when any such changes may occur, nor the impact they may have on our business.

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. In 2012, the Argentine economy experienced a slowdown with gross domestic product (“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 using 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 this new method, the estimated GDP growth rate 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 growth rate for 2014 and the first half of 2015 published by the National Statistics Institute (Instituto Nacional de Estadística y Censos) (“INDEC”) are 0.5% and 2.2%, respectively. 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 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.

 

Argentina has confronted and continues to confront 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, and the wholesale price index increased 8.8%, 10.3%, 14.5%, 12.7%, 13.1% and 14.7%, respectively. In 2014, the Argentine government established a new consumer price index, known as the “IPCNU,” that 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 increased 23.9% in 2014 and increased 10.7% from January 2015 to September 2015. The wholesale price index increased 28.3% in 2014 and increased 11.9% from January 2015 to October 2015. Before the new administration took office, certain private sector analysts believed that the inflation rate was significantly higher than the rate published by INDEC. On January 7, 2016 through Decree No. 55/2016, the new leadership of INDEC issued a report declaring a “national statistical emergency.” INDEC stated that its administration since 2006 was irregular and it would reorganize. As a result, INDEC would not publish new information until at least June 2016. There can be no assurance of the potential impact these changes may have on our results of operations and financial condition. According to a price index published by the government of the City of Buenos Aires, inflation in the city was 3.9%, 4.1% and 4.0% in December 2015, January 2016 and February 2016, respectively. Previously, from December 2014 to November 2015, inflation averaged less than 2.0% per month. Increased rates of inflation in Argentina could increase our costs of operation, and may negatively impact our results of operations and financial condition. There can be no assurance that inflation rates will not increase in the future.

 

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

 

    international demand for Argentina’s principal exports;

 

    international prices for Argentina’s principal commodity exports;

 

    stability and competitiveness of the peso against foreign currencies;

 

    competitiveness and efficiency of domestic industries and services;

 

    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. Mauricio Macri was elected president of Argentina, and his administration took office on December 10, 2015. The new administration faces challenges in respect of Argentina’s economy, such as reducing the rate of inflation and a further devaluation of the Argentine peso, improving the competitiveness of the local industries and normalizing or adjusting prices of certain goods and services, such as electricity and natural gas in certain residential consumers of Argentina. Some of the measures necessary to meet these objectives could be unpopular and generate political and social opposition or unrest. As a result, it is difficult to predict the impact of these measures on the Argentine economy as a whole and the energy sector in particular, including revisions and reforms to pricing mechanisms for oil and gas and elimination of energy subsidies, as well as other policy changes that may affect the energy sector. This includes decisions that the new administration has already taken, such as the elimination of exchange restrictions, or future measures it may take to address inflation or changes to the exchange rate. Uncertainty regarding the measures to be taken by the new administration on the economy could further lead to price volatility of Argentine companies, including in particular companies like ours in the energy sector, given the high level of regulation. In addition, there can be no assurance that current government 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.”

Argentina’s economy is also vulnerable to adverse developments affecting its principal trading partners. A continued deterioration of economic conditions in Brazil, Argentina’s main trading partner, and a deterioration of the economies of Argentina’s other major trading partners, such as 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 devaluation 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.

As part of the challenging macroeconomic scenario in Argentina, including peso devaluation and increasing inflation, in 2015, despite an increase of 10.0% in our net revenue, to Ps. 156,136 million from Ps. 141,942 million in 2014, our operating income decreased by 16%, to Ps. 16,588 million from Ps. 19,742 million in 2014, and our net income decreased by 50.0%, to Ps. 4,426 million from Ps. 8,849 million in 2014. If these trends continue our results of operation and financial condition would be negatively affected.

In 2005, Argentina restructured a substantial portion of its bond indebtedness with approximately 76% of its bondholders, and in 2006 it settled all of its debt with the International Monetary Fund (“IMF”). In June 2010, Argentina restructured additional defaulted bond indebtedness that was not swapped in 2005. As a result of the 2005 and 2010 debt swaps, over 92% of the bond indebtedness on which Argentina had defaulted in 2002 has been restructured (“Exchange Bonds”).

Certain holders of bonds that were not swapped in the debt restructuring have sued Argentina for payment (“Holdout Bondholders”). On December 7, 2011, the U.S. District Court for the Southern District of New York held that Argentina was required by the pari passu clause in the 1994 Fiscal Agency Agreement governing the defaulted bonds to rank its payment obligations to the Holdout Bondholders equally with those of its other debt, including the Exchange Bonds. On February 23, 2012, the District Court enjoined Argentina from making payments on the Exchange Bonds without making ratable payments on the defaulted debt, and on October 2012, the District Court’s injunction was affirmed by the U.S. Court of Appeals for the Second Circuit.

On November 21, 2012, the District Court issued an amended order requiring Argentina to pay 100% of the amounts due to the Holdout Bondholders upon payment of the amounts due on the next maturity date to the Exchange Bondholders. Argentina appealed the District Court’s November 21, 2012 order to the Second Circuit Court of Appeals, which granted Argentina’s request for a stay of the order. 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 U.S. Supreme Court. On June 16, 2014, the U.S. Supreme Court denied Argentina’s appeal, and with the appeal process exhausted, the Second Circuit Court of Appeals lifted its stay of the District Court’s order on June 18, 2014.

 

 

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On June 26, 2014, Argentina deposited U.S.$832 million due to the Exchange Bondholders for the payment of interest that matured on June 30, 2014, of which U.S.$539 million was deposited in accounts of the Bank of New York Mellon (“BoNY”), as indenture trustee, in the Central Bank of Argentina. On June 27, 2014, the District Court referred to such funds as an illegal payment. On October 22, 2014, the Second Circuit Court of Appeals dismissed Argentina’s appeal of the District Court’s decision finding that the payment on the Exchange Bonds was illegal and that BoNY, therefore, should retain such funds.

BoNY has invoked the decision of the District Court to not deliver the funds deposited by Argentina to the Exchange Bondholders. Argentina has asserted that it has complied with its obligation to the Exchange Bondholders by making said deposit, and that BoNY, as the indenture trustee, has the obligation to deliver those funds to their beneficiaries.

On September 11, 2014, Argentina promulgated Law No. 26,984, which provided for various mechanisms to pay 100% of the amounts owed on the Exchange Bonds, authorizing for that purpose, among other things, the Minister of Economy and Public Finance to replace BoNY as indenture trustee and appoint Nación Fideicomisos S.A. instead, and to deposit funds owed to the Exchange Bondholders in an account created to that end, providing also the possibility for the bondholders to change the trustee, the jurisdiction or the governing law of the bonds.

On September 29, 2014, the District Court declared Argentina in contempt of court but did not impose sanctions. On October 3, 2014, the District Court ordered Argentina to repair its relations with BoNY, remove Nación Fideicomisos as indenture trustee and resolve the situation with the Holdout Bondholders.

On March 12, 2015, the District Court held that U.S. dollar-denominated bonds issued by Argentina under Argentine Law constitute external indebtedness, and, therefore, are covered by the court’s amended injunction dated November 21, 2012.

On May 11, 2015, certain Holdout Bondholders moved to amend the complaint to add two claims: (i) a claim for a declaratory judgment stating that the “BONAR 2024” bonds issued by Argentina are considered foreign debt, and (ii) a claim for a pari passu order stating that Argentina must make ratable payments to claimants each time the BONAR 2024 bonds or other amounts are paid on past or future external debt. On July 16, 2015, the District Court accepted the amended complaint.

Other holders of bonds that were not exchanged in the 2005 and 2010 debt swaps have sought relief similar to that sought by the Holdout Bondholder plaintiffs (“Me Too Plaintiffs”). On June 5, 2015, the District Court granted summary judgment in 36 of these cases, declaring that Argentina was in breach of the pari passu clause contained in their bonds. By an order of October 22, 2014, the District Court granted identical summary judgment in fifteen other Me Too Plaintiffs actions. On August 14, 2015, certain Me Too Plaintiffs submitted motions requesting a pari passu order similar to that previously obtained by other Holdout Bondholders. Those Me Too Plaintiffs were afterwards followed by many others, and on October 30, 2015, the District Court granted 49 such motions.

Since the pari passu injunction became effective, litigation has continued regarding Argentina’s efforts to make payments to Exchange Bondholders. Payments by Argentina have been blocked from reaching the Exchange Bondholders by judicial orders, and various Exchange Bondholders have sought release of such funds through litigation before the District Court and in various jurisdictions.

In connection with the Holdout Bondholder litigation against Argentina, the Holdout Bondholders 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 Argentina, including YPF. During a hearing on September 3, 2013, the District Court ruled that such discovery could proceed as to, among others, YPF, in order for the Holdout Bondholders to determine if those documents supported an argument that YPF is an alter ego of Argentina. YPF is not a recipient of any such subpoenas and, as such, has no obligation to produce documents or otherwise participate in discovery.

On June 17, 2015, the plaintiff NML and other Holdout Bondholders submitted a motion to the District Court alleging Argentina did not comply with the court’s discovery order dated September 25, 2013 and seeking sanctions, including precluding Argentina from disputing the Holdout Bondholder’s alter ego allegations as to the Central Bank of Argentina, Energía Argentina Sociedad Anónima (“ENARSA”), and YPF, and deeming that Argentina’s assets in United States were used for commercial purposes. During a hearing on August 12, 2015, the District Court found that Argentina had not complied with the September 25, 2013 discovery order and ordered that Argentina’s assets in the United States, except for diplomatic and military assets, be deemed to be used for commercial purposes. The District Court made no determination as to sanctions, if any, with respect to the alter ego issues.

 

 

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Notably, the District Court has previously held that Banco de la Nación Argentina, or BNA, is not an alter ego of Argentina, and on August 31, 2015, the Second Circuit Court of Appeals ruled that the Central Bank of Argentina is not an alter ego of Argentina and dismissed claims asserted against it on that basis. On January 7, 2016, NML filed a writ of certiorari before the Supreme Court of the United States on appeal of this issue. In addition, the U.S. District Court for the Northern District of California on December 1, 2015 affirmed a magistrate judge’s ruling that the Holdout Bondholders’ assertion that YPF was an alter ego of Argentina was insufficient to support discovery concerning YPF. This decision was appealed by NML on December 23, 2015.

In February 2016, Argentina negotiated and reached agreements in principle with respect to a substantial number of the Holdout Bondholders. On February 5, 2016, Argentina published its proposal to other Holdout Bondholder plaintiffs. Argentina has indicated that it estimates that the settlement payments for the Holdout Bondholders covered by the pari passu injunctions, if made, would total approximately U.S.$6.5 billion in cash.

On February 19, 2016, the District Court issued an indicative ruling stating that in light of Argentina’s settlement proposal, and upon remand of Argentina’s motion to vacate the pari passu injunctions in the Me Too Plaintiffs’ actions from the Court of Appeals, it would grant a motion to vacate the injunctions in all cases upon the occurrence of two conditions: (1) Argentina’s repeal of the legislative obstacles to settlement and (2) Argentina’s payment to all Holdout Bondholders that entered into agreements in principle with Argentina on or before February 29, 2016 in accordance with the terms of such agreements, and notification of such payment to the District Court.

On February 24, 2016, the Court of Appeals remanded the pari passu cases on appeal to the District Court, stating that the order formalizing the indicative ruling was subject to a motion from Argentina, with notice to all parties and an opportunity to be heard, and that any such order will be stayed for up to two weeks. Argentina submitted that motion, and the District Court held a hearing of oral arguments on March 1, 2016. On March 2, 2016, the District Court vacated the injunctions on all actions upon the occurrence of the conditions set forth in the indicative ruling. During the two week stay, plaintiffs filed appeals and consented to an extended stay. On March 11, the Second Circuit entered an order staying enforcement of the District Court’s March 2 order pending resolution of the appeals.

There can be no assurance that Argentina will be able to raise sufficient capital or have available cash to fund the payments to the Holdout Bondholders and other payments it might need to make to settle ongoing litigation, or whether the outcome of this or other potential future litigation, or the efforts of 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 and 2015.

 

 

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

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

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

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

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

Since 2002, new duties have been implemented on exports, and have been progressively increased over the years. 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 for the importer to have access to the foreign exchange market to pay for the imported products and services. This procedure was recently modified by the new administration through Resolution 3823/15, which set forth the “Comprehensive Monitoring System of Imports,” known as “SIMI,” to provide statistical information in advance of an importation, in order to allow timely analysis of Argentina’s imports, analyze trade defense measures and avoid delays in delivering imported items to various industries. See “Item 4. Information on the Company—Regulatory Framework and Relationship with the Argentine Government—Market Regulation.”

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

In addition, 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 fluctuations, 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 declined approximately 23% against the U.S. dollar and in December 2015 when the Argentine peso declined approximately 40% against the U.S. dollar. The peso may fluctuate in the future. See “Item 5. Operating and Financial Review and Prospects—Macroeconomic Conditions” for additional information. The main effects of the devaluation of the Argentine peso on our net income are related to the accounting treatement of (i) deferred income tax related mainly to fixed assets, which we expect would have a negative effect; (ii) current income tax, which we expect would have a positive effect; (iii) increased depreciation and amortization resulting from the remeasurement in pesos of our fixed and intangible assets; and (iv) 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.

 

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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, 2015, 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 controls have been imposed that restrict or limit purchases of foreign currency and transfers of foreign currency abroad. 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.”

In December 2015, the new administration eliminated certain exchange controls imposed by the previous administration, such as (i) the requirement that foreign currency be deposited and exchanged in Argentina in respect of finance transactions outside Argentina, and (ii) the requirement that 30% of funds in U.S. dollars held in Argentina be frozen pursuant to Decree No. 616/05. Following these changes, the peso fell to Ps. 12.99 per U.S.$1.00, as of December 31, 2015, a decrease of approximately 52% compared to December 31, 2014. Between December 16, 2015 and December 31, 2015, the peso decreased approximately 40% against the U.S. dollar. As of March 15, 2016, the peso fell to Ps. 14.61 per U.S.$1.00, a decrease of approximately 12% compared to December 31, 2015. There can be no assurance that future regulatory changes related to exchange and capital controls will not adversely affect our financial condition or results of operations, our ability to meet our obligations denominated in foreign currency or our ability to execute our financing and capital expenditure 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 debt or equity securities. We can give no assurance as to potential adverse impact of the factors discussed above on our financial condition and/or results of operations. See “Item 4. Information on the Company—History and Development of YPF.”

We could be required to reveal confidential information.

On November 10, 2015, the Argentine Supreme Court ordered us to furnish information regarding an agreement we entered into based on the requirements of Decree No. 1172/03, which regulates access to information considered public. The agreement aims to develop hydrocarbon resources in Argentina. The information was delivered to the court on February 23, 2016. We believe that public disclosure of confidential information could put us at a competitive disadvantage in relation to our contracting parties and potential partners. For this reason, and given the business, industrial, technical, economic and financial value as well as the nature of the information requested, we are pursuing all avenues to preserve its confidentiality. We have stated we intend to comply with the requirements of the aforementioned decree while preserving our rights to keep certain industrial, commercial, financial and technical issues matters confidential as provided by the decree. Notwithstanding the foregoing, on March 14, 2016, the judge ordered us to deliver within five business days the requested agreement without a chance to keep certain information confidential as requested by us and in accordance with the exemptions contemplated by Decree No. 1172/03. On March 16, 2016, the Company appealed that decision.

 

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As a result, there can be no assurance that the application of Decree No. 1172/03 in respect of the disclosure of confidential information regarding our operations will not affect our ability to conduct certain business or access the financing through potential new agreements with other partners, the occurrence of which could affect our results of operations and financial condition.

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 of 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;

 

    in connection with the former and current incentive programs established by the Argentine government for the oil and gas industry, such as the Natural Gas Additional Injection Stimulus Program (“Gas Plan”) (see “Risk Factors—A significant percentage of our cash flow from operations is derived from counterparties that are governmental entities”), cash collection of balances with the Argentine government;

 

    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 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.”

 

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

Due to regulatory, economic and government policy factors, our domestic gasoline, diesel and other fuel prices have substantially differed from those prevailing international and regional market prices for such products, and our ability to increase prices in connection with international price increases or domestic cost increases has been limited. In addition, revenues we obtain as a result of selling natural gas in Argentina (including amounts received through the Gas Plan, see “Item 4. Information on the Company—Regulatory Framework and Relationship with the Argentine Government—Market Regulation—Natural gas”) are subject to government regulations and could be negatively affected, principally if the Gas Plan were modified, canceled or not extended past its current expiration date. The prices that we are able to obtain for our hydrocarbon products affect 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.” We cannot provide any assurances that we will be able to increase the domestic prices of our products to reflect the effects of increased production costs, domestic taxes and exchange rate fluctuations. 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.

A significant percentage of our cash flow from operations is derived from counterparties that are governmental entities.

In the normal course of business, and considering that YPF is the primary oil and gas company in Argentina, its portfolio of clients and suppliers includes both private sector and governmental entities. All material transactions and balances with related parties as of December 31, 2015 are set forth in Note 6 to the Audited Consolidated Financial Statements, including those related to the Natural Gas Additional Injection Stimulus Program and the Oil Production Stimulus Program. As of December 31, 2015, the accounts receivable balance corresponding to the Natural Gas Additional Injection Stimulus Program reflects nine months of accrued, unpaid payments, representing approximately Ps. 9.9 billion. This receivable is due to an increase in the standard payment timetable under the program that in the past was an average of between four to six months from the month of accrual. As of the date of this annual report, we have not yet received any payments related to amounts accrued and unpaid as of December 31, 2015 under such programs. We cannot guarantee that new regulations or interpretations of current regulations would not impair our rights in connection with such amounts due from national, provincial and municipal governmental entities. This could consequently affect our financial condition and results of operations. In addition, if certain governmental counterparties were (i) not able to pay or redeem such accrued amounts in cash or cash equivalents, or (ii) not able to make such payments or redemptions according to our estimated schedule, our financial condition and results of operations would be adversely affected.

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.

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 must also first demonstrate that the local demand for diesel is duly satisfied. Because domestic diesel production does not currently satisfy Argentine domestic consumption needs, we have been prevented since 2005 from selling diesel production in the export market, and we are obliged to sell in the local market at prevailing domestic prices.

 

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We are unable to predict how long these export restrictions will be in place, or whether any further measures will be adopted that adversely affect our ability to export gas, crude oil and diesel 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, current and expected 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.$35. This is a decrease of approximately U.S.$17 per barrel from the 2015 average of U.S.$52.30 per barrel, representing an approximately 33% decrease. 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.$7.00 reduction during 2015 of the domestic price per barrel compared to the price in effect on December 31, 2014, and an additional approximately 10% reduction in 2016 compared to the price in effect on December 31, 2015, resulting in a price of U.S.$67.50 and U.S.$54.90 per barrel for Medanito and Escalante crude, 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. This could lead to changes to our development plans, which could in turn lead to the loss of proved reserves and proved undeveloped reserves. 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 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 could be adversely affected, which in turn would have an adverse effect on our financial conditions and results of operations. Furthermore, we may be required to write down the carrying value of our properties if oil prices decline or if we have substantial downward adjustments to our estimated proved reserves, increases in our operating costs, among others. See additionally “Item 5. Operating and Financing Review and Prospects—Critical Accounting Policies” for information regarding our sensitivity analysis related to impairment. In addition, if a reduction in our capital expenditures materializes, including the capital expenditures of our domestic competitors, it would likely have a negative impact on the number of active drilling rigs, workovers and pulling equipment in Argentina, including related services, thus affecting the number of active workers in the industry. We are unable to predict whether, and to what extent, the potential consequences of such measures would affect our business, mainly the impact on our production and consequently our financial condition and results of operations. See “—We could be subject to organized labor action.”

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, 2014 and 2015, including the production that came from our acquired properties, our production increased by approximately 1.7%, 13.5% and 3.0%, 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, 163% in 2014 and 107% in 2015.

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.”

 

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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, 2015, 2014 and 2013 was calculated in accordance with SEC rules and FASB’s ASC 932, as amended. Accordingly, crude oil prices used to determine reserves were calculated each month, for crude oils of different quality produced by us.

As previously discussed, domestic prices for oil and gas products and derivatives have demonstrated in recent years they do not follow international prices both in the down and upside, mainly as a result of domestic economic variables affecting Argentina such as regulations, labor costs, labor unions, political, economic and social constraints, among others. Accordingly, for calculations of our net proved reserves as of December 31, 2015, we considered the realized prices for crude oil in the domestic market, which are higher than those prevailing in the international market, taking into account the unweighted average price for each month within the twelve-month period ending December 31, 2015.

Commodity prices in general have declined significantly since 2014. If these prices do not increase significantly, and domestic prices for crude oil were reduced in line with international prices, our future calculations of estimated proved reserves would be based on lower prices. This 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 to match international prices of approximately U.S.$40 per barrel for WTI, and considering such prices since January 1, 2016, our total proved reserves as of December 31, 2015 would decrease by approximately 39%. Holding all other factors constant, if commodity reference prices used in our year-end reserve estimates were decreased for crude oil to match the current prices for crude oil in the domestic market since January 1, 2016 of approximately U.S.$67.50 per barrel for WTI equivalent quality, and considering such prices since January 1, 2016, our total proved reserves at December 31, 2015 would decrease by approximately 5%. In addition, as a result of the prices used to calculate the present value of future net revenues from our proved reserves, in accordance with SEC rules, which are similar to the calculation of proved reserves described above, 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. In particular, they may be reduced due to the recent significant decline in commodity prices if such prices do not increase significantly and domestic prices were reduced in line with international prices.

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 or impairment charges, which would reduce earnings and shareholders’ equity. See “—Oil and gas prices, including the recent decline in global prices for oil and gas, could affect our business.”

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 the 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.

 

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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.

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.

 

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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 wholly-owned 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 ultimate design and implementation of the remedial action 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 and any other action by the EPA related to the Newark Bay Complex.

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 action in the lower eight miles of the Passaic River. As a result of comments received, the EPA withdrew the FFS for revision and further consideration in light of the comments. On November 14, 2013, the EPA described four alternatives it was considering in the revised FFS, including: (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) one additional alternative that it subsequently discarded.

On April 11, 2014, the EPA published the revised FFS for the lower eight miles of the Passaic River in final form. In the final FFS, the EPA recommended as its preferred remedial action for this area removal of approximately 4.3 million cubic yards of sediment 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 remedy (without CAD) for the lower eight miles of Passaic River to be U.S.$1,731 million (present value estimated with a 7% discount rate).

 

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On August 20, 2014, Maxus and Tierra, on behalf of Occidental, submitted extensive comments on the final FFS to the EPA. The main comments offered by Maxus, Tierra and Occidental 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;

 

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

 

    The processes of the EPA Region 2 have a lack of public transparency; and

 

    The inclusion in the remediation plan of dredging for navigational purposes is not covered by the regulation.

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. The EPA provided additional comments to the In-ECO Statement of Work in March 2015. Tierra subsequently developed responses to those comments and submitted them to the EPA. A meeting was held in September 2015 between Tierra, its experts and the EPA. During this meeting, certain issues were resolved, and laboratory studies are now anticipated to begin sometime in early 2016.

In October 2015, the U.S. Government Accountability Office (the “GAO”) advised Maxus, Tierra and Occidental that it had commenced a study on some “Superfund” sites with sediment contamination issues, including the Lower Section of the Passaic River, at the request of the Committee of Environmental Matters and Public Works of the United States Senate. It is anticipated that the GAO’s report will be made public in the third quarter of 2016.

On March 4, 2016, subsequent to the issuance of the accompanying Financial Statements, EPA released the Record of Decision for the “Lower 8.3 Miles of the Lower Passaic River, Part of the Diamond Alkali Superfund Site—Essex and Hudson Counties, New Jersey” (hereinafter, the “ROD”).

The ROD presented the selected remedy to address contaminated sediments found in the lower 8.3 miles of the Lower Passaic River, a part of the Diamond Alkali Superfund Site. In this regard, the EPA selected Alternative 3 (capping with dredging for flooding and navigation of 3.5 million cubic yard over 6 years term). This approach is consistent with the alternative selected in the Second Draft FFS – 2014 but for the amount of sediment to be removed through bank-to-bank dredging (which was approximately 4.3 million cubic yards in the FFS 2014 draft and is approximately 3.5 million cubic yards in the ROD).

The ROD provides that the estimated total net present value costs to be US$ 1,382 million. This amount is consistent with the amount provided in the FFS – 2014 Draft, taking in consideration a reduction of 0.8 million cubic yards to be removed between the two reports. According to the EPA, a major source of dioxin in the river was discharges from the former Diamond Alkali facility in Newark, where the production of Agent Orange and other pesticides during the 1960s generated dioxin that contaminated the land and the river.

The EPA further stated that the selected alternative is the first of three remedies to be selected for the Lower Passaic/Newark Bay waterway, highlighting that separate RI/FSs are being conducted for the full 17-mile Lower Passaic River Study Area and for the Newark Bay Study Area. Accordingly, the EPA expects the three remedies to be integrated into a comprehensive response action.

In accordance with the issuance of the ROD, the EPA stated that now that the cleanup plan has been selected, the EPA will immediately begin discussions with those responsible for the contamination to seek their performance of or payment for the cleanup work. The EPA stated that once the legal process concludes, the design of the activities necessary to carry out the cleanup will be outlined in a legally binding document. The EPA expects that the design will take three to four years to complete. In accordance with the EPA, the dredging, dewatering and disposal of dredged materials and related construction work will follow and is expected to take six years to complete.

 

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At this time, there is significant uncertainty regarding the outcome of any allocation negotiation or mediation process to estimate the percentage share to Occidental for which Maxus might be liable under the indemnity.

Based on (a) the uncertainties identified by the Company as of the date of this annual report, including but not limited to (i) the extraordinary volume of sediment materials for which, to date, the sediment treatment technologies have neither been constructed nor operated in the United States on a scale commensurate with the capacity that would be necessary for the remedial work this remediation that this project would be requiring, (ii) the results of the studies and discoveries yet to be produced, (iii) the number and diversity of contaminants of concern identified by the ROD (furans, PCB’s, mercury, copper, dieldrin, PAHs, lead, dioxins and DDT), many of which have not been previously associated with the Lister Site and/or have been generated by other potentially responsible parties, (iv) the number and diversity of potential responsible parties involved in the matter (EPA identified more than one hundred potential responsible parties), and (v) the final allocation of the removal and remediation costs; (b) consultation with our internal and external counsel; (c) the amounts previously incurred and recorded by YPF Holdings in remediation activities in the area covered by the ROD; and (d) the limitation on responsibility that YPF may have as an indirect controlling shareholder of Maxus, no additional liability has been accrued for this environmental matter as of the date of this annual report. Depending on the final outcome of this matter, our financial condition and results of operation could be negatively affected. 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, 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.

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.

For instance, 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. The rainfall set a new record for the area and disrupted refinery systems, causing 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 six tanks, four of which are for processing and two are for dispatch of treated crude oil, concentrates the production of ten fields in the Malargue area. This 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 has almost returned to previous levels, and the construction of the new oil treatment plant has advanced as planned.

 

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We could be subject to organized labor action.

Our operations have been affected by organized work disruptions and stoppages in the past and we cannot assure you that we will not experience them in the future, which could adversely affect our business and revenues. Labor demands are commonplace in Argentina’s energy sector and unionized workers have blocked access to and damaged our plants in the recent past. Our operations were affected occasionally by labor strikes in recent years. See “—Oil and gas prices, including the recent decline in global prices for oil and gas, could affect our business” and “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 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. On April 30, 2015, our shareholders approved a dividend of Ps.503 million (Ps.1.28 per share or ADS), which was paid during July 2015. On March 3, 2016, our Board of Directors agreed to propose at the shareholders’ meeting the allocation of Ps. 889 million to a reserve for the payment of dividends, authorizing the Board to determine the opportunity for its distribution within a period not exceeding the end of 2016. Notwithstanding the foregoing, our ability to pay, maintain or increase dividends is based on many factors, including 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, the successful implementation of our strategy 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. Our ability to continue to rely on these key individuals is dependent on our success attracting, training, motivating and retaining key management and commercial and technical personnel with the necessary skills and experience. There is no assurance 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.

On March 9, 2016, our current Chairman and CEO Miguel Galuccio announced that he will step down at the end of his term, which ends at our next annual shareholders meeting, expected to be held in April 2016. See “Item 6. Directors, Senior Management and Employees—Board of Directors.” 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. Consequently, the Argentine government 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 the Expropriation Law” and “—Our business is largely dependent upon economic conditions in Argentina.” 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 our results of operations.

Our business has become increasingly dependent on digital technologies to conduct day-to-day operations, including oil, gas and petrochemical operations.

As dependence on digital technologies has increased, cyber incidents, including deliberate attacks or unintentional events, have also increased worldwide. Our technologies, systems, networks and those of our business associates have been and may continue to be the target of cyberattacks or information security breaches, which could lead to disruptions in critical systems (such as SCADAs, DCS systems), the unauthorized release of confidential or protected information, corruption of data or other disruptions of our business operations. In addition, certain cyber incidents, such as surveillance, may remain undetected for an extended period. To our knowledge, we have not experienced any material losses relating to cyberattacks. However, as cyberattacks continue to evolve, there can be no assurance that we will not suffer any cyberattack in the future that may affect our operations or our financial condition.

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 in the market price of our shares and ADSs. For example, the price of our ADSs has varied from U.S.$54.58 on January 5, 2011 to U.S.$9.57 on November 16, 2012. The price hit a high closing price of U.S.$36.99 on July 1, 2014, but subsequently fell to U.S.$12.83 on January 20, 2016. See “Item 9. The Offer and Listing.” We cannot assure you that concerns about factors that could affect the market price of our ordinary shares as previously mentioned may have a material adverse effect on the trading values of our securities.

 

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

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

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

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

The government is empowered, for reasons of public emergency, as defined in Article 1 of 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.

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 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.

 

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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) (“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 devaluation 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 a limited 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 2015, we had consolidated revenues of Ps. 156,136 million and consolidated net income of Ps. 4,426 million. Due to decreased export volumes, the portion of our revenues derived from exports has decreased steadily in recent years. Exports accounted for 7.9%, 17.1% and 13.3% of our consolidated net sales revenues in 2015, 2014 and 2013, respectively.

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

 

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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 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, 2015, 2014 and 2013 has been derived from our Audited Consolidated Financial Statements included in this annual report. See Note 20 to the Audited Consolidated Financial Statements. The financial data contained in this annual report as of December 31, 2012 and 2011 and for the years ended December 31, 2012 and 2011 have been derived from our consolidated financial statements as of and for the years ended December 31, 2013, 2012 and 2011 included in our 2013 20-F.

Upstream Operations

 

    As of December 31, 2015, we held interests in 108 oil and gas fields in Argentina. According to the Argentine Secretariat of Energy, in 2015 these assets accounted for approximately 48.6% of the country’s total production of crude oil, excluding NGLs, and approximately 44.1% of its total natural gas production, including NGLs, in 2015, according to information provided by the Argentine Secretariat of Energy.

 

    We had proved reserves, as estimated as of December 31, 2015, of approximately 679 mmbbl of oil, including condensates and NGLs, and approximately 3,072 bcf of gas, representing aggregate reserves of approximately 1,226 mmboe as of such date, compared to 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 December 31, 2014.

 

    In 2015, we produced approximately 91 mmbbl of oil (approximately 250 mbbl/d), including condensates, approximately 18 mmbbl of NGLs (approximately 49 mbbl/d), and approximately 569 bcf of gas (approximately 1,560 mmcf/d), representing a total production of approximately 210 mmboe (approximately 577 mboe/d), compared to 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) in 2014.

 

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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, 2015 consisted of 1,538 YPF-branded service stations, of which we own 112 directly and through our 100% subsidiary Operadora de Estaciones de Servicios S.A. (“OPESSA”), and we estimate we held approximately 35% 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 of the Apache Group acquired on March 12, 2014.

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 the 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, 2015.

 

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 2014 production, according to the 2015 edition of the BP Statistical Review of World Energy, published in June 2015.

In response to the economic crisis of 2001 and 2002, the Argentine government, pursuant to the Public Emergency Law, 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. 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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In 2012, Argentina’s GDP experienced a slowdown, with GDP increasing 1.9% on an annual 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 growth rate for 2013 was revised from 4.9% to 2.9%. As of the date of this annual report, the provisional figures of Argentina’s estimated GDP for 2014 and the first half of 2015 published by INDEC is 0.5% and 2.2%, respectively. However, on January 7, 2016 through Decree No. 55/2016, the new leadership of INDEC issued a report declaring a “national statistical emergency.” INDEC stated that its administration since 2006 was irregular and it would reorganize. As a result, INDEC would not publish new information until at least June 2016.

Driven by 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). As a result of a high number of power outages caused by the consumption increase, the Ministry of Energy requested that the Executive Branch declare a National Electric System Emergency through December 31, 2017. This decree instructs the Minister of Energy to develop and propose measures and to ensure adequate power supplies. Also by Resolution No. 06/2016, published in January 2016, the Ministry of Energy and Mining established new seasonal reference prices for power and energy in the Wholesale Electricity Market (“MEM”) for the period from February 1, 2016 to April 30, 2016. See “—Regulatory Framework and Relationship with the Argentine Government—Resolution No. 06/2016.”

Argentine natural gas consumption grew at an average annual rate of approximately 5.0% during the period from 2003 to 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 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, and increased imports of gas (including NGL). In 2003, Argentina’s net exports of diesel amounted to approximately 1,349 mcm, while in 2015 its net imports of diesel amounted to approximately 1,933 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 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 sales. 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, to create jobs, to increase the competitiveness of various economic sectors and to promote the equitable and sustainable growth of 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, the Privatization Law, which established the procedures by which we were to be privatized, was enacted. In accordance with the Privatization Law, in July 1993, we completed a worldwide offering of 160 million Class D shares that had previously been owned by the Argentine government.

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

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

 

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

On May 3, 2012, the Argentine congress passed the Expropriation Law. Among other matters, the Expropriation Law provided for the expropriation of 51% of the share capital of YPF represented by an identical stake of Class D shares owned, directly or indirectly, by Repsol YPF and its controlled or controlling entities. The shares subject to expropriation, which have been declared of public interest, will be assigned as follows: 51% to the federal government and 49% to the governments of the provinces that compose the National Organization of Hydrocarbon Producing States. See “Item 3. Key Information—Risk Factors—Risks Relating to Argentina—The Argentine federal government controls the Company according to domestic energy policies in accordance with Law No. 26, 741 (“the Expropriation Law”).” As of the date of this annual report, the transfer of the shares subject expropriation between the 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.

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) continuing to increase production, especially of natural gas; (ii) improving efficiency and productivity to enable us to adapt to a scenario of a prolonged decline in international oil prices; (iii) increasing exploration of mature areas; (iv) developing unconventional resources; (v) improving our capacity to refine in order to accommodate the growth in demand for refined products; (vi) exploring conventional and unconventional resources and pushing the limits of existing deposits and exploring new frontiers, including offshore; and (vii) maintaining a solid capital structure.

The investment plan related to our growth needs to be accompanied by an appropriate financial plan, whereby we intend to reinvest earnings, search for strategic partners and raise debt financing at levels we consider prudent for companies in our industry. Consequently, the financial viability of these investments and hydrocarbon recovery efforts will generally depend, among other factors, on the prevailing economic and regulatory conditions in Argentina, the ability to obtain financing in satisfactory amounts at competitive costs, as well as the market prices of hydrocarbon products. See “Item 3. Key Information—Risk Factors—Risks Relating to Argentina.” and “Item 5. Factors Affecting Our Operations” for additional information regarding 2016 activity.

 

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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.

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 business 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 4 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 one exploratory area in Chile. See “—Exploration and Production Overview—Main properties.” Additionally, we market lubricants and specialties in Brazil and Chile.

The following table sets forth revenues and operating income for each of our lines of business for the years ended December 31, 2015, 2014 and 2013:

 

     For the year ended December 31,  
     2015      2014      2013  
     (in millions of pesos)  

Revenues (1)

        

Exploration and production

        

Revenues

     16,044         8,853         3,851   

Revenue from intersegment sales (3)

     64,243         61,844         38,846   
  

 

 

    

 

 

    

 

 

 

Total exploration and production

     80,287         70,697         42,697   
  

 

 

    

 

 

    

 

 

 

Downstream

        

Revenues

     138,962         132,254         85,624   

Revenue from intersegment sales

     1,535         1,489         1,147   
  

 

 

    

 

 

    

 

 

 

Total refining and marketing

     140,497         133,743         86,771   
  

 

 

    

 

 

    

 

 

 

Corporate and other

        

Revenues

     1,130         835         638   

Revenue from intersegment sales

     6,182         5,212         2,285   
  

 

 

    

 

 

    

 

 

 

Total corporate and other

     7,312         6,047         2,923   
  

 

 

    

 

 

    

 

 

 

Less inter-segment sales and fees

     (71,960      (68,545      (42,278
  

 

 

    

 

 

    

 

 

 

Total revenues

     156,136         141,942         90,113   
  

 

 

    

 

 

    

 

 

 

Operating income (Loss) (2)

        

Exploration and production

     7,535         12,353         6,324   

Downstream

     8,446         10,978         6,721   

Corporate and other

     (2,331      (3,343      (1,522

Consolidation adjustments

     2,938         (246      (363
  

 

 

    

 

 

    

 

 

 

Total operating income

     16,588         19,742         11,160   
  

 

 

    

 

 

    

 

 

 

 

(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 6.n 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.15 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.

 

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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 2015, our oil production in Argentina increased by 2.1% and our gas production in Argentina increased by 4.2%, compared to our production in 2014. This increase reflects the intensive work we performed in the conventional and unconventional fields we operate. See “Item 5. Operating and Financial Review and Prospects—Factors Affecting Our Operations” for additional information regarding 2016 activity.

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.” and “Item 5. Operating and Financial Review and Prospects—Factors Affecting Our Operations” for additional information regarding 2016 activity.

 

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Staying the Path of Unconventional Resources

During 2015, we continued extending our leadership in this area. We reaffirmed our commitment to the objective of growing our production and reserves through the development of unconventional resources, which began in 2013. More than 400 wells were drilled with Vaca Muerta shale as the target, mostly in the Loma Campana field, continuing the massive development we began in 2013. The remaining wells were targeted to continue the development phase in El Orejano block, in association with Dow Chemical, the Narambuena project in association with Chevron, and the La Amarga Chica pilot in association with Petronas. The purpose of these projects is to determine the potential of Vaca Muerta shale gas formation.

As we gathered more experience, drilling activity in Loma Campana migrated to horizontal wells of 1,500 meters in lateral length and 18 frack stages, obtaining wells with a promising relation between expected Estimated Ultimate Recovery (“EURs”) and well costs.

During 2014, we finalized the agreement with Petronas to jointly start a new three-year pilot project in the La Amarga Chica concession, located northeast of Loma Campana. See “—Main properties.” At the end of 2015, three horizontal and one vertical well had been drilled in the block.

Like the previous agreements with Chevron and Dow Chemical, the 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 operational optimizations 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.” and “Item 5. Operating and Financial Review and Prospects—Factors Affecting Our Operations” for additional information regarding 2016 activity.

Tight sands also contributed to the increase of natural gas production and reserves in 2015, as was the case in the Mulichinco formation in the Rincón del Mangrullo concession, where Pampa Energía SA acquired 50% of the working interest during 2015. More than 87 wells were drilled in these marine tight sands, increasing gas production to 3 mmcm/d through a gas pipeline that connects to Loma La Lata facilities. This pipeline may enable the development of other gas fields, like the recent shale gas discovery La Ribera, where a successful well is already in production.

Recently we acquired land in the province of Chubut and Río Negro which can produce sand to be used as proppant in the development of unconventional hydrocarbons. Additionally, a sand treatment plant is under construction in the province of Neuquén and is expected to be operational by the first quarter of 2016. We expect to gradually replace the more expensive imported sand with our domestic product, allowing for significant well cost reductions.

 

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Vaca Muerta Formation

 

LOGO

 

  “Loma Campana” Area: On July 16, 2013, YPF and Chevron signed an investment project agreement for 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, the total investment is U.S.$1,500 million. In the second phase, which started during 2014 after completion of the Pilot Project, both companies continued the development of the area, sharing investments equally. Drilling activity continued in 2015 with more than 10 rigs operating most of the year. In addition, 122 vertical wells and 30 horizontal wells were put into production during the year. The plan for 2016 is to complete eight vertical wells and 54 horizontal wells. 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 S.A. signed an agreement that included 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 contemplated a first phase of work during which 16 wells would be drilled. This first phase ended in June 2015, with all 16 wells hooked up and reaching production of 668 mcm/d of gas at the end of this phase. On October 22, 2015, the companies signed an amendment to the original agreement whereby Dow Europe Holding B.V. and PBB Polisur S.A. increased the original commitment by U.S.$60 million for the development of a second phase, which includes the drilling of 18 new wells. On December 15, 2015, the parties executed all steps contemplated in the agreement so that PBB Polisur S.A. became a partner in “El Orejano” Area on a 50/50 basis with YPF. During December 2015, the project had an average production of 765 mcm/d, with 19 producing wells. The total YPF investment for 2015 was U.S.$228 million, including drilling, completion and facilities.

 

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  “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 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 assigned 50% of the La Amarga Chica concession to PEPASA and is 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, comprising 30 wells in three years, started in May 2015, with the drilling of a first vertical well , which will be finished in 2016. By the end of 2015, one vertical and three horizontal wells were drilled. Completion of these four wells is scheduled for early 2016. This drilling activity developed during 2015 implied an investment of U.S.$30 million, with an additional U.S.$6.5 million expended on production facilities.

 

  “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. The agreement defined a first phase exploratory commitment during 2015 and 2016, which includes the drilling and completion of four exploration wells (three vertical wells and one horizontal well) with a total investment of U.S.$62.6 million. During 2015, this activity began, with two of the wells already drilled and completed and the third well (horizontal) in the drilling phase. In October 2016, Chevron will declare whether the joint activity continues to a second phase, during which five wells would be drilled and completed (during the pilot phase) during 2017 and 2018. If the second phase takes place, then the farm-in decision deadline for Chevron will be in June 2019. 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 2015, 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. As of December 2015, Puesto Hernández produced over 9,100 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.

 

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  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 Río 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.

 

  On December 5, 2014, YPF S.A., Yacimientos del Sur 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 (as amended by Law No. 27,007). The Memorandum Agreement was also approved by the National Executive Office 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.

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 National Executive Office 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; 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 began in May 2015 once conditions precedent to the effectiveness of the Investment Agreement and the Supplemental Agreements were fulfilled, which relate primarily to the granting of the 35-year exploitation concession for the project area 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.

 

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The following table sets forth information with regard to our developed and undeveloped acreage by geographic area as of December 31, 2015:

 

     As of December 31, 2015  
     Developed (1)      Undeveloped (2)  
     Gross (3)      Net (4)      Gross (3)      Net (4)  
     (thousands of acres)  

South America

     1,481         1,092         32,990         16,833   

Argentina

     1,481         1,092         32,405         16,531   

Rest of South America (5)

     —           —           585         302   

North America (6)

     0.2         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1,481.2         1,092         32,990         16,833   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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 Colombia and Chile. In the case of Colombia, YPF has requested approval from the application authority (“ANH”), for the farm-out of its total working interest in COR 12 block. YPF and its partners informed ANH of the decision to relinquish COR 33 block. In Chile, YPF’s undeveloped surface acreage totaled 130,000 acres.
(6) Relates only to the United States’ Gulf of Mexico.

As of December 31, 2015, none of our exploratory undeveloped acreage was subject to exploration permits that will expire in 2016 in accordance with the Hydrocarbons 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 that did not have association agreements with ENARSA as of the date of the new law reverted and were transferred to the Argentine Secretariat of Energy. Permits and concessions granted prior to Law No. 25,943 will be exempt from this provision. In September 2015, the National Executive Office and YPF began negotiating the conversion of association agreements signed with ENARSA. As of the date of this annual report, the negotiations are ongoing. YPF currently participates in three offshore blocks in association with ENARSA, which represent approximately 60% of the undeveloped acreage. 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 2016 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 2016, we would be required to relinquish approximately 3,500 km2 of exploratory undeveloped acreage (approximately 9% of our 39,000 km2 of net exploratory undeveloped acreage as of December 31, 2015) during 2016.

 

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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 600 km2 of exploratory undeveloped acreage (approximately 2% of our 39,000 km2 of net exploratory undeveloped acreage as of December 31, 2015) during 2017 and 2018.

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, other than those already governed by previous laws.

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 2015 edition of the BP Statistical Review of World Energy, published in June 2015. 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, 2015:

 

     Wells(1)(2)  
     Oil      Gas  

Basin

   Gross      Net      Gross      Net  

Onshore

     13,539         12,186         1,515         1,142   

Neuquina

     4,689         4,048         1,349         1,008   

Golfo San Jorge

     7,856         7,230         57         57   

Cuyana

     843         769         —           —     

Noroeste

     20         8         52         20   

Austral

     131         131         57         57   

Offshore

     —           —           19         10   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     13,539         12,186         1,534         1,152   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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, 2015).
(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, 2015, we held 146 exploration permits and production concessions in Argentina. We directly operate 113 of them, including 34 exploration permits and 79 production concessions.

 

  Exploration permits. As of December 31, 2015, we held 38 exploration permits in Argentina, 34 of which were onshore exploration permits and four of which were offshore exploration permits. We had 100% ownership of two 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, 2015, we had 108 production concessions in Argentina. We had a 100% ownership interest in 69 production concessions, and our participating interests in the remaining 39 production concessions varied between 7% and 98%.

 

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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.”

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, 2015, most of which are mature:

 

            Production 2015      Proved Reserves as
of December 31,
2015
           

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         8,198         114,236         36,633         617,212         146,555       Neuquina    Mature Field

Los Perales

     100         5,497         13,758         63,204         72,650         76,142       Golfo San Jorge    Mature Field

Aguada Toledo - Sierra Barrosa

     100         1,963         74,505         10,289         358,519         74,139       Neuquina    Mature Field

Estación Fernández Oro

     97         922         20,719         17,887         271,798         66,293       Neuquina    Mature Field

Seco León

     100         4,232         4,722         44,017         25,015         48,472       Golfo San Jorge    Mature Field

Lindero Atravesado (3)

     38         99         12,036         822         246,072         44,646       Neuquina    Mature Field

Barranca Baya

     100         5,787         1,125         40,322         6,619         41,501       Golfo San Jorge    Mature Field

Manantiales Behr

     100         7,388         6,484         34,798         22,534         38,812       Golfo San Jorge    Mature Field

Loma La Lata Norte (4)

     61         5,690         18,524         22,610         87,285         38,155       Neuquina    Mature/New Field

Tierra del Fuego - Fracción B

     100         804         27,929         4,642         158,253         32,826       Austral    Mature Field

Chihuido Sierra Negra

     100         4,346         1,016         29,296         7,415         30,617       Neuquina    Mature Field

Puesto Hernández

     100         3,400         809         26,449         6,107         27,536       Neuquina    Mature Field

Magallanes (3)

     50         811         14,022         3,925         127,520         26,635       Austral    Mature Field

San Roque (3)

     34         1,528         20,828         7,452         101,494         25,528       Neuquina    Mature Field

Rincón del Mangrullo

     50         767         12,597         5,332         103,577         23,778       Neuquina    New Field

El Portón

     100         2,877         32,986         7,997         82,423         22,676       Neuquina    Mature Field

El Trébol

     100         2,490         1,037         21,513         5,701         22,529       Golfo San Jorge    Mature Field

CNQ 7A (3)

     50         4,422         1,270         21,733         4,165         22,475       Neuquina    Mature Field

Lomas del Cuy

     100         2,702         1,374         19,565         7,845         20,962       Golfo San Jorge    Mature Field

Vizcacheras

     100         2,682         241         18,529         1,789         18,847       Cuyana    Mature Field

Chihuido La Salina

     100         3,020         26,785         8,470         55,891         18,424       Neuquina    Mature Field

Cañadón Yatel

     100         1,940         12,412         6,641         53,226         16,121       Golfo San Jorge    Mature Field

Señal Picada

     100         2,165         255         15,253         1,756         15,566       Neuquina    Mature Field

Desfiladero Bayo

     99         2,221         316         14,957         1,978         15,309       Neuquina    Mature Field

Aguada Pichana (3)

     27         1,534         25,048         3,427         64,359         14,889       Neuquina    Mature Field

La Ventana Central

     70         1,278         165         12,734         2,018         13,093       Cuyana    Mature Field

Escalante

     100         1,387         982         11,453         6,178         12,554       Golfo San Jorge    Mature Field

Acambuco (3)

     23         237         10,321         1,285         62,664         12,445       Noroeste    Mature Field

Cerro Fortunoso

     100         1,317         0         11,993         0         11,993       Neuquina    Mature Field

(1) Exploitation areas.

(2) Includes condensate and NGL.

(3) Non-operated fields.

(4) Working interest is 100% in the Sierras Blancas formation (mature field) and 50% in the Vaca Muerta and Quintuco formations (new field).

Approximately 88% of our proved crude oil reserves in Argentina are concentrated in the Neuquina (47%) and Golfo San Jorge (41%) basins, and approximately 86% of our proved gas reserves in Argentina are concentrated in the Neuquina (75%) and Austral (11%) basins.

Joint ventures and contractual arrangements in Argentina

As of December 31, 2015, we participated in 30 exploration and 32 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, 2015, 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.

 

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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, 2015, 2014 and 2013 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 each month, for crude oils of different quality produced by the Company. Consequently, for calculation of our net proved reserves as of December 31, 2015, the Company considered the realized prices for crude oil in the domestic market (which are higher than those that had prevailed in the international market), taking into account the unweighted average price for each month within the twelve-month period ended December 31, 2015. 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 since 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, 2015 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.”

 

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Net Proved Developed and Undeveloped Reserves as of December 31, 2015

The following table sets forth our estimated net proved developed and undeveloped reserves of crude oil, NGLs and natural gas at December 31, 2015.

 

Proved Developed Reserves

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

Consolidated entities

           

South America

           

Argentina

     439         56         2,205         887   

North America

           

United States

     1         —           5         2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consolidated entities

     440         56         2,210         889   

Equity-accounted entities

           

South America

           

Argentina

     —           —           —           —     

North America

           

United States

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total equity-accounted entities

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total proved developed reserves

     440         56         2,210         889   
  

 

 

    

 

 

    

 

 

    

 

 

 

Proved Undeveloped Reserves

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

Consolidated entities

           

South America

           

Argentina

     168         15         862         337   

North America

           

United States

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consolidated entities

     168         15         862         337   

Equity-accounted entities

           

South America

           

Argentina

     —           —           —           —     

North America

           

United States

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total equity-accounted entities

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total proved undeveloped reserves

     168         15         862         337   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Proved Reserves (2) (3)

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

Consolidated entities

           

Developed reserves

     440         56         2,210         889   

Undeveloped reserves

     168         15         862         337   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consolidated entities

     608         71         3,072         1,226   

Equity-accounted entities

           

Developed reserves

     —           —           —           —     

Undeveloped reserves

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total equity-accounted entities

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total proved reserves

     608         71         3,072         1,226   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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 88 mmbbl of crude oil and 14 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 329 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 2015, 2014 and 2013, see Note 20 to the Audited Consolidated Financial Statements.

 

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The paragraphs below explain in further detail the most significant changes in our proved undeveloped reserves during 2015, 2014 and 2013.

Changes in our proved undeveloped reserves during 2015

YPF had estimated a volume of net proved undeveloped reserves of 337 mmboe at December 31, 2015, which represented approximately 27% of the 1,226 mmboe total reported proved reserves as of such date. This compares to estimated net proved undeveloped reserves of 307 mmboe as of December 31, 2014 (approximately 25% of the 1,212 mmboe total reported proved reserves as of such date).

The 10% total net increase in net proved undeveloped reserves in 2015 is mainly attributable to:

 

    Extensions and discoveries, which added 93 mmboe (24.5 mmbbl of crude oil, 7.3 mmbbl of NGL and 341.8 bcf of natural gas) of proved reserves mainly from Lindero Atravesado, Estación Fernandez Oro, Aguada Toledo—Sierra Barrosa, Rincón del Mangrullo, Loma Campana and Loma La Lata Norte fields.

 

    Ongoing successful development activities related to proved undeveloped reserves projects, which allowed a transfer of approximately 77 mmboe (29 mmbbl of crude oil, 10.2 mmbbl of NGL and 212 bcf of natural gas) to proved developed reserves. Main contributions are related to development wells (51 mmboe), gas compression projects (15 mmboe) and improved recovery projects (8 mmboe).

 

    New project studies and revision of gas and oil development projects, which added approximately 18 mmboe (7.5 mmbbl of crude oil, 0.9 mmbbl of NGL and 52.4 bcf of natural gas) of proved undeveloped reserves. The main contributions came from Loma La Lata Central, Barranca Baya, Tierra del Fuego Fracción B, Seco León and Los Perales fields.

 

    New improved recovery projects, adding approximately 10 mmbbl of proved undeveloped secondary recovery reserves of crude oil. The most important additions belong to Los Perales, CNQ7A, Chachahuen Sur, Punta Barda and El Trebol fields.

 

    A new joint venture agreement for Rincón del Mangrullo field resulted in an approximately 8 mmboe (0.3 mmbbl of crude oil, 1.6 mmbbl of NGL and 34.7 bcf of natural gas) reserves reduction in proved undeveloped reserves, due to a change in YPF’s working interest in this area.

YPF’s total capital expenditure to continue the development of reserves was approximately U.S.$4,592 million during 2015, of which U.S.$ 1,557 million was allocated to projects related to proved undeveloped reserves.

As at December 31, 2015, we did not have material amounts of proved undeveloped reserves in individual fields or countries that have remained undeveloped for five years or more after being disclosed as proved undeveloped reserves.

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).

 

    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.

 

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    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.

 

    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.

 

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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.

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.

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 Audit (“RA”) is separate and independent from the Exploration and Production segment. RA’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 RA 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 RA 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 RA is also responsible for providing training to personnel involved in the reserves estimation and reporting process within YPF. The RA 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 RA 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 RA are registered with or affiliated to the relevant professional bodies in their fields of expertise.

 

(b) The Reserves Auditor, who has headed the RA 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 19 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 Auditor, 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 Auditor’s compensation is not affected by changes in reported reserves.

 

(c) A quarterly internal review by the RA 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.

 

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(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 5 years of practical experience in petroleum engineering or petroleum production geology, with at least three years of such experience in charge of the estimation and evaluation of reserves, and (ii) has either (A) obtained, from a college or university of recognized stature, a bachelor’s or advanced degree in petroleum engineering, geology or other related discipline of engineering or physical science, or (B) received, and is maintaining in good standing, a registered or certified professional engineer’s license or a registered or certified professional geologist’s license, or the equivalent thereof, from an appropriate governmental authority or professional organization.

 

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

 

(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.

In 2015, IHS Global Canada Limited audited certain YPF operated and non-operated areas in the Neuquina, Golfo San Jorge and Cuyana basins in Argentina, and DeGolyer and MacNaughton audited Neptune, a non-operated area in the United States. These audits were performed as of December 31, 2015, and the audited fields contain in aggregate, according to our estimates, 330.6 mmboe proved reserves (93.8 mmboe of which were proved undeveloped reserves) as of such date, which represented approximately 27.0% of our proved reserves and 27.8% of our proved undeveloped reserves as of December 31, 2015. Copies of the related reserves audit reports 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, 2014. 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.

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.

 

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Oil and Condensate Production (1)

   2015      2014      2013  
     (mmbbl)  

Consolidated entities

        

South America

        

Argentina

     91         89         84   

North America

        

United States

     *         *         *   
  

 

 

    

 

 

    

 

 

 

Total consolidated entities

     91         89         84   

Equity-accounted entities

        

South America

        

Argentina

     —           —           —     

North America

        

United States

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total equity-accounted entities

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total oil production(2)

     91         89         84   
  

 

 

    

 

 

    

 

 

 

NGL Production (1)

   2015      2014      2013  
     (mmbbl)  

Consolidated entities

        

South America

        

Argentina

     18         18         18   

North America

        

United States

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total consolidated entities

     18         18         18   

Equity-accounted entities

        

South America

        

Argentina

     —           —           *   

North America

        

United States

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total equity-accounted entities

     —           —           *   
  

 

 

    

 

 

    

 

 

 

Total NGL production (3)

     18         18         18   
  

 

 

    

 

 

    

 

 

 

Natural Gas Production (1)

   2015      2014      2013  
     (bcf)  

Consolidated entities

        

South America

        

Argentina

     452         470         372   

North America

        

United States

     *         1         1   
  

 

 

    

 

 

    

 

 

 

Total consolidated entities

     452         471         373   

Equity-accounted entities

        

South America

        

Argentina

     —           —           5   

North America

        

United States

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total equity-accounted entities

     —           —           5   
  

 

 

    

 

 

    

 

 

 

Total natural gas production (4) (5)

     452         471         378   
  

 

 

    

 

 

    

 

 

 

Oil Equivalent Production (1)(6)

   2015      2014      2013  
     (mmboe)  

Consolidated entities

        

Oil and condensate

     91         89         84   

NGL

     18         18         18   

Natural gas

     81         84         66   

Equity-accounted entities

        

Oil and condensate

     —           —           —     

NGL

     —           —           *   

Natural gas

     —           —           1   
  

 

 

    

 

 

    

 

 

 

Total oil equivalent production

     190         191         169   
  

 

 

    

 

 

    

 

 

 

 

* 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 6, 5, and 5 mmbbl for the years ended December 31, 2015, 2014 and 2013, respectively. NGL production in these fields was approximately 8, 8 and 9 mmbbl for the years ended December 31, 2015, 2014 and 2013, respectively. Natural gas production in the Loma La Lata field was 133, 138 and 110 bcf for the years ended December 31, 2015, 2014 and 2013, respectively.
(2) Crude oil production for the years ended in December 31, 2015, 2014 and 2013 includes an estimated approximately 13, 13 and 12 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, 2015, 2014 and 2013 includes an estimated approximately 2, 2 and 3 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, 2015, 2014 and 2013 includes an estimated approximately 58, 60 and 47 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 “Supplemental Information on Oil and Gas Exploration and Production Activities—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 2015, 2014 and 2013:

 

Production costs and sales price

   Total      Argentina      United States  
     (Ps./boe)  

Year ended December 31, 2015

        

Lifting costs

     152.00         151.85         240.76   

Local taxes and similar payments (1)

     4.82         4.83         —     

Transportation and other costs

     14.95         14.91         41.09   
  

 

 

    

 

 

    

 

 

 

Average production costs

     171.77         171.59         281.85   
  

 

 

    

 

 

    

 

 

 

Average oil sales price

     620.77         621.85         392.86   

Average NGL sales price

     133.92         133.59         175.25   

Average natural gas sales price (2)

     249.71         249.75         129.73   

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 (2)

     204.02         204.01         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(2)

     129.86         129.87         108.12   

 

(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. 60.39 per boe, Ps. 45.51 per boe and Ps. 32.77 per boe for the years ended December 31, 2015, 2014 and 2013, respectively.
(2) Includes revenues from the Gas Plan.

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,  
     2015      2014      2013  

Gross wells drilled (1)

        

Exploratory productive

     35         35         38   

Oil

     24         20         30   

Gas

     11         15         8   

Dry

     5         8         3   
  

 

 

    

 

 

    

 

 

 

Total

     40         43         41   
  

 

 

    

 

 

    

 

 

 

Development productive

     962         861         728   

Oil

     766         725         664   

Gas

     196         136         64   

Dry

     10         4         2   
  

 

 

    

 

 

    

 

 

 

Total

     972         865         730   
  

 

 

    

 

 

    

 

 

 

Net wells drilled (2)

        

Exploratory productive

     27         30         29   

Oil

     22         17         25   

Gas

     6         13         4   

Dry

     4         5         3   
  

 

 

    

 

 

    

 

 

 

Total

     31         35         32   
  

 

 

    

 

 

    

 

 

 

Development productive

     766         708         679   

Oil

     629         592         624   

Gas

     137         116         55   

Dry

     8         4         2   
  

 

 

    

 

 

    

 

 

 

Total

     774         712         681   
  

 

 

    

 

 

    

 

 

 

 

(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).
(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.

 

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Exploration & Production Activity in Argentina

During 2015, our main exploratory and development activities in Argentina have had the following principal focus:

 

  1. Operated areas - Exploratory activities

During 2015, our main exploratory activities in Argentina were principally focused on:

1.1 Onshore:

 

    Unconventional activities:

The successful exploration results achieved in 2014 continued into 2015. We continued the regional exploration of the Vaca Muerta formation to determine the 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 Bandurria Sur block and requested 35-year exploitation permits for the La Ribera I & II blocks.

 

    Shale oil:

Neuquina basin: Exploration continued along the shale oil strip, in an attempt to define intermediate control points of productivity.

We obtained positive results in wells drilled in the Bandurria, Chihuido de la Sierra Negra and Bajo del Toro blocks. These wells confirmed the productivity of the Vaca Muerta formation at various points of the basin.

 

    Shale gas:

Neuquina basin: During 2015, we focused on the regional definition of the shale gas strip area obtaining positive results in the Bandurria and La Ribera I & II blocks. Discoveries will be evaluated further in order to establish their commercial production potential. Studies to confirm results in Cerro Arena, Pampa de las Yeguas and Loma del Molle are still underway.

 

    Conventional activities:

1. Neuquina basin:

Tight gas: Exploration of tight gas continued with the drilling of RDM.xp-38 in the Rincón de Mangrullo block. As of the date of this annual report, this well is pending completion.

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

 

  ¡    Los Caldenes (gas)
  ¡    Paso de las Bardas (gas)
  ¡    Payún Oeste (oil) (2 wells)
  ¡    Altiplanicie del Payún (oil)
  ¡    Las Tacanas (gas)
  ¡    Loma la Lata - Sierra Barrosa (gas)
  ¡    Octógono (oil)
  ¡    Chachahuen Sur (oil)
  ¡    El Manzano Este (oil)
  ¡    Puntilla del Huicán (oil)

 

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In the Cajón de los Caballos Oriental block one exploration well LoAl.x-1 was drilled in 2015, with the objective of the classic rocks of Neuquén group and the fissured rocks of Mendoza group. As of December 2015, this well was awaiting completion with a target date of March 2016.

2. Golfo San Jorge basin:

During 2015, we continued exploration activity targeting conventional oil and gas reservoirs in the Golfo San Jorge basin and we are continuing exploration of deep objectives during 2016. We obtained positive results in three exploration wells in the following blocks:

 

  ¡    Restinga Alí (gas)
  ¡    Los Perales-Las Mesetas (oil)

3. Cuyana basin:

We continued exploration activity targeting conventional oil in Cuyana basin, with results under evaluation in the following blocks:

 

  ¡    Barrancas
  ¡    La Ventana
  ¡    Ugarteche
  ¡    Cuenca Cuyana y Bolsones 17/B (CCyB 17/B)

From the results obtained in the Payun Oeste block (Neuquen basin) and Cuenca Cuyana y Bolsones 17/B (Cuyana basin), we have requested the province to allow commercial exploitation of the blocks, which opens new areas of development.

CCyB17/B Exploration block: Successful exploration of a well revealed a new mineralized area to be delineated and studied, in the Río Blanco formation.

4. Bordering areas:

Los Tordillos Oeste block located in the province of Mendoza: We fulfilled our commitment to drill two exploratory wells. Considering the results, we decided not to continue with the second exploratory period and, as a result, the block was relinquished to the province of Mendoza.

 

    Seismic activities:

A long-term 2D-3D seismic registration campaign was started in 2015 and will continue in 2016.

During 2015, 1,070 km2 of seismic 3D was registered in the following blocks:

 

  ¡    Chachahuén (Mendoza province – Neuquina basin)
  ¡    Zampal Norte (Mendoza province – Cuyana basin)
  ¡    Cerro Piedra – Cerro Guadal Norte (Santa Cruz province - Golfo San Jorge basin)

Also, 350 km of seismic 2D was registered in the following blocks:

 

  ¡    Cajón de los Caballos (Mendoza province – Neuquina basin)
  ¡    Chachahuén (Mendoza province – Neuquina basin)

After the survey is performed, seismic data processing will be carried out for subsequent interpretation. The purpose of acquiring and processing the seismic data is to identify new exploration opportunities.

 

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  2.2 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 total acreage of 23,700 km2. In September 2015, the National Executive Office and YPF began negotiating the conversion of association agreements signed with ENARSA. As of the date of this annual report, the negotiations are ongoing. As of December 31, 2015, 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 apply to new production concessions or exploitation permits.

 

       Operated Areas - Development activities

During 2015, our development activities in Argentina were mainly focused on the following regions:

 

  2.1 Neuquén—Río Negro

 

    Neuquén concession:

1. Loma La Lata field:

The Sierras Blancas Infill project in the Southeast area continues its development with nine wells (four horizontal and five directional) during 2015. Six of these are already in production, one is being completed and tested, and two are being drilled. The four horizontal wells have had good pressure and production results. During 2016, we plan to drill eighteen wells.

In order to address the declining production of the field, we also continue improving production with plunger lift and wellhead compression.

2. Aguada Toledo–Sierra Barrosa field:

 

  ¡    Tight gas (Lajas formation)

During 2015, the regular offset drilling was almost completed. Several wells were drilled in the outer area of the main structure. The infill drilling started in 2015, achieving good results so far. We are conducting a horizontal drilling pilot in the deepest and tightest sands of Lajas formation to define the potential of the formation in low levels of the structure.

 

  ¡    Waterflooding (Lotena formation)

In 2015 we completed the Aguada Toledo Waterflooding project. We achieved the injection flow capacity planned (21,000 cm/d). For that, facilities were built and refurbished, 17 wells were converted to injectors and several others were repaired. Also, during 2016, studies will be carried out to extend waterflooding to Sierra Barrosa, an adjacent field, where there is an anticipated potential oil recovery of 3 mmboe.

 

  ¡    Delineation of tight oil strata (Quintuco-Vaca Muerta formation)

As part of a regional study of Quintuco-Vaca Muerta Formation, seven workovers and three wells were completed, from which rock and fluid data was taken. More studies and strategic evaluations are needed (such as horizontal wells) to confirm the formation’s potential.

 

  ¡    Barrosa Norte tight gas field (Lajas formation)

During 2015, six wells were drilled in this field. Three of the wells are already in production and the others are being completed and tested. In 2016, 15 wells will be drilled, with thirteen development wells and two appraisal wells in the west side of the structure. The Precuyo and Molles formations will be evaluated to determine their potential for future development.

 

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  ¡    El Cordón tight gas field

In this field, we are in the early stages of development. Three wells and a workover were performed in 2015, with results meeting expectations, especially for the Lower Lajas formation, which is over-pressured and produces at expected rates. In 2016, new wells are planned in order to produce gas from the region ranging from Lower Lajas to the Sierras Blancas formations. A new pipeline has allowed us to increase flow rate from this field from December 2015.

3. Octógono block:

Four development wells were completed targeting the Basamento formation. The results were as expected, with an average production of 660 bbl/d by the end of December 2015. In addition to this, we completed two workovers targeting the same formation, with an average production of 43 bbl/d by the end of December 2015.

We completed four other workovers targeting the Lajas formation, which confirmed its potential in the north of the Octógono concession area, where good results were obtained. Regarding the secondary recovery pilot, we drilled and completed one replacement well and did four workovers. In addition to drilling activities, we are building and refurbishing facilities to reach a capacity of 1,500 cm/d of water injection, considering the first stage of the project.

4. Chihuido de la Sierra Negra field:

During 2015, we successfully completed a single well chemical tracer test, alkali surfactant polymer (“ASP”). This field test validated the entire previous lab test. In order to start a pilot on the field, further tests are required to evaluate ASP efficiency over longer time periods.

5. Volcán Auca Mahuida and Las Manadas blocks:

We continued with the appraisal and development of the Centenario and Mulichinco formations. Five new wells were completed during 2015, all of which were productive with good results. Further appraisal and development wells are scheduled to be drilled in 2016.

6. Cerro Hamaca Noroeste field:

The northwest area was discovered in late 2012. During 2015, we continued with the development campaign of the Rayoso formation. Ten wells were completed in 2015. As of December 2015, the field average oil production was 900 bbl/d, approximately 117% higher than the previous year, as of December 2014. Water injection is scheduled to begin in 2017.

7. Puesto Hernandez block:

During 2015, we reactivated the drilling activity in the area where new wells had not been added since 2008. This activity contemplated the drilling of four production wells and two injection wells in the northwest and southeast of the field. As of December 2015, this activity generated an incremental production of oil of 126 bbl/d.

8. Bardita Zapala field:

Four development wells were drilled targeting the Tordillo formation, three of them with average oil production of 8 bbl/d in 2015. The results were lower than expected. The fourth well, BZ.a-10(d), had gas production of 14 mcm/d in 2015, meeting expectations.

9. Portezuelos field:

Four workovers were performed targeting shallow gas in the Centenario formation with an average gas production in 2015 of 15 mcm/d. In addition, three workovers were performed in the Lajas formation with an average gas production in 2015 of 10 mcm/d. The results of these workovers did not meet expectations.

10. Portezuelos Oeste field:

Five workovers were performed to open gas-bearing intervals in the Grupo Cuyo Superior formation, with average gas production for the PO-09 and PO-10 wells of 12 mcm/d in 2015. The expected production exceeds expectations.

 

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11. Ranquil Co field:

Four development wells were drilled targeting the Precuyo formation, with average gas production of 47 mcm/d in 2015. These results did not exceed the plan.

12. Guanaco field:

Two step-out wells were drilled during 2015 in the Guanaco Shallow area targeting the Lotena and Lajas formations. One of them produces oil from Lotena with average production of 43 bbl/d in 2015. The results were lower than expected. To confirm the shallow gas potential from the Lajas formation in this field, we executed two workovers, which had a combined average production of 19 mcm/d in 2015.

13. Huincul field:

Two Lajas development wells with secondary exploratory targets of the Precuyo and Basamento formations were drilled during 2015, with an average oil production of 8 bbl/d and average gas production of 1 mcm/d in 2015. The results exceed the plan in oil but not in gas.

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 Sur; 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 Cortadera; 32 Dadín—Lote I; 33 Dadín—Lote II; 34 Dadín—Lote III; 35 Don Ruíz; 36 Dos Hermanas; 37 El Orejano; 38 El Portón; 39 El Santiagueño; 40 Filo Morado; 41 Huacalera; 42 La Amarga Chica; 43 La Banda; 44 La Calera; 45 La Ribera I; 46 La Ribera Ii; 47 Las Manadas (Calandria Mora); 48 Las Tacanas; 49 Lindero Atravesado; 50 Loma Amarilla; 51 Loma Campana; 52 Loma del Mojón; 53 Loma Del Molle; 54 Loma La Lata—Sierra Barrosa; 55 Los Candeleros; 56 Mata Mora; 57 Meseta Buena Esperanza; 58 Narambuena; 59 Octogono; 60 Ojo De Agua; 61 Pampa de Las Yeguas I; 62 Pampa de Las Yeguas II; 63 Paso de Las Bardas Norte; 64 Puesto Hernandez; 65 Rincón Del Mangrullo; 66 Río Barrancas; 67 Salinas del Huitrin; 68 San Roque; 69 Santo Domingo I; 70 Santo Domingo II; 71 Señal Cerro Bayo; 72 Señal—Punta Barda; 73 Volcán Auca Mahuida.

 

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    Río Negro Concession:

1. Los Caldenes block:

We drilled four wells and completed three wells in 2015. We also performed two workovers on existing wells. The oil is produced from two layers, as we successfully tested production from Quintuco and Sierras Blancas. As a result of this activity, oil production averaged 591 bbl/d as of December 31, 2015 (an increase of 389% compared to December 2014). Further drilling and completion activity is scheduled for 2016 and a gas line is planned to produce gas from deeper formations.

2. Señal Picada-Punta Barda block:

During 2015, we continued optimizing the existing waterflooding projects in the 50-year-old Señal Picada area. We completed 21 new wells and workovers in existing wells. Oil production decreased to 5,791 bbl/d (a decrease of 101 bbl/d or 2%) from December 2014 to December 2015. In the Punta Barda area, we continued with the appraisal campaign to extend the proved reserves area. Two wells were drilled in the Loma Montosa formation. One of these wells was completed and successfully tested for oil. The other well is scheduled to be completed in 2016. Three other wells were completed and ten workovers were performed in 2015. Oil production increased to 1,208 bbl/d (an increase of 166 bbl/d or 16%) from December 2014 to December 2015.

3. Los Ramblones field:

Eleven oil wells were drilled during 2015, targeting primarily the Sierras Blancas formation. The best results were achieved from eight wells drilled on the western end of the field on a faulted combined trap. The 2015 drilling campaign had an average production with excellent results that restored the field’s production to its highest levels, reached in the 1980’s. It hit a peak of 1,406 bbl/d in December 2015. The successful campaign has opened up new opportunities for drilling in the area, which are currently under study.

4. Punta Rosada field:

Four workovers were performed targeting shallow gas in the Centenario formation. The successful campaign has created new opportunities in the area, which are currently under study.

5. Estación Fernandez Oro block:

During 2015, we drilled 19 gas wells targeting the Lajas formation (13 development gas wells, five step-out gas wells and one exploratory gas well) with results better than expected for the development wells, but poorer than expected for the rest of the wells. The development of the gas field will continue during 2016, focusing on drilling activity. An expansion in the mid-pressure compression and continuation of work on three drilling rigs are planned for 2016.

 

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Río Negro YPF Concession

 

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  2.2 Mendoza

 

    Mendoza Norte concession:

During 2015, our activities were focused on the development of new areas and performing primary recovery and waterflooding in mature oilfields by workovers and drilling new wells. Key activities are described below:

1. Barrancas block:

 

  ¡    Barrancas area: Results obtained from the appraisal well B.a-508, drilled in 2014, helped revitalize this mature oilfield as it opens a new opportunity in the area located at the northeast flank from the Barrancas Anticline. The drilling activity plan involved drilling 15 development wells. The dynamic-static model shows opportunities along the eastern flank of the structure and it is consistent with results from well B.a-507. Both support the expansion of the drilling activity.

 

  ¡    Ugarteche area: After 14 years, drilling activity has been revitalized with two development wells located in Ugarteche Occidental field. The successful results allow the expansion of the productive area in the south portion of the field. These wells produce from both the Barrancas and the Río Blanco formations.

 

  ¡    Estructura Cruz de Piedra area: The field development plan continued during 2015, including four workovers and five new development wells. We obtained good results that support the proposed activity for 2016, which includes the expansion of waterflooding to the ECP-Lunlunta area in the southern portion of the field.

2. La Ventana block:

After reaching a new Joint Operating Agreement with Sinopec, drilling activities were increased during 2014 and 2015. Four exploration wells were drilled between June 2014 and December 2015. According to the field development plan (infill & replacements wells), seven wells were drilled in 2014 and nine wells were drilled in 2015.This activity allowed us to incorporate reserves and production in the block. We expect to continue with the development plan, increasing the recovery factor of this mature field by drilling deep-objective appraisal wells, development wells, and workovers and optimizing the secondary recovery. In addition, this block is included in regional studies in order to develop an ASP formulation (tertiary recovery), according to temperature and salinity conditions of the reservoir-enhanced oil recovery (“EOR”) in the Barrancas Formation.

 

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3. Vizcacheras block:

A new geological model of this mature field was created after seismic re-interpretation in 2012. This model enabled the construction of a development plan (including 63 new wells to drill). During 2015, three wells were drilled in the Vizcacheras Oeste field. We tested oil downdip in the Papagayos formation in the Vizcacheras field, Vi.a-1138 well. Three re-entry wells to the Barrancas formation were drilled (with positive results in the northwest zone). We also drilled two infill wells in the Cañada Dura field. In addition, this block is included in regional studies in order to develop EOR, in the Barrancas and Papagayos formations.

4. Llancanelo block:

Six horizontal wells and two appraisal wells were drilled in 2015, targeting two geological formations. A total of 23 wells have been drilled since 2010, with an oil production of 1,116 bbl/d, in line with expectations.

5. El Manzano block:

Positive results, which exceeded expectations, were obtained in the appraisal well LVo.a-9 drilled in 2014. This project continued in 2015 with the drilling of appraisal well LVo.a-14, which is not complete.

6. Cerro Fortunoso block:

A water treatment plant was installed to treat a maximum rate of 4,500 cm/d of injection water. We continued the waterflooding development plan in 2015, including drilling two injector wells, repairing one injector well and repairing one water production well. The last of the injector wells from the 2015 plan was being drilled at the end of December 2015.

Mendoza Norte YPF Concession

 

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Mendoza Sur YPF concession:

During 2015, we remained focused on the development of new areas and waterflooding in mature oil fields. Key activities are described below:

1. Desfiladero Bayo area:

We drilled eight development wells and four appraisal wells in the Rayoso, Troncoso, Agrio, Mulichinco and Tordillo formations, in keeping with the development plan, and focused on investigating deep formations. Water injection was started to define the polymer baseline in the pilot area. We intend to begin the polymer injection pilot during the first half of 2016.

2. Chachahuen Sur block:

We drilled 52 development wells and 12 appraisal wells in the Rayoso formation with positive results. The expansion of water injection in block 1 is ongoing.

3. Cañadón Amarillo block:

We drilled 17 development wells and six appraisal wells in shallow formations (La Tosca and Chorreado), and deep formations (Grupo Cuyo, Barda Negra and Tordillo) to continue the development of the north area in the Cañadón Amarillo block. We obtained results exceeding expectations from the development wells and good results from shallow appraisal wells.

4. Paso Bardas Norte block:

We drilled three development wells and one appraisal well in tight gas formations (Lotena and Grupo Cuyo). The results were below expectations.

5. Puesto Molina block:

Three development and two injector wells were drilled, and workovers of producers and injector wells were perfomed to extend and optimize waterflooding patterns. The results were better than expected.

6. El Portón block:

One appraisal well was drilled to investigate deep formations (Quintuco and Mulichinco) with positive results.

7. Chihuido de la Salina block:

One appraisal well was drilled to investigate deep formations (Quintuco and Mulichinco) with positive results.

 

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Mendoza Sur YPF Concession

 

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  2.3 Chubut

The oil production of the blocks operated by YPF in the province of Chubut surpassed historic levels for the third consecutive year, achieving a 1.8% increase in net oil production in 2015 compared to 2014. In addition, wellhead gas production increased 12% in 2015 compared to 2014.

1. Manantiales Behr block:

We drilled 43 wells in 2015 among three main oil fields, La Carolina, El Alba and Grimbeek, with positive results. Additionally, we completed 61 workovers also with positive results.

The assisted recovery project in Grimbeek began in 2013 with a focus on standard waterflooding. It is currently in an advanced stage with good production results.

During the first quarter of 2015, the polymer injection phase began. Some evidence of water decreases in the central well was recorded in 2015, which was the first positive result of the pilot phase. In the same field, the secondary recovery is performing well. Its peak oil rate surpassed expectations.

 

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During the second half of 2015, the extension of this project, known as Grimbeek Norte, was implemented. It is expected to increase production in 2016.

The short-term focus on the Manantiales Behr block is to extend waterflooding projects along the field in order to sustain production growth. Facilities developments to extend waterflooding projects will continue in 2016.

As a result of the activities described, the volume of oil production has remained at similar levels of production compared to 2014.

Gas production increased by 10.9%, driven by the development of a new shallow low pressure target, the Glauconitic formation.

Chubut YPF Concession

 

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2. El Trébol – Escalante block:

As a result of the investments during 2015 in this mature block, oil production increased by approximately 7.1% compared to 2014. We drilled 60 new wells and performed 58 workovers within waterflooding optimization projects, which, along with the delineation of new, deeper structures, increased the accumulated production by 18.6% in the last two years.

A new structure and project was delineated and partially developed in Escalante oilfield, called G3, with excellent production performance and geographic extension. We are employing an integrated primary and secondary development strategy to be carried out over the next three years.

3. Zona Central – Cañadón Perdido block:

This block is located near the urban area of Comodoro Rivadavia. Production decreased by 10.2% compared to 2014. This decrease was a consequence of delays in the extension of the Bella Vista Sur drilling project and a disruption at the HMO oil treatment plant for the block. One of the plant tanks failed on August 18, 2015, and we were forced to suspend oil production completely for two weeks. The problem was gradually remedied over three months.

 

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4. Restinga Alí block:

Located on the coast between the urban area and the sea, this block was reactivated in 2013. Production increased to a peak of 940 bbl/d in July 2015. Beginning mid-August, production significantly decreased following a disruption at the Km9 oil plant. The block has been prevented from delivering oil to date. Production is expected to return to normal during the first quarter of 2016.

 

  2.4 Santa Cruz

During 2015, we implemented 31 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 40 projects. The main projects include the following reserve areas: Cañadón Escondida, Cerro Grande, Seco León, Los Perales, Cañadon Yatel and El Guadal, with 243 wells drilled (220 oil wells, 13 injectors and 10 advanced wells), 489 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. Drilling of new advanced wells in Los Perales.

 

  ¡    Providing development support through the appropriate surface facilities.

Santa Cruz YPF Concession

 

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  2.5 Tierra del Fuego

After five years with no activity, in June 2015 drilling activity in the area resumed with one rig. The 2015 campaign focused on drilling of oil development wells.

1. Carmen Silva field:

In this partially developed field, one well was drilled during 2015 (CS-2003), targeting the Springhill formation classic reservoir with average oil production of 20 bbl/d and an initial daily production of 113 bbl/d.

2. Cañadón Piedras field:

Two development wells were drilled in this mature oil field. The pressure ranges from 40% to 50% of the original well in the Springhill formation. One of the wells, CP-2003(d), was a dry hole well. The other, CP-2004(d), was put on production with average oil production of 19 bbl/d in 2015, below the expected production level.

A workover program consisting of six wells was executed, three of which obtained initial average daily production of 10.6 bbl/d (CP-69, CP96, CP50) and three of which did not produce (CP-73, CP109, RC-14). The results were lower than expected.

3. Cabo Nombre field:

Two development wells were drilled in this mature oil field, where a waterflooding project is ongoing, targeting primarily Springhill formation. One of them, CN-2002, had average oil production of 79 bbl/d, and met the expected production. The other well, CN-2001, began production in January 2016.

A workover program consisting of five wells was executed, four of which obtained initial average daily production of 7.5 bbl/d (CN-78, CN-1, CN17, CN-37). The other (CN-8) obtained initial production of 1.2 bbl/d. The results were lower than expected.

4. San Sebastián field:

A workover program consisting of nine wells was executed in this very mature gas field. The program reversed the declining output in the field.

During 2015, seismic reprocessing and 5D interpolation of 1,821 km2 in the Los Chorrillos and Uribe blocks was performed. It will be applied to the development of the fields located in Los Chorrillos block and in the review of Uribe’s exploratory prospects.

The 2016 campaign calls for drilling of gas development wells in the San Sebastián and Lago Fuego fields.

 

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Tierra del Fuego YPF Concession

 

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  3. Non-operated areas

 

    Exploration activities:

We obtained positive results in exploration wells drilled in the Lindero Atravesado block, which is operated by Pan American Energy, and CNQ7/A, which is operated by Pluspetrol.

 

    Development activities:

1. El Tordillo and La Tapera-Puesto Quiroga blocks:

Beginning in January 2014, under an agreement between YPF and the province of Chubut related to the negotiation of an extension of YPF concessions there, YPF transferred 41% of its working interest in the joint venture’s ET/LT-PQ to Petrominera Chubut S.E. As a result, the participation of YPF in the joint venture is 7.196%.

During 2015, 19 wells were drilled. Of those, 17 were producing in line with our expectations and two were pending completion as of December 2015.

2. 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 the concession. On January 8, 2016, the Argentine government approved a concession extension through November 17, 2027. See “Item 4. Information on the Company—Regulatory Framework and Relationship with the Argentine Government—Extension of Exploitation Concessions in the Cuenca Marina Austral.”

 

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During 2015, an incremental production project began, known as “PIAM.” This project aims to increase the production capacity of the area by approximately 1.6 mmcm/d of gas beginning mid-2017. Currently, a portion of the engineering tasks have been in process. This project involves laying a marine pipeline, expanding compression capacity and reopening approximately 24 wells that are currently shut-in. The total estimated value of the project is approximately U.S.$354 million and its completion is expected during the second half of 2017.

3. Aguada Pichana block:

This block is operated by Total S.A. YPF holds a 27.2% working interest in this block.

Tight gas projects: during 2015, we continued tight gas development in different areas of the block and seven wells were drilled. Six of them are in production or waiting to put into production. The last well, APO-25(h), is pending its producing line to begin production.

Production improvements: during 2015, we continued our efforts to maintain or improve daily production. We continued the campaign initiated during the first half of 2013, under which six velocity strings and five capillary strings were initiated, three wells were refractured and three workovers were conducted.

Unconventional: we continued drilling the pilot wells for unconventional development, which consisted of six horizontal wells. During the second half of 2015, the completion stage began, which consisted of ten fractures by well and treatment facilities.

4. Lindero Atravesado block:

This block is operated by Pan American Energy LLC. YPF holds a 37.5% working interest in this block.

During 2015, a new non-conventional concession through 2060 was granted by the government of Neuquén, according to the Hydrocarbons Law as amended by Law No. 27,007. This non-conventional concession is based on developing and drilling the Lajas formation. The original scope of the concession includes 97 wells and three new gas plants, as well as the renovation of two existing gas plants. The 2015 drilling campaign, consisted of 28 wells, all of which are in production. The project also includes building the corresponding field facilities. Additionally, two wells were drilled in the Sierras Blancas formation.

5. Aguaragüe block:

This block is operated by Tecpetrol, and YPF holds a 53% working interest in this block. Two gas wells were drilled in the Tupambi formation of the Campo Durán field, with better results than expected. One oil well was drilled in the Los Monos formation of the Altos de Yariguarenda field, with results meeting expectations.

Properties and E&P activities in rest of the world

 

  1. United States:

During 2015, Maxus relinquished a total of three blocks in the Green Canyon area and one in the Mississippi Canyon area.

As of December 31, 2015, we had mineral rights in 16 blocks in U.S. territorial waters in the Gulf of Mexico, comprised of 13 exploratory blocks, with a gross surface area of 303 km2 (128 km2 net to Maxus), and three development blocks, with a gross surface area of 70 km2 (10.5 km2 net to Maxus). Our U.S. subsidiaries’ net proved reserves as of December 31, 2015 was 2.266 mmboe. Our U.S. subsidiaries’ net hydrocarbon production for 2015, including in the GOM area and Crescendo (ORRIs), was 0.584 mmboe.

The Neptune field is located approximately 120 miles off the Louisiana coast in the deepwater region of the Central Gulf of Mexico. The field 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 in 4,230 feet of water. The platform supports seven sub-sea development wells that are tied back to the TLP via a subsea gathering system.

 

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In addition, YPF Holdings entered into various operating agreements and capital commitments associated with the exploration and development of its oil and gas properties. These contractual, financial and 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 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 eight exploratory wells. Between 2013 and 2014, 679 km2 of 3D seismic data were registered. Exploratory wells were drilled during 2015. In 2015, YPF requested to access a second exploration period in the San Sebastián block. However, Wintershall and ENAP have formally decided not to enter the second exploration period. Subsequently, the Marazzi/Lago Mercedes block was relinquished.

 

  3. Colombia:

Blocks COR12 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) (“ANH”). Our working interest in these blocks ranges from 55% to 60%. The net acreage relating to our working interest in the blocks is 700 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 block. YPF and its partners informed the ANH of their decision to relinquish the COR 33 block. As of the date of this annual report, no confirmation from the ANH has been received.

 

  4. Uruguay:

4.1 Deep Water Offshore — Punta del Este basin:

 

  ¡    Area 3: We owned a 40% working interest in this area and acted as operator, in partnership with Shell, which had a 40% working interest it took over from Petrobras Uruguay, and GALP, which had a 20% working interest. The permit expired on October 6, 2014 and a 120-day extension application was submitted to the authorities. The consortium declined to opt for a second exploration period.

 

  5. 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 contemplates drilling of at least ten wells, using technologies for enhanced oil recovery and performing activities to increase oil production in this field, located in Block 21 in the Amazonian province of Napo.

During 2015, we opened an office in Quito and constituted its project team, composed of 16 members. A geological and reservoir model of the Hollín reservoir was constructed, allowing YPF to design the field development strategy, and the first workover operation was performed on the YRCA-012 well.

In October 2015, Petroamazonas EP requested that YPF suspend operations and immediately start renegotiating terms and conditions of the contract noting the abrupt drop in crude oil prices.

 

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Additional information on our present activities

The following table shows the number of wells in the process of being drilled as of December 31, 2015.

 

     As of December 31, 2015  
Number of wells in the process of being drilled    Gross      Net  

Argentina

     57         50   

Rest of South America

     —           —     

North America

     —           —     

Total

     57         50   
  

 

 

    

 

 

 

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, 2015, we were not contractually committed to deliver material quantities of crude oil to third parties in the future.

As of December 31, 2015, we were contractually committed to deliver 12,806 mmcm (or 452 bcf) of natural gas in the future, without considering interruptible export supply contracts, of which approximately 3,690 mmcm (or 130 bcf) will have to be delivered from 2016 through 2018. According to our estimates as of December 31, 2015, 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. 31 million, Ps. 52 million and Ps. 174 million have been recorded in 2015, 2014 and 2013, 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, compelling us 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 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, 2015, supply requirements under 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.”

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.

 

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To achieve the goals set forth above, we intend to focus on (i) continuing to increase production, especially of natural gas; (ii) improving efficiency and productivity to enable us to adapt to a scenario of a prolonged decline in international oil prices; (iii) increasing exploration of mature areas; (iv) developing unconventional resources; (v) improving our capacity to refine in order to accommodate the growth in demand for refined products; (vi) exploring conventional and unconventional resources and pushing the limits of existing deposits and exploring new frontiers, including offshore; and (vii) maintaining a solid capital structure. 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 international and domestic natural gas markets, which have affected the ability of producers in Argentina to export natural gas 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 (the “Agreements”)). Pursuant to instructions from the Argentine government, deliveries have been interrupted since 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 has fulfilled the agreed commitments mentioned above. As a result, current commitments under the Agreements amount to a daily quantity of 46 mmcf/d through 2019. To the extent that the Company does not comply with the Agreements, we could be subject to significant claims, subject to the defenses that the Company might have.

We are currently engaged in a 15-year contract signed in 2003 with Gas Valpo, a natural gas distributor, to supply 35 mmcf/d (or 1 mmcm/d) through the Gas Andes pipeline linking Mendoza, Argentina to Santiago, Chile, which has a transportation capacity of 353 mmcf/d (or 10 mmcf/d) (designed capacity with compression plants).

The contracts with Colbun and Gas Valpo were modified to become interruptible supply contracts.

We 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 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.

 

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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 1,732 bcf (or 49.1 bcm) in 2015. We estimate that the number of users connected to distribution systems throughout Argentina was approximately 8.5 million as of October 31, 2015.

In 2015, we sold approximately 40% of our natural gas to local residential distribution companies, approximately 9% to compressed natural gas end users, approximately 44% to industrial users (including our affiliates, Mega and Profertil) and power plants, less than 1% in exports to foreign markets (Chile) and 7% to YPF downstream operations. Sales were affected by increased consumption by residential consumers during winter months (June to August). During 2015, approximately 85% of our natural gas sales were produced in the Neuquina basin. In 2015, our domestic natural gas sales volumes were 2% higher than 2014.

The Argentine government has taken a number of steps aimed to satisfy domestic natural gas demand, including pricing, export regulations, 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 YPF, 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.

Argentine natural gas supplies

Most of our proved natural gas reserves in Argentina (approximately 75% as of December 31, 2015) 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.

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 the agreement was extended to October 2018.

Since the beginning of its operations, the regasification vessel has converted 17.4 bcm (or 614.12 bcf) of LNG into natural gas, which has been injected into a pipeline which feeds the Argentine national network. Most of this volume was supplied during the peak winter demand period. In 2015, natural gas injected into the network amounted to approximately 3.1 bcm (or 109.0 bcf).

 

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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 the beginning of its operations, the total volume injected into the network by this vessel was 10.02 bcm (or 353.9 bcf). In 2015 natural gas injected into the network amounted to approximately 2.4 bcm (or 86.9 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.

Downstream

During 2015, our Downstream activities included crude oil refining and transportation, and the marketing and transportation of refined fuels, lubricants, LPG, compressed natural gas, and other refined petroleum products in the domestic wholesale and retail markets and certain export markets and also power generation and natural gas distribution.

The Downstream segment is organized into the following divisions:

 

    Refining and Logistic Division;

 

    Refining Division;

 

    Logistic Division;

 

    Trading Division;

 

    Domestic Marketing Division;

 

    LPG General Division; and

 

    Chemicals.

We market a wide range of refined petroleum products throughout Argentina through an extensive network of sales personnel, YPF-owned and independent distributors, and a broad retail distribution system. In addition, we export refined products, mainly from the port at La Plata. The refined petroleum products marketed by us include gasoline, diesel, 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.

 

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Our three wholly-owned refineries have an aggregate refining capacity of approximately 319,500 boe/d. The refineries are strategically located along our crude oil pipeline and product pipeline distribution systems. In 2015, our crude oil production, substantially all of which was destined to our refineries, represented approximately 82.8% of the total crude oil processed by our refineries, while in 2014 it was 84.5%. 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, 2015, 2014 and 2013:

 

     For the Year Ended December 31,  
     2015      2014      2013  
     (mmboe)  

Throughput crude

     109.1         106.0         101.4   

Throughput feedstock

     4.4         4.2         4.1   

Throughput crude and feedstock

     113.5         110.2         105.5   

Production

        

Diesel

     40.6         40.3         38.8   

Motor gasoline

     24.5         22.4         23.1   

Petrochemical naphtha

     7.0         6.5         5.7   

Jet fuel

     6.1         6.1         6.1   

Base oils

     1.1         1.4         1.0   
     For the Year Ended
December 31,
 
     2015      2014      2013  
     (thousands of tons)  

Fuel oil

     1,878         1,715         1,338   

Coke

     770         746         803   

LPG

     612         638         607   

Asphalt

     171         185         198   

During 2015, our global refinery utilization reached 93.6%, compared to 90.9% in 2014, both calculated over a nominal capacity of 319.5 mboe/d.

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 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 2015, the refinery processed approximately 163.9 mbbl/d. The capacity utilization rate at the La Plata refinery for 2015 was 86.7%, slightly above 163.3 mbbl/d processed in 2014, with a utilization rate of 86.4%. The crude oil processed at the La Plata refinery, 84.9 % of which was YPF-produced in 2015, 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.

During 2015, a revamping in Vacuum B unit was successfully completed, which will permit us to increase our crude utilization rate by 1.5%, with an increase in unit capacity of approximately between 14% and 20%, depending on the operation program.

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, motor gasoline and coke.

 

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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 2015, the refinery processed approximately 109.2 mbbl/d, with a capacity utilization rate of more than 100%. In 2014, the refinery processed 103.2 mbbl/d with a capacity utilization rate of 97.8%. 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 from 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 we own, 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 Cuyana basins by pipeline directly into the facility. Approximately 77.8% of the crude oil processed at the Luján de Cuyo refinery in 2015 (and 77.9% of the crude oil processed in this refinery in 2014) 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.

The Plaza Huincul refinery, located in the province of Neuquén, has an installed capacity of 25,000 bbl/d. During 2015, the refinery processed approximately 25.8 mbbl/d, with a capacity utilization rate of more than 100%, far from the 24.0 mbbl/d processed in 2014 at a lower capacity utilization rate of 95.9%. The only products currently produced at the refinery are gasoline, diesel 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 2015, 1.7% of the refinery’s crude supplies were purchased from other companies, while in 2014, such purchases were 0.3% of the refinery’s crude supplies.

Since 1997 and 1998, each of our refineries (La Plata, Luján de Cuyo, and Plaza Huincul) have been certified under International Organization for Standardization (“ISO”) 9001 (quality performance) and ISO 14001 (environmental performance). All of them are also certified under the OHSAS 18001 (occupational health and safety performance) standard. Since 2009, inventories of industrial greenhouse gases and savings of CO2 emissions equivalent (MDL projects) have been verified in accordance with ISO 14064 in both the La Plata and Lujan de Cuyo refineries. 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)   

 

(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 an 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. (previously ESSO, a former subsidiary of ExxonMobil which was 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 which 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.

YPF currently blends ethanol in the Luján de Cuyo, Monte Cristo, San Lorenzo, La Plata, Junín, Plaza Huincul, Barranqueras, Concepción del Uruguay, Villa Mercedes and La Matanza storage plants.

In 1998, our logistics activities were certified under ISO 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 oil, LPG, light naphtha and virgin naphtha.

The division exports mainly to countries in South America, Africa and North America. Sales to international customers for 2015 and 2014 were Ps. 2,387 million and Ps. 4,081 million, respectively. In 2015, refined products accounted for 25% of total sales, up from 8% in 2014. In 2015, 73% of total sales corresponded to marine fuels, down from 77% in 2014. In 2015 and 2014, sales volumes to customers outside Argentina consisted of 1.6 mmbbl and 0.89 mmbbl of refined products, respectively, and 3.3 mmbbl and 4.3 mmbbl of marine fuels, respectively.

For the domestic market, sales of crude oil totaled Ps. 712 million, or 1.1 mmbbl, in 2015 and Ps. 914 million, or 1.4 mmbbl, in 2014. Sales of marine fuels totaled Ps. 1,516 million, or 1.4 mmbbl, in 2015 and Ps. 1,352 million for the same volume in 2014. In addition, imports of high and low sulfur diesel in 2015 totaled 7.3 mmbbl in 2015, a decrease of 7% compared with 2014.

 

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Marketing Division

Our Marketing Division supplies gasoline, diesel, LPG and other petroleum products throughout the country and other countries in the region. We supply several industries, including retail, transport and agriculture.

During 2015, YPF extended its leadership in Argentina, reaching a market share of 57.9% for liquefied fuels.

YPF sells two types of gasoline: Infinia, a premium 98 octane gasoline, and Super, a regular 95 octane gasoline.

During 2015, we continued to hold a leading position from sales of Infinia and Super gasolines, reaching a market share, according to our estimates, of 62.0% and 55.1%, respectively, as of December 31, 2015, compared with 61.3% and 56.9%, respectively, in 2014. Our sales volume for Infinia was 1,461 mcm in 2015 (26.0% higher than in 2014) and 3,392 mcm for Super in 2015 (3.3% less than in 2014).

After its launch in November 2014, sales of premium Infinia gasoline increased slightly as a percentage of our total gasoline sales to 30.1% in 2015, compared to 29.6% in December 2014. The marketing and communication activities carried out during 2015 for Infinia gasoline resulted in an improvement in the product’s image. Results for the same poll carried out in 2014 and 2015 showed an increase in “very good” responses from 48% in 2014 to 59% in 2015 (48% from December to March 2015 and 59% from August to October 2015). The loyalty program Serviclub, which actively promotes tourism in Argentina among other things, reached more than 1.1 million members in 2015.

With respect to diesel, according to our own estimates, as of December 2015 our market share was 58.5%, compared to 60.0% in 2014, with a decrease in our share of high sulphur content products. Along with D-Euro (10 ppm), for which sales volume was 1,271 mcm in 2015 compared to 1,015 mcm in 2014, our diesel (500 and 1500 ppm) reached a sales volume of 6,688 mcm compared to 6,928 mcm in 2014. Finally, market penetration for D-Euro and Diesel 500 reached 42% of total diesel sales volumes, up from 39.5% in 2014.

YPF markets lubricants through three segments of the domestic market: retail, agriculture and industry. Our three manufacturing facilities, part of the CIE industrial complex, include lubricant, asphalt and paraffin production lines. Our line of automotive lubricants, including mono-grade, multi-grade and oil, has received approval and recommendations from leading global automotive and engine manufacturers, including Ford, Volkswagen, Renault, Audi, Deutz, Cummins, Volvo, MAN Truck, GM, Porsche, Scania, Detroit Diesel and Caterpillar.

We are engaged in the LPG wholesale business, which encompasses LPG storage, logistics and commercialization to 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, used in the aerosols manufacturing processes.

YPF also markets lubricants in Brazil and Chile, where we have subsidiary companies. Additionally, through a network of exclusive resellers, we market lubricants in three bordering countries (Uruguay, Paraguay and Bolivia).

Retail Division

As of December 31, 2015, the Retail Division’s sales network in Argentina consisted of 1,538 retail service stations, compared to 1,534 as of December 31, 2014. Of these, 112 are owned by YPF. The remaining 1,426 service stations are associated service stations. OPESSA, our wholly-owned subsidiary, actively operates 174 retail service stations of which 89 are owned by YPF, 27 are leased to the Automóvil Club Argentino and 58 are leased to independent owners. Additionally, YPF owns 50% of Refinor, a company operating 69 service stations.

According to our estimates, as of December 31, 2015, we were the main fuel retailer in Argentina, with 35% of the country’s gasoline service stations, followed by Shell, Axion, Petrobras and Oil with 14.1%, 11.4%, 6.1% and 6.3%, respectively. During 2015, our market share in diesel and gasoline, marketed in all segments, decreased from 59.2% to 58.0%, from December 31, 2014 to December 31, 2015. This was due to increased market competition stemming primarily from an increase in the number of service stations of our competitors and a smaller gap between our competitors’ prices and YPF’s during 2015.

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, connecting most of our network. As of December 31, 2015, 1,283 service stations were linked to the Red XXI network system, unchanged from 2014.

Our convenience stores, YPF Full and YPF Full Express, are present in 391 and 100 points of sale, respectively, as of December 31, 2015. Additionally, a modern oil change service shop called YPF Boxes is present in 251 service stations across the country.

 

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During 2015, a service station operation manual was rolled out across the Retail Division sales network. The purpose of this model is to promote self-management of our service stations.

In April 2015 we launched Opessa Leones, Argentina’s biggest service station, located on the highway between the cities of Rosario and Cordoba. As the only rest area in the area, we expect 10,400 customers per day. With a footprint of 16,000 square meters, it includes parking for 250 cars, a YPF full convenience store accommodating more than 170 people and 24 fuel supply islands.

The project incorporates advanced fuel supply technology. Truck fueling is the fastest on the market, with a 30% performance increase. The service station has six tanks equipped with a drive system with dual containment and sensors, giving more control and the ability to detect potential leaks. The storage capacity of the service area exceeds 240,000 liters of fuel.

Agriculture Division

The Agriculture Division provides diesel, fertilizers, lubricants, agrochemicals, and ensiling bags (“silobolsa”), among other products, directly or through a network of 105 wholesaler bases (nine owned by YPF), offering an extensive portfolio of products to agricultural producers, including the delivery of products to the consumption site. Many of these wholesaler bases operate under a “one stop shop” concept, with an audited operating system, offering a complete range of products under a unified brand image. During 2015, YPF has launched several new products (mainly agrochemicals, fertilizers, biologic fertilizers and seeds), under our own brand or through distribution agreements with leading local suppliers. At the option of the customer, we accept different types of grains as payment (canje), mainly soybean, some of which is processed by third-party companies to obtain oil and other sub-products that we generally export. In 2015, revenue from these exports was U.S.$398 million, a 6.8% increase compared to 2014. Although the fall of international commodity prices affected local farmers, reducing overall sowing surface, we received approximately 1,348,000 tons of grains (oilseed and cereal), primarily soy, a 10.6% increase compared to 2014. In addition, the Agriculture Division provides approximately 8% of YPF’s fatty acid methyl esters (“FAME”) needs (a natural product added to commercial grade diesel), which is obtained from soybean oil.

Industry Division

This division supplies the national industry and transportation (ground and air) sectors’ needs, consisting of a broad portfolio of products and services. The division develops specific solutions for the mining, oil & gas, aviation, transport, 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 our own ground and waterway network, or through a network of twelve distributors. Regarding the 37 distributors for 2014, twelve of them remain in the Industry Division and the remaining 25 were serviced by the Agriculture Division.

The Industry Division’s mission is to promote efficiency in the value chains of the industries we serve through energy solutions, 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 2015, our lubricants and complementary products sales in the domestic market amounted to almost 127.7 mcm (an increase of 2.6% compared to 2014) while exports decreased 14.1% from 20.0 mcm in 2014 to 17.2 mcm in 2015. Sales of asphalts decreased 13% and paraffin increased 7% compared to 2014.

We export to two main markets. First, to our wholly-owned companies in Brazil and Chile. Sales volumes decreased 55% in Brazil, due to market recession and increased 11% in Chile compared to 2014. In both countries, we produce lubricants locally. However, local production in Chile has been replaced by Argentinean production due to lower tax withholdings in Argentina. On the other hand, we export through our distribution network in Bolivia, Uruguay and Paraguay, in which sales volume increased 15% compared to 2014. This increase was primarily due to a decrease in export taxes beginning in 2015, according to resolution S.E. 1077/14. Our Lubricants and Specialties Division has followed a strategy of differentiation, allowing it to achieve and maintain a leading position in the Argentinean market. Our market share as of December 31, 2015 was 39.1% (a decrease of 2.2% compared to 2014) according to information provided by the Argentine Secretariat of Energy. As indicated above, our line of automotive lubricants has received approvals and recommendations from leading global automotive and engine manufacturers (Ford, Volkswagen, GM, Porsche and Scania).

 

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With respect to lubricants, sales of the high-end light and heavy products, under the Elaion and Extravida brand names, were 43.7 mcm in 2015, compared to 43.6 mcm in 2014.

The Elaion brand reached sales volumes of 14.6 mcm in 2015, a 4% increase compared to 14.0 mcm in 2014. The Extravida brand reached sales volumes of 29.1 mcm, remaining stable compared to 29.1 mcm in 2014.

Sales of the Elaion Moto lubricant, used for motorcycles, increased by 4% to 2.1 mcm from 2.0 mcm in 2014.

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. It is supplied by YPF Gas S.A., which is not a YPF-controlled company. During 2015, we sold approximately 40% of our LPG production to YPF Gas S.A. for the domestic market.

We are the largest LPG producer in Argentina, with sales in 2015 reaching approximately 559 mtn, compared with 572 mtn in 2014. Of this, approximately 378 mtn were sold in the domestic market, compared to 414 mtn in 2014. Our main clients in the domestic market are companies that sell LPG in cylinders or bulk packing to end-consumers, also providing LPG to households in some regions. Additionally, exports in 2015 reached approximately 181 mtn, compared to 159 mtn in 2014. The main destinations were Chile, Paraguay and Bolivia. Transportation 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. 1,415 million and Ps. 1,678 million in 2015 and 2014, respectively.

The LPG Division obtains LPG from natural gas processing plants and from our refineries and petrochemical plants. We produced 447 mtn of LPG in 2015, not including LPG destined for petrochemical usage, and purchased LPG from third parties, as detailed in the table below:

 

     Purchase (tons)
2015
 

LPG from Natural Gas Processing Plants(1)

  

General Cerri

     12,569   

El Portón

     108,479   

San Sebastián

     0   
  

 

 

 

Total Upstream

     121,048   
  

 

 

 

LPG from Refineries and Petrochemical Plants

  

La Plata refinery

     182,514   

Luján de Cuyo refinery

     110,255   

CIE

     33,072   
  

 

 

 

Total refineries and petrochemical plants(2)

     325,841   
  

 

 

 

LPG purchased from joint ventures(3)

     25,684   
  

 

 

 

LPG purchased from unrelated parties

     62,997   

Total

     535,569   
  

 

 

 

 

(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 241 mtn of LPG in 2015.

 

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Chemicals Division

Petrochemicals are produced at our petrochemical facilities 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.

Petrochemical production operations in the Complejo Industrial Ensenada (“CIE”) are closely integrated to the refining activities at the La Plata refinery, allowing 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 capacities per year are as follows:

 

     Capacity  
     (tons per year)  

CIE

  

BTX (Benzene, Toluene, Mixed Xylenes)

     526,000   

Paraxylene

     38,000   

Orthoxylene

     25,000   

Cyclohexane

     95,000   

Solvents

     66,100   

MTBE

     60,000   

Butene I

     25,000   

Oxoalcohols

     35,000   

TAME

     105,000   

LAB

     52,000   

LAS

     32,000   

PIB

     26,000   

Maleic Anhydride

     17,500   

Plaza Huincul

  

Methanol

     411,000   

During 2015, the LAS plant was revamped increasing its capacity from 25,000 to 32,000 tons/year.

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 divisions.

We also use high carbon dioxide-content natural gas for methanol production, which allows us to keep the methanol plant working at 50% of its production capacity during winter periods.

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

In 2015 and 2014, 72% and 73%, respectively, of our petrochemicals sales (including propylene), were made in the domestic market, while we export to Mercosur countries, the rest of Latin America, Europe and the United States.

 

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We also participate in the fertilizer business, directly and through Profertil, a 50%-owned subsidiary. Profertil is a joint venture with Agrium, a worldwide leader in fertilizers, which initiated operations in 2001. Profertil has a production facility in Bahía Blanca which produces 1.1 million tons of urea and 750,000 tons of ammonia per year. In addition, Profertil markets other nutrients and special blends of prepared land to optimize soil performance.

The CIE was certified under ISO 9001 in 1996 and recertified in 2013 (2008 version). The La Plata petrochemical plant was certified under ISO 14001 in 2001 and recertified in 2013. The plant was also certified under OHSAS 18001 in 2005 and recertified in 2013. 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 Ensenada petrochemical complex laboratory was certified under ISO 17025, in 2005 and recertified in 2013.

The CIE has recently attained ISO 50001 certification (version 2011), covering the following processes: production of complex aromatics, olefins, maleic, polybutenes and the energy generation facilities that operate within the La Plata petrochemical complex.

The methanol plant was certified under ISO 9001 in December 2001 and recertified in August 2012. The methanol plant was also certified under ISO 14001 in July 1998 together with the Plaza Huincul refinery, and recertified in August 2012. In addition, the plant was also certified under OHSAS 18001 in December 2008, and the last date of recertification was August 2012.

The certification of our petrochemical business covers the following processes:

 

    refining process of crude oil and production of gas and liquid fuels, base stocks for lubricants 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 and commercial control, marketing and post-sale service of petrochemical products.

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. Through the fractionation of gas liquids, Mega increased production at the Loma La Lata gas field by approximately 5.0 mmcm/d (or 176.5 mmcf/d) in 2001 with the assistance of YPF.

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 1.4 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. On October 27, 2015, the Argentine Supreme Court ruled on the appeal filed by Mega covering the period up to the issuance of Law No. 26784. It ruled that Decree 2067/08 was unconstitutional and did not apply to Mega.

 

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Electricity market—generation

The Argentine Electricity Market

Argentina’s overall power generation was 4.6% higher in 2015 than 2014 according to Compañía Administradora del Mercado Mayorista Eléctrico S.A. (“CAMMESA”). In 2015, 63% of Argentina’s power generation came from thermal power plants, 30% from hydroelectric power plants, 5% from nuclear power plants, 1% from spot imports from Uruguay and Paraguay and the balance from unconventional sources such as wind and solar power.

Thermal power plants consumed 2,237,761 cm of diesel oil, a 24.7% increase compared to 2014, 3.1 million tons of fuel oil, a 13.4% increase compared to 2014, and 14.4 billion cm of natural gas, a 0.2% increase compared to 2014.

The average electricity price was Ps. 490.90/MWh, a 26% increase compared to 2014, while the annual average marginal cost of production was Ps.1,567/MWh, an 8.8% increase compared to 2014.

In 2014, 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 Resolution No. 529/14 of the Secretariat of Energy, increasing the remuneration to be received by 75%. In 2015, the same rule was updated with Resolution No. 482/15 of the Secretariat of Energy, increasing the remuneration to be received by 25% and adding some new concepts.

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 2015, YPF EE generated 5,276 GWh with its two combined cycles. Central Térmica Tucuman’s production was 3,071 GWh, and Central Térmica San Miguel de Tucumán’s production was 2,205 Gwh. Additionally, Central Dock Sud generated 3,799 GWh. The energy produced by YPF EE and Central Dock Sud (9,075 GWh in total) represented 6.6% of Argentina’s electricity generation in 2015.

Energy produced by both combined cycles in Tucumán was 1.4% higher in 2015 compared to 2014, despite major overhauls on units SMTUTV01 and SMTUTG02 in May and September 2015, respectively.

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 2015 decreased by 20.6% compared to 2014 because of a major overhaul and a serious failure in the electrical connection.

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;

 

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

 

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

During 2015, YPF EE developed an important new generation project. A new thermal power generation plant will be located in Añelo, Neuquén. This additional generation plant was designed in order to supply YPF energy demand all over the country. The project will be financed with those additional revenues from CAMMESA, which were recovered after the takeover, and others.

Finally, as a consequence of new legislation about renewable energy, YPF EE has commenced design of a renewable generation project near Comodoro Rivadavia, Chubut, in order to supply a percentage of YPF total demand with clean generation.

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 2015, Metrogas distributed approximately 19.5 mmcm (or 688 mmcf) of natural gas per day to 2.3 million customers in comparison to approximately 19.2 mmcm (678 mmcf) of natural gas per day to 2.3 million customers in 2014. 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 54.7% interest in GASA. Prior to this acquisition, the Company through its interest in YPF Inversora Energética S.A. owned 45.3% 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 reduction 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%.

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 December 14, 2015, YPF SA informed GASA that it acquired 100% of GASA’s outstanding securities, and it intends to cancel them in light of GASA’s planned merger with YPF. YPF irrevocably waived compliance by GASA with any of its obligations under the indenture as of March 15, 2013.

On March 3, 2016, the Board of Directors of the Company approved the merger of YPF Invesora Energética S.A. and GASA, whereby the former will absorb the latter. GASA will be dissolved without liquidation.

Metrogas debt reorganization.

Given the adverse business conditions, Metrogas decided to file a voluntary reorganization petition in June 2010. On the same date, Metrogas was notified of Resolution No. I-1260 issued 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 reduction 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 Argentina’s bankruptcy law, where the company’s proposal was unanimously approved. On July 13, 2012, Metrogas informed the Judge that it considered that the legal majorities established in the Article 45 of the Bankruptcy Law had been obtained to approve the proposal.

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

 

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Under the terms of the debt restructuring proposal, Metrogas was required to 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 would become due and payable only if the New Class A Notes were accelerated as a result of the occurrence of an event of default on or before December 2015. If an event of default had occured prior to December 2015, the new Class B Notes would have been automatically cancelled.

In compliance with the reorganization, 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 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.

 

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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.

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.

No event of default has occurred as of December 31, 2015. During the present fiscal year Metrogas has complied with the terms and covenants established under the offering circular.

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.

The Public Emergency Law, which was originally scheduled to be terminated in December 2003, has been extended until December 31, 2017. 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.

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

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%.

Temporary Economic Assistance

On June 8, 2015, the Official Gazette published ES Resolution No. 263/2015 whereby the Argentine Energy Secretariat approved the allocation of funds as temporary economic assistance to be paid in ten consecutive installments for Metrogas and other natural gas distributors effective from March 2015. The compensation was intended to cover expenditures and investments related to the regular operation of the natural gas public service and in advance for the Comprehensive Tariff Revision to be carried out in the future.

 

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This resolution establishes that the beneficiaries will assign a portion of the funds received by each of the monthly installments to cancel unpaid past due debt as of December 31, 2014 with natural gas producers, and moreover, that distributor shall not take more debt resulting from the purchase of natural gas after the above-mentioned Resolution has taken effect.

In the case of Metrogas, ENARGAS established a need for funds for 2015 to be disbursable monthly according to the schedule between March and December. ENARGAS also established that the company will assign a portion of the temporary economic assistance to pay debts to producers from December 31, 2014 in 36 monthly installments, plus interest, as from January 2015, calculated using the current “Average Active Rate of Banco Nación for Commercial Discount Operations” (2.05% monthly), and will begin to pay the installments in March 2015.

ENARGAS stated that distributors will proceed to pay gas purchase invoices due in 2015, estimating payments within 30, 60 and 90 days in line with the receipt of invoices by clients.

At the date of this annual report, Metrogas has received seven of the ten installments provided as a temporary economic assistance, amounting to Ps. 561.7 million from a total of Ps. 711 million. Metrogas has also entered into payment agreements with the majority of producers in terms of ES Resolution No. 263/15, this subject to availability of the amounts committed.

Funds from a letter of understanding executed on November 21, 2012 with ENARGAS, a provisional agreement executed on March 26, 2014 with the UNIREN and collections from the temporary economic assistance program have been insufficient so far to restore the financial condition of Metrogas.

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

At the end of 2013, YPF created YPF Tecnología S.A (“Y-TEC”), a highly specialized company focusing on research and development activities. YPF holds an equity stake of 51% and CONICET, a state-owned research and development organization, holds an equity stake of 49%.

The lines of R&D carried out by Y-TEC are mainly aligned with the needs of YPF. The Board of Directors of Y-TEC consists of three directors appointed by YPF and two directors appointed by CONICET. Additionally, the chairman and the general manager of Y-TEC are appointed by YPF.

For the operations of Y-TEC, five hectares on the farm belonging to the National University of La Plata (“UNLP”) were acquired and a 12,000 m2 building consisting of 48 labs and 12 experimental plants is under construction. Completion of the work is expected in 2016. We expect that about 320 professionals will work in the new building, and their main goal is to create innovative solutions for the energy sector. The R&D will be supported by a staff of over 6,000 researchers of different scientific backgrounds, available to the CONICET through agreements with different universities and institutes of research and development.

As of December 2015, we managed a R&D portfolio consisting of 122 projects, 37 of which are short-term, high impact “quick wins,” and more than 150 technical assistance and specialized service projects.

In 2015, U.S.$29.7 million was allocated to R&D activities, and U.S.$22.7 million (related to YPF´s working interest in projects) was invested in a new laboratory building and equipment.

 

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R&D projects are related to the entire energy 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, renewable energies and environmental solutions.

R&D efforts are focused on the design, development and application of very specific technologies for the exploration and exploitation of unconventional resources. Our most important challenges include the design and development of simulation and modelling tools, specific software, measuring devices, proppants, fluids and materials for optimizing perforation, hydraulic stimulation and production operations in our oilfields.

To optimize production from mature fields, we focused on the development of enhanced oil recovery technologies 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 are mainly focused on the development of new products with higher added value, such as special solvents, fertilizers and several agricultural products.

Renewable energy is a strategic R&D area. Energy storage, bioenergy and energy efficiency are among the larger challenges.

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 creates competition, driven by investment and technical capacities, 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 90% 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 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. At the same time, exploration and development programs of different play types are allowed different, progressive benefits, according to their anticipated level of complexity and investment intensity. 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, including YPF as a non-operating party to some existing JVs where YPF is used to participating. 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.

 

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In our Refining and Marketing 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.

In Argentina, we operate in a competitive oil and gas industry with a dynamic market. 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, including the recent decline in global prices for oil and gas, could affect our business.”

On May 3, 2012, the Expropriation Law was passed by the Argentine congress, by which the government regained control of 51% of the capital structure of YPF. The Expropriation Law also declared that achieving energy self-sufficiency was of public interest, and that the exploitation, industrialization, transportation and sale of hydrocarbons are priorities 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.” Despite all these overarching objectives, the Law maintained YPF as a commercial corporation with the focus on keeping competitiveness in the market. That competitive drive, along with the Company’s widely recognized professionalism, has driven its decision-making and will continue to do so.

During 2015, the Argentine government continued promoting the industry which, along with the competitive responses of different market participants throughout the year, 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 and local 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 adapt to these variables. One such change relates to the agreement among industry participants and the Argentine government to address the steep decline in international crude oil prices that occurred at the end of 2014, prices that continued at a relelatively low level during 2015. As of December 30, 2014, the National Executive Office decided to reduce taxes on the sale of fuels, which partially compensated 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 the decrease in the price of international hydrocarbon products. These two measures were part of a comprehensive plan set forth by the Argentine government, producers and the refiners. The principal Argentine producers and refiners privately negotiated an approximately U.S.$7 reduction to the domestic crude oil price per barrel as a function of the decline in international prices in order to continue developing 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 was in place from January 1, 2015 through December 31, 2015 and through which the Argentine federal government, subject to certain requirements, paid an export stimulus or a production stimulus for companies registered under that program. The plan is intended to offset the potential impact international crude oil prices could have had on the local industry which, in turn, created a comparatively more attractive oil and gas market for Argentina during 2015. As of the beginning of 2016, the National Executive Office, which took office on December 10, 2015, along with producers and refiners agreed to a reduction of the local price of crude oil beginning January 2016, setting a new price for Medanito of U.S.$67.50/bbl and U.S.$54.90/bbl for Escalante. At the same time, and further to the efforts initiated in 2015, producers and refiners continue working closely to encourage contractors and unions to acknowledge the fundamental changes in the industry worldwide by significantly reducing costs and increasing productivity, thus making 2016 an opportunity to further improve the competitiveness of the industry as a whole towards international standards. See “Item 3. Key Information—Risk Factors” for a description main risks and uncertainties we face.

 

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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 diesels. In the La Plata refinery, a new ultra-low sulfur diesel desulfurization plant 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, 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 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 2015, 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 Continuous Catalyst Regeneration (“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.$1,015 million (the total amount disbursed as of December 31, 2015 was U.S.$869 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 during 2016.

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.

 

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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. During 1997 and 1998, each of our refineries (La Plata, Luján de Cuyo, and Plaza Huincul) were 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. In addition, since 2008, the La Plata and Luján de Cuyo complexes have been verified in accordance with ISO 14064 for the inventories of industrial greenhouse gases. The refineries maintain their systems under continuous improvement and revision by accredited organizations.

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;

 

    a new internal corporate commitment on climate change and energy efficiency which was developed in June 2015. This document obligates the company to work on reducing greenhouse gas emissions, contributing to mitigation activities while promoting sustainable development and preserving natural resources;

 

    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 the approval of the United Nations in December 2010 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 2015 the La Plata project reduced carbon dioxide emissions by 111,115 tons;

 

    obtained the approval of the United Nations in December 2011 for an industrial project developed by YPF in Argentina defined as a CDM at the Luján de Cuyo refinery. During 2015 the project reduced carbon dioxide emissions by 24,521 tons;

 

    secured the approval of the CDM project. YPF developed a new methodology which was approved by the United Nations in 2007 under the name of AM0055 “Baseline and Monitoring Methodology for the recovery and utilization of waste gas in refinery facilities.” Currently, five CDM projects are being developed around the world (Argentina, China, and Egypt) 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 June 2015, the inventory verification process of greenhouse gases in the La Plata complex and the Luján de Cuyo refinery was completed. A 2016 inventory check, ending in the first half of 2016, is planned in all the refineries;

 

    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 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 from 1984 (when the first afforestation activity occurred) through 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 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 law Disposition No. 112/2011 of the Environmental Subsecretary of 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 focuses 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 2016 and (iii) aquatic and terrestrial environmental studies in the Loma Campana, El Mangrullo and El Orejano areas beginning 2016 to 2017.

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 the offshore blocks in which we have a working interest are included in a Health, Safety and Environmental (“HSE”) Management system to address risks and environmental impacts during each phase of the offshore activities.

Neptune

Under the Neptune Joint Operating Agreement, the operator of the field is required to maintain an HSE 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 HSE 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 HSE management plan for Neptune, which is maintained by the operator of the field, includes the following critical elements and procedures:

 

    emergency shutdown (“ESD”) system

 

    fire detection system

 

    combustible gas detection system

 

    ventilation systems (mechanical)

 

    spill/leak containment systems

 

    vent/flare system

 

    subsea well control system

 

    temporary refuge

 

    escape water craft

 

    critical power systems (including electric, pneumatic, hydraulic)

 

    emergency communication systems

 

    hull ballast systems

 

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    hull tendons

 

    riser hang-off components

 

    design HSE case critical procedures

 

    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, HSE, 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 (level 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 HSE 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 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, 2015, 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 Properties.”

Our petroleum exploration and production rights are in general based on sovereign grants of concession. Upon the expiration of the concession, our exploration and production assets associated with the particular property subject to the relevant concession revert to the government. In addition, as of December 31, 2015, we leased 85 service stations to third parties and also had activities with service stations that are owned by third parties and operated by them under a supply contract with us for the distribution of our products.

Insurance

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

 

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Argentine operations

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

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

Our insurance policy also covers physical loss or damage in respect of, but not limited to, onshore and offshore property of any kind and description (whether upstream or downstream), up to U.S.$2 billion 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.

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.

 

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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% coverage), with deductibles ranging from U.S.$0.75 million (100% coverage) to U.S.$1.25 million (100% coverage).

 

    Coverage for operator’s extra expenses is subject to a limit of U.S.$250 million (100% coverage) per incident, with a U.S.$1 million deductible (100% coverage). 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.$29.1 million (15% coverage) 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 a 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% coverage) 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% coverage) per incident, without a deductible.

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.

 

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Regulatory Framework and Relationship with the Argentine Government

Overview

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 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. 27,007, 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, 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 September 2015, the National Executive Office and YPF began negotiating the conversion of association agreements executed with ENARSA. As of the date of this annual report, these negotiations are ongoing.

Decree No. 13/15 modified article 1 of the Law of Ministries No. 22,520 and created the Ministry of Energy and Mining, absorbing the functions of the Secretariat of Energy.

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

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

 

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

 

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

 

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    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.

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.

 

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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 the 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.

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.

 

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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.

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 created a commission, that was later dissolved by Decree No. 272/2015, the Commission for Planning and Strategic Coordination of the National Plan of Hydrocarbons Investments (the “Commission”). This Commission was entrusted with annually making the National Plan for Hydrocarbons Investments.

Decree No. 1277/12 required 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 was also responsible for a National Hydrocarbons Investments Registry for all companies performing the activities of exploration, exploitation, refining, transport and commercialization. All these companies were required to file an annual plan of investments before the Commission.

 

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With respect to the refining industry, Decree No. 1277/12 gave the Commission the power to regulate the minimum utilization rates for primary or secondary refining. It also had 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 was 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 had 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.

Decree No. 13/2015

On December 11, 2015, Decree No. 13/2015 was published in the Official Gazette of the Republic of Argentina, modifying the Ministries Law No. 22,520. Among other changes, it created the Ministry of Energy and Mining, which absorbs the functions of the Secretaries of Energy and Mining and decentralized entities, from the Ministry of Federal Planning, Public Investment and Services. The responsibilities of the Ministry of Energy and Mining include participating “in the management of the State’s shareholdings in the corporations and companies operating in the area of its competence.”

Decree No. 272/2015

On January 4, 2016, Decree No. 272/2015 was published in the Official Gazette of the Republic of Argentina, which modified Decree No. 1277/12. Among other changes, it dissolved the Commission, derogated certain responsibilities of the Commission and stated that the tasks assigned to the Commission will be performed by the Ministry of Energy and Mining.

Furthermore, the decree established that the rights derived from the shares owned by the Argentine National State in YPF S.A. and YPF GAS S.A., with the exception of the shares that belong to the Sustainability Guarantee of the Public Securities Regime Fund, created by Decree No. 897/07, will be exercised by the Ministry of Energy and Mining, as of its publication date.

In addition, the decree established that the Ministry of Energy and Mining will conduct a comprehensive review and reorganization regarding the creation of records and information duties in the hydrocarbon industry, which remain in force as long as they are not derogated by the dispositions of the decree or addressed by the re-organization plan to be determined by the Ministry of Energy and Mining.

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 that had no association agreements with ENARSA as of the date of the new law reverted and were 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. In September 2015, the National Executive Office and YPF began negotiating the conversion of association agreements executed with ENARSA. As of the date of this annual report, there has been no agreement on the conversion.

 

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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 was in force from January 1, 2015 through December 31, 2015. This Program provided 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 was 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 for Resolution 33/2015. The base production level under the Program was the total production of crude oil of the beneficiary company for the fourth quarter of 2014. Those beneficiary companies that had 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.

The payments would 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. See “Item 5. Operating and Financial Review and Prospects—Results of Operations—Revenues.”

Resolution 21/2016

On March 9, 2016, Resolution 21/2016 of the Ministry of Energy and Mining was published in the Official Gazette and established an export stimulus program of crude oil surplus, after domestic demand for crude oil Escalante from the San Jorge Gulf Basin is satisfied. The stimulus will be paid for each shipment and to the extent that the average price of Brent oil does not exceed U.S.$.47 per barrel two days before and two days after the shipment. It is valid until December 31, 2016. The compensation to be paid by the Argentine government will amount to U.S.$ 7.50 per barrel, as long as the criteria is met.

Public Emergency

On January 6, 2002, the Argentine congress enacted the 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 the 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, 2017 by Law No. 27,200. 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.

 

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Under the Hydrocarbons Law, the federal and/or competent provincial authorities may grant exploration permits after submission of competitive bids. Permits 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 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 ten 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 twelve 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.

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;

 

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

 

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    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.$4.1 billion 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 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. 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.

As of the date of this annual report, the Company had not filed the request to extend the portion of the Magallanes concession located in the province of Tierra del Fuego.

 

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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.

 

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

 

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    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 three) 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 Río Negro

In December 2014, YPF entered into an agreement with the province of Río 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 Río 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 Río 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 Río Negro in an aggregate amount of U.S.$46 million;

 

  (ii) to make contributions to social development and institutional strengthening within the province of Río 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 en