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, 2018

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) 5441-1276

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, 2018 was:

 

Class A Shares

     3,764  

Class B Shares

     7,624  

Class C Shares

     40,422  

Class D Shares

     393,260,983  
  

 

 

 
     393,312,793  

 

 

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

Act.    Yes  ☒    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  ☒

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  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or an emerging growth company. See definition of “accelerated filer,” “large accelerated filer” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Emerging growth company  

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

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    Other  ☐
   by the International Accounting Standards Board:  ☒   

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.    Item 17  ☐    Item 18  ☐

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  ☒

 

 

 


Table of Contents

TABLE OF CONTENTS

 

     Page  

Conversion Table

     4  

References

     4  

Disclosure of Certain Information

     4  

Forward-Looking Statements

     4  

Oil and Gas Terms

     5  

PART I

     7  

ITEM 1. Identity of Directors, Senior Managers and Advisers

     7  

ITEM 2. Offer Statistics and Expected Timetable

     7  

ITEM 3. Key Information

     7  

Selected Financial Data

     7  

Exchange Regulations

     10  

Risk Factors

     12  

ITEM 4. Information on the Company

     32  

History and Development of YPF

     32  

The Argentine Market

     36  

Business Organization

     37  

Upstream Overview

     38  

Downstream

     75  

Gas and Power

     85  

Research and Development

     95  

Competition

     96  

Environmental Matters

     97  

Property, Plant and Equipment

     103  

Insurance

     104  

Legal and Regulatory Framework and Relationship with the Argentine Government

     105  

ITEM 4A. Unresolved Staff Comments

     143  

ITEM 5. Operating and Financial Review and Prospects

     143  

Overview

     144  

Presentation of Financial Information

     144  

Segment Reporting

     144  

Summarized Statement of Comprehensive Income

     145  

Factors Affecting Our Operations

     145  

Critical Accounting Policies

     153  

 

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Off-Balance Sheet Arrangements

     172  

Research and Development, Patents and Licenses, etc.

     172  

ITEM 6. Directors, Senior Management and Employees

     172  

Management of the Company

     172  

Board of Directors

     173  

Senior Management

     179  

The Audit Committee

     182  

Disclosure Committee

     184  

Compliance with New York Stock Exchange Listing Standards on Corporate Governance

     186  

Compensation of members of our Board of Directors

     187  

Supervisory Committee

     187  

Employee Matters

     191  

ITEM 7. Major Shareholders and Related Party Transactions

     193  

Related Party Transactions

     194  

Argentine Law Concerning Related Party Transactions

     194  

ITEM 8. Financial Information

     194  

Financial Statements

     194  

Legal Proceedings

     195  

Dividend Policy

     195  

Significant Changes

     195  

ITEM 9. The Offer and Listing

     195  

Shares and ADSs

     195  

Argentine Securities Market

     195  

ITEM 10. Additional Information

     201  

Memorandum and Articles of Association

     202  

Directors

     204  

Dividends

     205  

Amount Available for Distribution

     206  

Preemptive and Accretion Rights

     207  

Voting of the Underlying Class D Shares

     208  

Certain Provisions Relating to Acquisitions of Shares

     209  

Material Contracts

     211  

Exchange Regulations

     211  

Taxation

     211  

Argentine Tax Considerations

     211  

United States Federal Income Tax Considerations

     213  

 

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Documents on Display

     216  

ITEM 11. Quantitative and Qualitative Disclosures about Market Risk

     216  

ITEM 12. Description of Securities Other than Equity Securities

     218  

PART II

     219  

ITEM 13. Defaults, Dividend Arrearages and Delinquencies

     219  

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

     219  

ITEM 15. Controls and Procedures

     219  

ITEM 16.

     220  

ITEM 16A. Audit Committee Financial Expert

     220  

ITEM 16B. Code of Ethics

     220  

ITEM 16C. Principal Accountant Fees and Services

     221  

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

     221  

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

     222  

ITEM 16F. Change in Registrant’s Certifying Accountant

     222  

ITEM 16G. Corporate Governance

     222  

PART III

     222  

ITEM 17. Financial Statements

     222  

ITEM 18. Financial Statements

     223  

ITEM 19. Exhibits

     223  

 

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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 barrel of oil, condensate or natural gas liquids = 0.159 cubic meters

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” or “YPF S.A.” 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, 2018, 2017 and 2016, YPF’s audited consolidated statements of comprehensive income for the years ended December 31, 2018, 2017 and 2016, YPF’s audited consolidated statements of cash flows for the years ended December 31, 2018, 2017 and 2016, YPF’s audited consolidated statements of changes in shareholders’ equity for the years ended December 31, 2018, 2017 and 2016 and notes 1 to 34.

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 Note 2.a 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 on-stream, 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

 

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expressed or implied in any such forward-looking statements. Such factors include, but are not limited to, currency fluctuations, inflation, the domestic and international prices for crude oil and its derivatives, the ability to realize cost reductions and operating efficiencies without unduly disrupting business operations, replacement of hydrocarbon reserves, environmental, regulatory and legal considerations, including the imposition of further government restrictions on the Company’s business, changes in our business strategy and operations, our ability to find partners or raise funding under our current control, the ability to maintain the Company’s concessions, and general economic and business conditions in Argentina, as well as those factors described in the filings made by YPF and its affiliates with the Securities and Exchange Commission, in particular, those described in “Item 3. Key Information—Risk Factors” and “Item 5. Operating and Financial Review and Prospects.” YPF does not undertake to publicly update or revise these forward-looking statements even if experience or future changes make it clear that the projected results or condition expressed or implied therein will not be realized.

Oil and Gas Terms

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

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

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

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

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

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

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

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

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

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

gas”: Natural gas.

hydrocarbons”: Crude oil, natural gas liquids and natural gas.

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

 

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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.

“dam3”

  

Cubic decameters (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. This information should be read 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.

Selected consolidated financial information contained in this annual report as of and for the years ended December 31, 2018, 2017 and 2016 has been derived from our Audited Consolidated Financial Statements included in this annual report. Selected consolidated financial information contained in this annual report as of December 31, 2015 and 2014 and for the years ended December 31, 2015 and 2014 have been derived from our audited consolidated financial statements as of and for the years ended December 31, 2015 and 2014 not included in this annual report.

 

     As of and for the year ended December 31,  
     2018     2017     2016     2015     2014  
    

(in millions of pesos, except for per share

and per ADS data)

 

Consolidated Statement of Comprehensive Income Data (1):

          

Revenues (2)

     435,820       252,813       210,100       156,136       141,942  

Costs

     (359,570     (211,812     (177,304     (119,537     (104,492

Gross profit

     76,250       41,001       32,796       36,599       37,450  

Administrative expenses

     (13,922     (8,736     (7,126     (5,586     (4,530

Selling expenses

     (27,927     (17,954     (15,212     (11,099     (10,114

Exploration expenses

     (5,466     (2,456     (3,155     (2,473     (2,034

Recovery / (Impairment) of property, plant and equipment

     2,900       5,032       (34,943     (2,535     —    

Other net operating results

     11,945       (814     3,394       1,682       (1,030

Operating profit (loss)

     43,780       16,073       (24,246     16,588       19,742  

Income from equity interests in associates and joint ventures

     4,839       1,428       588       318       558  

Net financial results

     41,525       (8,798     (6,146     12,157       1,772  

Net profit / (loss) before income tax

     90,144       8,703       (29,804     29,063       22,072  

Income tax

     (51,538     3,969       1,425       (24,637     (13,223

Net profit / (loss) for the year

     38,606       12,672       (28,379     4,426       8,849  

Total other comprehensive income for the year

     172,600       21,917       27,414       43,758       16,276  

Total comprehensive income / (loss) for the year

     211,206       34,589       (965     48,184       25,125  

 

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     As of and for the year ended December 31,  
     2018      2017      2016     2015     2014  
    

(in millions of pesos, except for per share

and per ADS data)

 

Earnings and dividends per share and per ADS

            

Earnings per share and per ADS (4)

     98.43        31.43        (72.13     11.68       22.95  

Dividends per share and per ADS (in pesos)

     3.05        1.82        2.26       1.28       1.18  

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

     0.08        0.10        0.15       0.14       0.14  

Consolidated Statement of Financial Position Data

            

Cash and cash equivalents

     46,028        28,738        10,757       15,387       9,758  

Working capital (3)

     29,446        19,564        4,760       (2,818     (11,266

Total assets

     994,016        505,718        421,139       363,453       208,554  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total loans (6)

     335,078        191,063        154,345       105,751       49,305  

Shareholders’ equity (7)

     362,357        152,533        118,661       120,461       72,781  

Other Consolidated Financial Data

            

Depreciation of property, plant and equipment and amortization of intangible assets

     89,318        54,350        45,469       27,008       20,405  

Cash used in acquisition of property, plant and equipment and intangible assets

     88,293        59,618        64,160       63,774       50,213  

 

(1)

The consolidated financial statements reflect the effect of the application of the functional and reporting currency. See Note 2.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 21 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 2.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, 2018, 2017, 2016, 2015 and 2014.

(4)

Information has been calculated as detailed in Note 26 to the Audited Consolidated Financial Statements. Each ADS represents one Class D share.

(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. 270,252 million, Ps 151,727 million, Ps. 127,568 million, Ps. 77,934 million and Ps. 36,030 million as of December 31, 2018, 2017, 2016, 2015 and 2014, respectively, and current loans of Ps 64,826 million, Ps. 39,336 million, Ps. 26,777 million, Ps. 27,817 million and Ps. 13,275 million as of December 31, 2018, 2017, 2016, 2015 and 2014, respectively. See Note 16 to the Audited Consolidated Financial Statements.

(7)

Our subscribed share capital as of December 31, 2018 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” “Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers” and Note 2.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.

For information regarding macroeconomic conditions such as exchange rates and inflation rates that affected our results of operations, see “Item 3. Key Information—Selected Financial Data—Exchange Rates” and “Item 5. Operating and Financial Review and Prospects—Factors Affecting Our Operations—Macroeconomic conditions.” In addition, for an explanation of our results of operations, see “Item 5. Operating and Financial Review and Prospects—Principal Income Statement Line Items—Results of Operations.”

 

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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 the U.S. dollar-peso parity. The Public Emergency Law, which had been periodically extended and expired on December 31, 2017, by virtue of Law No. 27,200, had granted 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 101.4% from December 31, 2017 to December 31, 2018, based on the period-end exchange rates for U.S. dollars as of December 31, 2018 and 2017. See “—Risk Factors—Risks Relating to Argentina—Our business is largely dependent upon economic conditions in Argentina.”

By means of Decree No. 27/2018 dated January 11, 2018, the Free Exchange Market (Mercado Libre de Cambios - “MELI”) was created, as a replacement of the Free Single Exchange Market (Mercado Unico Libre de Cambios - “MULC”), for purposes of providing additional flexibility to the market, to enable competition and allow for the entry of new operators into the foreign exchange market, thus reducing systemic costs. Exchange operations will be conducted through the MELI by financial entities and other participants authorized by the Central Bank to conduct regular transactions or purchase and sale of foreign currency, gold coins or deliverable gold bars and travelers’ checks, and transfers and similar analogous foreign exchange operations.

Pursuant to Communication “A” 6,443 of the Central Bank, which became effective on March 1, 2018, companies from any sector of the economy which operate on a regular basis in the MELI may act as an exchange agency, as long as they comply with the sole requirement of registering their electronic signature in the “Exchange operators’ registry”.

Currently, the Central Bank may intervene the foreign exchange market by selling dollars into the market when the exchange rate is above 44 pesos per dollar and by buying dollars from the market when the exchange rate falls below 34 pesos per dollar which range was subject to a daily adjustment of 3% per month through the end of 2018, and is currently subject to a daily adjustment of 2% per month (1.75% per month for the second quarter of 2019), while the area within such range is considered to be a “non-intervention” zone.

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 the Argentine peso.

 

     Low      High      Average (1)      Period End  
     (pesos per U.S. dollar)  

Year ended December 31,

           

2014

     6.54        8.56        8.23        8.55  

2015

     8.73        13.76        9.39        13.01  

2016

     13.07        16.04        14.78        15.85  

2017

     15.17        18.83        16.76        18.77  

2018

     18.42        40.90        29.32        37.81  

Month

           

September 2018

     36.99        40.90        38.59        40.90  

October 2018

     36.20        40.34        37.12        36.20  

November 2018

     35.49        38.88        36.46        38.02  

December 2018

     36.89        38.57        37.89        37.81  

January 2019

     37.04        37.93        37.41        37.04  

February 2019

     37.20        40.04        38.41        39.00  

March 2019 (2)

     39.45        43.70        39.87        43.59  

Source: Central Bank

(1)

Calculated using the average of the exchange rates on the last day of each month during the period (for annual periods), and the average of the exchange rates on each day during the period (for monthly periods).

(2)

Through March 28, 2019.

 

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

Exchange Regulations

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

On December 3, 2001, the Argentine government imposed a number of monetary and currency exchange control measures through Decree No. 1,570/01, 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 that came into Argentina, which mainly consisted of a prohibition against the transfer abroad of any funds until 180 days after their entry into the country.

On June 9, 2005, by means of Decree No. 616/2005, the National Executive Office established that (a) all inflows of funds into the domestic foreign exchange market arising from foreign debts incurred by individuals or entities of the private sector, excluding foreign trade financing and primary issuances of debt securities admitted to public offering and authorized to be listed and/or traded on self-regulatory markets; and (b) all inflows of funds of non-residents channeled through the local foreign exchange market to be applied to: holdings of local currency, acquisition of all types of financial assets or liabilities in the financial or non-financial private sector, to the exclusion of direct foreign investment and primary issuances of debt securities and shares admitted to public offering and authorized to be listed and/or traded in self-regulatory markets, and investments in Government securities acquired in secondary markets must meet the following requirements: (i) the funds entering the country may only be transferred out of the local foreign exchange market at the expiration of a term of 365 calendar days counted as beginning on the date the funds were received in Argentina; (ii) the proceeds of the foreign exchange settlement of the funds received in Argentina must be credited to an account in the local banking system; (iii) a registered, non-transferable and non-interest bearing deposit equivalent to 30% of the amount involved in the relevant transaction is to be maintained for a term of 365 calendar days in the conditions prescribed by the regulations (the “Mandatory Deposit”); and (iv) the Mandatory Deposit is to be made in U.S. dollars and held in a financial institution in Argentina. The Mandatory Deposit shall not accrue interest nor any other type of benefits and it shall not be used to secure credit facilities of any type. There are various exceptions to the requirements of Decree No. 616/2005, including but not limited to, those detailed below.

However, Resolution No. 3/2015 issued by the Ministry of Budget and Public Finances reduced the Mandatory Deposit percentage created by Decree No. 616/2005 from 30% to 0% and reduced the period in which the incoming funds must remain in Argentina from 365 calendar days to 120 calendar days. Moreover, in January 2017, the Ministry of Treasury reduced the holding period of the Mandatory Deposit from 120 calendar days to 0 calendar days. As a result of these two changes to the regulations, the Mandatory Deposit is currently not required.

On August 8, 2016, the Central Bank of the Argentine Republic (“BCRA” or “Central Bank”) established a new exchange rate regime through Communication “A” 6,037, substantially modifying existing exchange regulations and facilitating access to the MULC. On May 19, 2017, the Central Bank issued Communication “A” 6,244 which, effective as of July 1, 2017, significantly modified and relaxed all the regulations that regulated the operation of the MULC. By virtue of this last Communication, all the rules that regulated the exchange operations were replaced by this new regulation, including - among others- the exchange rate transaction, the general position of changes, the provisions adopted by Decree No. 616/2005, and maintaining the validity of the regulations related to information regimes, surveys or follow-ups related to such topics.

 

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In addition, through Communication “A” 6,401 of December 26, 2017, the Central Bank replaced the information regimes and surveys established by Communications “A” 3,602 and “A” 4,237 with a unified regime, applicable from the corresponding information as of December 31, 2017.

The information required will be used exclusively for statistical purposes, framed in the provisions of the Law on Statistics and Census No. 17,622. According to the new regime, individuals and legal entities, assets and other universal residents are subject (for example: trusts, joint ventures, business collaboration groups, cooperation consortiums or other multilateral associative contracts), which are not included in the category of General Government according to the definition of the Sixth Edition of the Balance of Payments Manual of the International Monetary Fund.

Three sample levels were contemplated, whose participants will be determined each calendar year based on: 1) the sum of the flows of external assets and liabilities during the previous calendar year; and 2) the balance of holdings of external assets and liabilities at the end of the previous calendar year: a) Main sample: any individual or legal entity for which the sum of the flows of external assets and liabilities during the previous calendar year, or the balance of external assets and liabilities at the end of that calendar year reaches or exceeds the equivalent of U.S.$ 50 million; b) Secondary sample: any individual or legal entity for which the sum of the flows of external assets and liabilities during the previous calendar year, or the balance of external assets and liabilities at the end of that calendar year, is between the equivalent of U.S.$ 10 million and U.S.$ 50 million; and c) Complementary sample: any individual or legal entity for which the sum of the flows of external assets and liabilities during the previous calendar year, or the balance of external assets and liabilities at the end of that calendar year is between the equivalent of U.S.$ 1 million and U.S.$ 10 million. For the rest of the individuals or legal entities, the declaration will be optional. In the three samples, an annual declaration must be presented and, in the first case, an advance for each of the quarters. External assets and liabilities must be reported according to the following classification: (i) shares and equity interests; (ii) non-negotiable debt instruments; (iii) negotiable debt instruments; (iv) financial derivatives; and (v) land, structures and real estate.

Additionally, Decree No. 893 dated November 1, 2017, in order to improve the competitiveness of Argentine exports, make financing conditions more flexible and improve financial predictability, repealed the mandatory entry and settlement of export currencies, as well as the obligation to negotiate the currencies so that the exporter could have access to the collection of export refunds. In accordance with the aforementioned decree, Communication “A” 6,363 of the Central Bank dated November 10, 2017 repealed the sections and other provisions related to the entry and settlement of foreign currency from exports.

Pursuant to Communication “A” 6,436, which became effective on January 20, 2018, the Central Bank derogated all foreign exchange regulations (except for those which were explicitly exempt therefrom), and substituted them with the following:

 

   

Any individual or entity may freely conduct operations through MELI.

 

   

All transactions involving foreign exchange must be carried out through an authorized financial entity.

 

   

Timing restrictions to operate in MELI were eliminated.

 

   

Persons subjects to these regulations must comply with the information requirements of the “Foreign Assets and Liabilities Survey”, even in those cases where they have not deposited any amounts through MELI or if they do not anticipate accessing such market for any transactions subject to reporting.

 

   

The obligation to settle foreign exchange transactions was eliminated; however, the intervening financial entity must continue to keep records thereof.

 

   

The intervening financial entities must satisfy the applicable regulations relating to anti-money laundering, financing of terrorist activities and other illegal activities.

 

   

Foreign exchange transactions shall be conducted at the exchange rate determined by the applicable parties.

As a result, as of the date of this annual report, the Argentine government has eliminated the restrictions on access to the MELI and there are no limitations for the repatriation of investments by non-residents, without prejudice to the fact that new exchange control policies could be established in the future.

 

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For more information regarding current foreign exchange restrictions and control regulations, you should seek advice from your legal advisors and read the applicable rules mentioned herein, as well as their amendments and complementary regulations, which are available at the website: http://www.infoleg.gob.ar/, or the Central Bank’s website: www.bcra.gob.ar, as applicable. Information contained on these websites is not part of, and shall not be deemed to be incorporated into, this annual report. See also “Item 3. Key Information—Risk Factors—Risks Relating to Argentina—We may be exposed to fluctuations in foreign exchange rates.”

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 Republic owns 51% of the shares of the Company.

The Argentine Republic owns 51% of the shares of the Company (see “Item 4. Information on the Company—Legal and Regulatory Framework and Relationship with the Argentine Government—The Expropriation Law”), and consequently, the federal government is able to determine all matters requiring approval by a majority of shareholders, including the election of a majority of directors. We cannot assure you that the decisions taken by our controlling shareholder or its interests, would not differ from your interests as a shareholder, including pricing policy of all our main products, and thus affect our operational decisions (see additionally “The result of the next presidential and provincial elections that will take place in 2019 could generate uncertainty in the Argentine economy and, consequently, in our businesses and the results of our operations;” “Our domestic operations are subject to extensive regulation”, and “Limitations on local pricing in Argentina may adversely affect our results of operations.”) In addition, according to the Argentine Constitution, presidential elections take place every four years. Argentina’s national election for president and vice-president will take place in October 2019, and other relevant local and federal elections will also take place in 2019. Accordingly, changes in government or its policies may occur. 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.

Most 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 assessment about Argentina and prevailing conditions in the country before taking an investment decision 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 currency devaluation. No assurances can be given that the rate of growth experienced over past years will be achieved in future years or that the national economy will not suffer recession. 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 to incentivize domestic economy activity are unsuccessful, such developments could adversely affect Argentina’s economic growth and in turn affect our financial health and results of operations.

Argentina has confronted and continues to confront inflationary pressures. According to inflation data published by the National Statistics Institute (Instituto Nacional de Estadística y Censos) (“INDEC”), in 2018 the consumer price index (“CPI”) and the wholesale price index increased by 47.6% and 73.5%, respectively and the three-year cumulative inflation rate has exceeded 100% causing Argentina to be now considered as a hyperinflationary economy. See “Item 5. Operating and Financial Review and Prospects—Factors Affecting Our Operations—Macroeconomic conditions”.

Additionally, during 2018 certain macroeconomic variables also suffered and continue to face considerable pressure during 2019, which in turn affected the development of the domestic economy. Among other variables, Argentina had increasing interest rates (where the BADLAR averaged 34.3% during 2018), the Argentine peso suffered a 101% devaluation during the December 2017-December 2018 period, preliminary GDP (gross domestic product) growth rate during 2018 was negative 2.5%, and Argentina’s country risk climbed to 817.27 points on December 31, 2018 from 350.97 on December 29, 2017.

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

 

   

domestic production, international demand and prices for Argentina’s principal commodity exports;

 

   

stability and competitiveness of the Argentine peso against foreign currencies;

 

   

competitiveness and efficiency of domestic industries and services;

 

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levels of consumer consumption;

 

   

foreign and domestic investment and financing;

 

   

adverse external economic shocks;

 

   

changes in economic or fiscal policies that may be adopted by the National Government;

 

   

labor disputes and work stoppages, which may affect various sectors of the Argentine economy;

 

   

the level of expenditure by the National Government and the difficulty of reducing the fiscal deficit;

 

   

the level of unemployment, which affects consumption;

 

   

political instability; and

 

   

interest and inflation rates.

The political parties opposed to the current administration maintained the majority of seats in both houses of the National Congress in the last elections, so the new administration should generate political consensus with the opposition to carry out their economic proposals. This situation generates more uncertainty regarding the ability of the National Government to get approval for new measures to be implemented. We cannot predict exactly if this situation could generate an adverse change in our financial condition and result of our operations.

The Argentine economy is also sensitive to local political developments. Despite significant measures taken by the Argentine government that was elected on December 10, 2015 such as reforms in the INDEC, the elimination of exchange restrictions, the elimination or reduction of export taxes on certain products (although these restrictions were reinstated in September 2018), the adjustment of gas and electricity prices, tax reform and IMF financing, among others. Argentina’s economy continues to face challenges. Inflation remains a challenge for Argentina given its persistent nature in recent years and also considering its high levels during 2018. The Argentine Government has announced its intention to reduce the primary fiscal deficit as a percentage of GDP over time and reduce the Government’s reliance on Central Bank financing. If the measures adopted by the Macri administration are not able to resolve the structural inflationary disruptions of Argentina, the current inflationary levels could subsist and have a negative impact on the economic and financial conditions of Argentina, and as such affect our operations and financial situation.

On May 8, 2018, President Macri announced that the Argentine government would begin negotiations with the IMF with the goal of acquiring a stand-by line of credit that would grant Argentina access to IMF financing. On June 8, 2018, the key points of the agreement were made public, which consist of a stand-by loan for U.S.$ 50 billion, subject to strict adjustments, mainly due to fiscal and political concerns, to which the national government will be subject for the upcoming years. On June 22, 2018 the IMF made an initial disbursement of U.S.$ 15.0 billion. In addition, on September 26, 2018, Argentina published a new agreement with the IMF. This new agreement supported the three-year stand-by agreement, approved on June 20, 2018 and includes an increase in available IMF funds of U.S.$ 19.0 billion through the end of 2019. It also raises the maximum loan amount available, to U.S.$ 57.1 billion through 2021. The funds available under the program will no longer be treated as preventive reserves, as the Argentine government has indicated that they intend to use IMF financing as budget support. The IMF-supported economic plan aims to strengthen the Argentine economy by focusing on four key pillars: (a) restore market confidence; (b) protect society’s most vulnerable sectors; (c) strengthen the credibility of the Central Bank’s inflation targeting framework; and (d) progressively lessen the strains on the balance of payments. There are no guarantees on the impact that the IMF loan will have on the Argentine economy or on the assets, economic and financial situation of Argentine companies.

Some of the commitments assumed by the National Government, as counterpart of the IMF loan consist of: reduction of the primary fiscal deficit, reaching a surplus in 2021, staggered reduction of inflation until 2021, greater power of the BCRA to establish inflation targets with an anticipation of three years and a reduction of the stock of titles of the BCRA proportionate to a level of capital that guarantees its financial autonomy, among others. The agreement includes a “social clause” according to which, in case the social situation worsens, the National Government can deviate from the objectives to reduce the fiscal deficit and increase social spending for the protection of the most vulnerable sectors.

On October 26, 2018, IMF approved the extension of the stand-by agreement in an amount of approximately U.S.$ 5.6 billion. The IMF approved the first review of Argentina’s performance under the new stand-by agreement and authorized a new transfer of approximately U.S.$ 5.7 billion. In turn, a new disbursement schedule was established and the amounts to be disbursed for 2018 and 2019 were expanded. Under this new schedule, the expected disbursements through the end of 2018 were raised from U.S.$ 6 billion to U.S.$ 13.4 billion. On December 19, 2018, the IMF approved a new disbursement of U.S.$ 7.6 billion, which together with the previous two disbursements reached a total amount of U.S.$.

 

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28.3 billion for the year 2018. In April 2019, Executive Board of the IMF will plan the following disbursement. We cannot predict exactly what measures will be adopted to comply with the agreements concluded with the IMF or their consequences on the Argentine economy, in general and if this could generate an adverse change in our financial condition and result of our operations.

On September 2018, the Central Bank established a new monetary policy with the aim of reducing the inflation rate. The Central Bank committed not to increase the monetary base until June 2019 and defined the ranges for an intervention zone and a non-intervention zone applicable to the exchange rate through the end of 2018. On October 2018, the lower limit of the non-intervention zone was established at an exchange rate of 34 pesos per dollar and the higher limit was set at 44 pesos per dollar, with a daily adjustment of 3% per month through the end of 2018. If the exchange rate rises above the maximum or falls below the minimum values of the area of intervention, the BCRA will purchase or sell foreign currency in an amount of up to U.S.$ 50 to U.S.$ 150 million per day, respectively. Within the non-intervention zone, the exchange rate fluctuates freely. During the last quarter of 2018, the exchange rate has remained within the non-intervention zone, although approaching the lower limit.

On December 5, 2018, BCRA established that the limits of the non-intervention zone will be updated daily at a monthly rate of 2% between January 1 and March 31, 2019. On March 14, 2019, BCRA announced that the new limits of the non-intervention zone for the second quarter of 2019 will be updated daily at a monthly rate of 1.75%. Likewise, this new monetary policy scheme is consistent with the goals of the Ministry of Finance of achieving a primary fiscal balance in 2019, and a surplus in 2020. For its part, BCRA will not carry out further transfers to the Treasury, thus eliminating this source of monetary issuance and reinforcing the BCRA’s commitment to a decreasing inflation over time. During January and February 2019, inflation remained at high levels, where the CPI increased by 2.9% and 3.8%, respectively, on a month-to-month basis. In addition, as of March 28, 2019, the peso was valued at Ps. 43.59 per U.S.$1.00, an increase of approximately 15.3% compared to December 31, 2018

If, despite the measures adopted by the Macri administration, these measures fail to address Argentina’s structural inflationary imbalances, the current levels of inflation may continue or increase and have an adverse effect on Argentina’s economy and, indirectly, on our business, financial condition and results of operations. Inflation can also lead to an increase in Argentina’s debt and have an adverse effect on Argentina’s ability to service its debt, mainly in the medium and long term when most inflation-indexed debt matures. In addition, weaker fiscal results could have a material adverse effect on the Government’s ability to access long term financing, which, in turn, could adversely Argentina’s economy and financial condition. Furthermore, considering the Government’s macroeconomic program, the Argentine Republic may not be able or willing to access international or domestic capital markets, and Argentina’s ability to service its outstanding public debt could be adversely affected, and consequently adversely affect Argentina’s economic and our financial health and results of operations. See “Item 5. Operating and Financial Review and Prospects—Factors Affecting Our Operations—Macroeconomic conditions.”

Argentina’s economy is also vulnerable to adverse developments affecting its principal trading partners. A 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, consequently, may adversely affect our financial health 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 health and results of operations.

On the other hand, a substantial increase in the value of the Peso against the U.S. dollar would adversely affect Argentina’s economic competitiveness. A significant real appreciation of the Peso would adversely affect exports and increase the trade deficit, which could have a negative effect on GDP growth and employment, as well as reduce the Argentine public sector’s revenues by reducing tax collection in real terms, given its current heavy reliance on taxes on exports.

Additionally, as a consequence of the emergency measures which the Argentine government adopted during or after the 2001-2002 Argentine economic crisis, foreign shareholders of companies with operations in Argentina began arbitration proceedings against the Argentine government before the International Centre for Settlement of Investment Disputes (“ICSID”) pursuant to the arbitration regulations of the United Nations Commission on International Trade Law (“UNCITRAL”). Outstanding claims against the Argentine government before ICSID under UNCITRAL regulations may entail new awards against the Argentine government, which in turn could have a substantially adverse effect on the Argentine government’s ability to implement reforms and to foster economic growth. We cannot assure you that in the future the Argentine government will not breach its obligations. If the Argentine government were to default on its debt payment obligations, this would probably result in an impairment of economic activity, an increase in interest rates, additional pressure on the foreign exchange market and an increase in inflation rates, which in turn could adversely affect our operations and financial position. Likewise, if Argentina’s access to international private financing or financing from multilateral organizations was

 

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restricted, or the inflows of foreign direct investments was limited, it is possible that Argentina will be unable to comply with its obligations and financing from multilateral financial entities may be limited or become unavailable. Additionally, a limitation on Argentina’s ability to obtain financing in international markets may have, in the future, an adverse effect on our ability to access international credit markets at standard market rates in order to finance our operations.

The result of the next presidential and provincial elections that will take place in 2019 could generate uncertainty in the Argentine economy and, consequently, in our businesses and the results of our operations.

Argentina’s national election for president and vice-president will take place in October 2019, and other relevant local and federal elections will also take place in 2019. The impact that the electoral process and its results could have on the policies and the economy of Argentina is uncertain. Additionally, it is not possible to predict the measures that may be adopted by the Macri administration or by any potential new administration at the national or provincial level, which could have a substantially adverse effect on the economy or the ability of Argentina to comply with its obligations that could affect our financial condition and results of operations. We cannot guarantee that current programs and policies that apply to the oil and gas sector will continue in place in the future. See “Risks relating to Our Business—Limitations on local pricing in Argentina may adversely affect our results of operations” and “Risks relating to Our Business—We are exposed to the effects of fluctuations in the prices of oil, gas and refined products.”

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

According to an MSCI (Morgan Stanley Capital International) release, Argentina is considered a “border market” and from May 2019 will be considered an “emerging market”. The 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 and capital 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 the past, we and the oil and gas industry generally experienced an increase in certain costs that exceeded the general trend of inflation.

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

 

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Failure to adequately address actual and perceived risks of institutional deterioration and corruption may adversely affect Argentina’s economy and financial condition.

A lack of a solid and transparent institutional framework for contracts with the Argentine government and its agencies and corruption allegations have affected and continue to affect Argentina. Argentina ranked 85 of 180 in the Transparency International’s 2018 Corruption Perceptions Index and 117 of 190 in the World Bank’s Doing Business 2018 report.

As of the date of this annual report, there are various ongoing investigations into allegations of money laundering and corruption being conducted by the Office of the Argentine Federal Prosecutor, including the largest such investigation, known as Los Cuadernos de las Coimas (the “Notebooks Investigation”) which have negatively impacted the Argentine economy and political environment. Depending on how long it takes to close said investigations and their results, companies involved in the investigations may be subject to, among other consequences, a decrease in their credit ratings, claims filed by their investors, and may further experience restrictions in their access to financing through the capital markets, together with a decrease in their income. Additionally, as the criminal cases against the companies involved in the investigations move forward, said companies may be restricted from rendering services or may face new restrictions, due to their customers’ internal standards. These adverse effects could restrict these companies’ ability to conduct their operating activities and to meet their financial obligations. As a consequence of the above, the number of suppliers available for our operations may be reduced and, as such, have an adverse effect on our commercial activities and results of operations.

Recognizing that the failure to address these issues could increase the risk of political instability, distort decision-making processes and adversely affect Argentina’s international reputation and ability to attract foreign investment, the Argentine Government has announced several measures aimed at strengthening Argentina’s institutions and reducing corruption. These measures include the reduction of criminal sentences in exchange for cooperation with the government in corruption investigations, increased access to public information, the seizing of assets from corrupt officials, increasing the powers of the Anticorruption Office (Oficina Anticorrupción) submitting a project for a new public ethic law, among others. The government’s ability to implement these initiatives is uncertain as it would be subject to independent review by the judicial branch, as well as legislative support from opposition parties.

We cannot give any assurance that the implementation of these measures by the Argentine government will be successful in stopping institutional deterioration and corruption.

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, including those relating to a potential trade war between China and the United States. Although economic conditions vary from country to country, investors’ reactions to events occurring in one country sometimes demonstrate a “contagion” effect in which an entire region or class of investment is disfavored by international investors.

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, indirectly, our business, financial condition and results of operations, and the market value of our ADSs.

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

In the past, the Argentine government established export taxes on certain hydrocarbon products by Law No. 25,561 of Public Emergency, for a period of five years. That period was extended for five more years by Law No. 26,732. The second extension expired on January 7, 2017 and was not extended. As a result, export duties on hydrocarbon products ceased to apply.

However, on September 4, 2018, Decree No. 793/2018 was published which establishes an export duty of 12% on the export for consumption of all merchandise included in tariff positions of the Common Mercosur Nomenclature through December 31, 2020. This export duty may not exceed 4 pesos per U.S. dollar of the taxable value or the official FOB price, as applicable. For merchandise which does not constitute primary sector products, the duty may not exceed 3 pesos per U.S. dollar of the taxable value or the official FOB price, as applicable. See “Item 4. Information on the Company—Legal and Regulatory Framework and Relationship with the Argentine Government—Market Regulation.”

We cannot assure you that taxes and import/export regulations of this nature will not be modified in the future or that other new taxes or import/export regulations will not be imposed.

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 (See “Risks relating to Our Business —Limitations on local pricing in Argentina may adversely affect our 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 value of Argentine Peso decreased approximately 40% against the U.S. dollar. During 2018, the value of the Argentine Peso reached its minimum value on September 2018 when the value of the Argentine Peso fell to 40.90 per U.S.$1.00, a decrease of approximately 118%

 

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against the U.S. dollar compared to December 31, 2017. As of December 31, 2018, the value of the Argentine Peso amounted to Ps. 37.81 per U.S.$1.00 which represented a year-over-year depreciation of approximately 101%. As of March 28, 2019, the peso was valued at Ps. 43.59 per U.S.$1.00, an increase of approximately 15% compared to December 31, 2018. See “Item 5. Operating and Financial Review and Prospects—Factors Affecting Our Operations—Macroeconomic conditions” for additional information. The main effects of the devaluation of the Argentine peso on our net profit are related to (i) deferred income tax related mainly to fixed assets, which we expect would have a negative effect; (ii) current income tax; (iii) increased depreciation and amortization resulting from the remeasurement in pesos of our fixed and intangible assets; (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 and (v) higher revenues because domestic prices in Argentina for our main products are principally based on international prices quoted in U.S. dollars (See “Risks relating to Our Business—We are exposed to the effects of fluctuations in the prices of oil, gas and refined products.” and “Item 5. Operating and Financial Review and Prospects—Factors Affecting Our Operations—Macroeconomic conditions”). In addition, regarding our financial position the majority of our debt is denominated in currencies other than the peso; consequently, a devaluation of the peso against such currencies will increase the amount of pesos we need to cope with in the terms of loans.

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 could 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.

Under our financing arrangements, 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, 2018, approximately 18% of our total debt is sensitive to changes in interest rates, mainly those prevailing in the domestic market. 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 cover our 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 peso/U.S. dollar exchange rate that could result in a significant increase in peso terms in the amount of the interest and principal payments in respect of such debt obligations.

We could be 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.

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. Additionally, through BCRA Communication “A” 6244, the Central Bank derogated the regulations relating to restrictions on exchange rate transactions, settlement of foreign exchange transactions, and the provisions of Decree No. 616/05, except for those regulations relating to information regimes, surveys or similar informational matters relating to foreign exchange transactions. Following these changes, the Argentine 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 December 31, 2018, the Argentine Peso fell to Ps. 37.81 per U.S.$ 1.00 which represented a year-over-year depreciation of approximately 101%. As of March [    ], 2019, the peso fell to Ps. [    ] per U.S.$ 1.00, an increase of approximately [    ]% compared to December 31, 2018. See “Item 4. Information on the Company—Legal and Regulatory Framework and Relationship with the Argentine Government—Repatriation of Foreign Currency.”

 

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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.

According to an MSCI (Morgan Stanley Capital International) release, Argentina is considered a “border market” and from May 2019 will be considered an “emerging market”. Economic and market conditions in Argentina and 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, regulatory and policy developments in Argentina that occurred in recent years, 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, including our ability to refinance our debt at maturity, which would negatively affect our investments plans and consequently our financial condition and results of operations, and also have a negatively impact 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.”

Risks Relating to our Business

We are exposed to the effects of fluctuations in the prices of oil, gas and refined products.

Most of our revenue in Argentina is derived from sales of refined products (mainly gasoline and diesel) and, to a lesser extent, natural gas. International prices for oil and oil products are volatile and, since the liberalization of the domestic market at the end of 2017, the prices of our oil products, are strongly influenced by conditions and expectations of world supply and demand, among other factors. Volatility and uncertainty in international prices for crude oil, oil products will most likely continue. With respect of our pricing policy of fuels see “Limitations on local pricing in Argentina may adversely affect our results of operations.”

In terms of investments, we budget capital expenditures related to exploration, development, refining and distribution activities by considering, among other things, current and expected local and international market prices for our hydrocarbon products. In general terms, we had come from domestic prices for crude oil higher than international benchmark prices, however during 2017 we entered into a convergence process towards to international prices that finally occurred in October 2017 when prices were liberalized (see “Item 5. Operating and Financial Review and Prospects—Factors Affecting Our Operations—Macroeconomic conditions”).

Nevertheless, due to various factors (including, but not limited to, the abrupt variation in the exchange rate and the increase in international prices of oil and the consequent difficulties to pass-through the corresponding variation to domestic prices) the intended liberalization could not be fully realized during 2018. Accordingly, we cannot guarantee that the liberalization of oil and fuel prices in the domestic market may finally operate in the future due to various factors such as, domestic demand, macroeconomic and political conditions prevailing in Argentina or potential new regulatory or legal limitations. The international price of crude oil has fluctuated significantly in the past and, if crude oil prices in the domestic market drop for an extended period (or if prices for certain products do not match cost increases), this could negatively affect the economic viability of our drilling projects. These reductions could lead to changes to our development plans, which could lead to the loss of proved developed reserves and proved undeveloped reserves and could also adversely affect our ability to improve our hydrocarbon recovery rates, find new reserves, develop unconventional resources and carry out certain of our other capital expenditure plans. In turn, these changes in conditions could have an adverse effect on our financial condition and results of operations. Additionally, they could also have an impact on our operating assumptions and estimates and, as a result, affect the recovery value of certain assets.

 

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Furthermore, we may be required to further write down the carrying value of our properties if estimated oil and gas prices decline or if we have substantial downward adjustments to our estimated reserves, increases in our operating costs, increases in the discount rate, 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, alongside 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 could affect our business, have an impact on our production and consequently affect our financial condition and results of operations.

Our domestic operations are subject to extensive regulation.

The Argentine 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. (see “Limitations on local pricing in Argentina may adversely affect our results of operations” and “We are exposed to the effects of fluctuations in the prices of oil, gas and refined products”). Although recently the Argentine government has promoted and tried to implement policies seeking to have domestic prices converge with those of international markets, we may 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”;

 

   

new export duties, similar taxes or regulations on imports;

 

   

limitations 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, or at prices lower than those related to import parity or those we may obtain if regulated margins were not being imposed or suggested. See “Item 4. Information on the Company—Legal and Regulatory Framework and Relationship with the Argentine Government—Market Regulation—Natural gas”;

 

   

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” and the “Investment in Natural Gas Production from Non-Conventional Reservoirs Stimulus Program” (“Gas Plan”) (see “A significant percentage of our cash flow from operations is derived from counterparties that are governmental entities”) and cash collection of balances with the Argentine government, which are additionally subject to the risk of potential changes in current regulations that could affect our projections or profitability. See “Item 4. Information on the Company—Legal and Regulatory Framework and Relationship with the Argentine Government—Market Regulation—Natural gas”;

 

   

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.

In past years, 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. 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—Legal and Regulatory Framework and Relationship with the Argentine Government—The Expropriation Law,” and “—Risks Relating to Argentina—The Argentine Republic owns 51% of the shares of the Company.”

 

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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—Legal and Regulatory Framework and Relationship with the Argentine Government.”

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

Due to regulatory, economic and government policy factors, our domestic gasoline, diesel, natural gas and other fuel prices have sometimes differed substantially from 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, including those resulting from the peso devaluation, has been limited from time to time. In general terms, we had come from domestic prices for crude oil higher than international benchmark prices, however during 2017 we entered into a convergence process towards to international prices that finally occurred in October 2017 when prices were liberalized, see “Item 5. Operating and Financial Review and Prospects—Factors Affecting Our Operations—Macroeconomic conditions.”

As a result of the liberalization of the domestic market, our pricing policy for fuels contemplates several factors such as international crude oil prices and, refining spreads, processing and distribution costs, biofuel prices, exchange rate, local demand and supply, competition, inventories, withholding tax on exports, local taxation, and domestic margins for our products, among others. Nevertheless, due to various factors (including, but not limited to, the abrupt variation in the exchange rate and the increase in international prices of oil and the consequent difficulties to pass-through the corresponding variation to domestic prices) the intended liberalization could not be fully realized during 2018. Accordingly, we cannot guarantee that the liberalization of oil and fuel prices in the domestic market may finally operate in the future due to various factors such as, domestic demand, macroeconomic and political conditions prevailing in Argentina, the interests of our controlling shareholder, or potential new regulatory or legal limitations (see “Item 5. Operating and Financial Review and Prospects—Factors Affecting Our Operations—Macroeconomic conditions”).

On the other hand, Argentina has faced and continues to face high inflationary pressures, which the Argentine Government continues to approach through different measures. The Government has the objective of reducing inflation, in line with the agreement with IMF and pursuant to the new policies put in place by the BCRA. Consequently, and taking into account the impact of the increase in the price of fuels in the aforementioned inflation, we cannot guarantee that we will be able to increase our fuel prices to compensate for the general increases in costs or import prices. (See “Our business is largely dependent upon economic conditions in Argentina.”)

Regarding natural gas markets, 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—Legal and Regulatory Framework and Relationship with the Argentine Government—Market Regulation—Natural gas” and “MINEM Resolution No. 46/2017”) are subject to government regulations and could be negatively affected, principally considering the evolution of gas prices for residential consumers which in turn are still subject to subsidies and the evolution of sale price to electric generation plants. 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—Legal and Regulatory Framework and Relationship with the Argentine Government—Market Regulation.”

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 we are the primary oil and gas company in Argentina, our portfolio of clients and suppliers includes both private sector and governmental entities. All material transactions and balances with related parties as of December 31, 2018 are set forth in Note 31 to the Audited Consolidated Financial Statements, including, among others, accounts receivables with SGE (related to the Natural Gas Stimulus Programs), Ministry of Transport (related to compensation for providing gas oil to public transport at a differential price) and Aerolineas Argentinas (related to the provision of jet fuel).

 

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As of December 31, 2018, the accounts receivable balance corresponding to the Natural Gas Additional Injection Stimulus Program reflects twelve months of accrued, unpaid payments for year 2017, representing Ps. 27.0 billion. As of the date of this annual report, we have not received additional payments related to amounts accrued and unpaid as of December 31, 2018 under such program. However, on February 28, 2019, the SGE notified YPF the amount of the compensation owed to it, estimated in compliance with Resolution No. 97/2018, which amounted to U.S.$ 758 million. See “Item 4. Information on the Company—Legal and Regulatory Framework and Relationship with the Argentine Government— MINEM Resolution No. 97/2018.”

As of December 31, 2018, the accounts receivable corresponding to the Stimulus Program for Investments in Developments of Natural Gas Production from Unconventional Reservoirs reflects twelve months of accrued, unpaid payments, representing Ps. 1.2 billion. As of the date of this annual report, we have received payments of Ps. 0.3 billion related to amounts accrued and unpaid as of December 31, 2018 under such program.

Additionally, because of the variation in the exchange rate, natural gas producers and distributors began a process of renegotiation of the specific agreements signed pursuant to the Terms and Conditions for the Provision of Natural Gas to Gas Distributors through Networks (the “Terms and Conditions”) (see “Item 4. Information on the Company—Exploration and Production—Delivery commitments—Natural gas supply contracts)”, where prices were denominated in dollars. The renegotiation process included two main aspects: i) payments of the debts arising from the differences between the exchange rate paid by the distributors and the exchange rate which had been originally agreed (for the period between April and September 2018), and ii) the applicable price for gas during the period between October and December 2018. On November 16, 2018, through Decree No. 1,053/18 the Argentine Government assumed on an exceptional basis, the payment of the daily differences which accrued monthly between the price of gas purchased by the distributors and the valid tariffs during the period between April 1, 2018, and March 31, 2019, exclusively arising from exchange rate variations and corresponding to the natural gas volumes delivered in that same period. The conditions are as follows:

 

   

30 monthly consecutive installments starting on October 1, 2019, which will be determined by using the BNA effective interest rate for 30-day deposits in Argentine currency (“electronic board”).

 

   

The installments will be collected by distributors, who will immediately pass it through to producers.

 

   

Distributors and producers must adhere to the system and expressly waive any action or complaint.

As of the date of this annual report, the complementary regulations for the application of the foregoing conditions to distributors and producers are pending issuance by the ENARGAS. See additionally “Item 4. Information on the Company—Legal and Regulatory Framework and Relationship with the Argentine Government— Tariff renegotiation.”

If certain governmental counterparties were (i) not able to pay or redeem such accrued amounts in cash or cash equivalents, or (ii) only able to make such payments or redemptions through delivery of financial instruments which: (a) may delay collection of working capital payments in excess of our estimates, (b) are subject to change in their listing value, or (c) are denominated a currency other than the origin of the credit, our financial condition and results of operations could be adversely affected.

We are subject to direct and indirect import and 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 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.

In the past, 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, 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.”

 

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Crude oil exports, as well as the export of most of our hydrocarbon products, currently required prior authorization from the SGE pursuant to the regime established under S.E. Resolution No. 241-E/17, 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.

In addition, on March 21, 2017, Decree No. 192/2017 was published in the Official Gazette of the Republic of Argentina (the “Official Gazette”), which created the “Oil and its Byproducts Import Operations Registry” (the “Registry”) and set forth that the MINEM (through the Secretariat of Hydrocarbon Resources) would be responsible controlling the Registry. The Registry involved import operations of: (i) crude oil and (ii) certain other specific byproducts listed in section 2 of the decree. By means of this regulation, any company that wished to perform such import operations was obligated to register such operation in the Registry and to obtain authorization from MINEM before the import took place. According to this decree, MINEM had to set the methodology applicable to issue import authorizations, which will be based in the following criteria: (a) lack of crude oil with the same characteristics offered in the domestic market; (b) lack of additional treatment capacity in domestic refineries with domestic crude oil; and (c) lack of byproducts listed in section 2 of the decree offered in the domestic market. This regime exempted any import by CAMMESA in order to supply power plants with the main purpose of technical supply to the “Inter-connection Argentinean System” (Sistema Argentino de Interconexión or “SADI”). On November 24, 2017, Decree No. 962/2017 was published in the Official Gazette amending Decree No. 192/2017 by providing that the Registry would be in effect until December 31, 2017. Decree No. 962/2017 provided that the need for the Registry was temporary and therefore, since December 31, 2017, the import operations related to crude oil, gasoline, and diesel oil included in Decree No. 192/2017 are no longer subject to registration.

On August 22, 2018, the former Ministry of Energy and Mining issued Resolution No.104/2018, later modified by Resolution No. 9/2018 of the SGE, which established a new procedure to obtain authorizations to export natural gas. For more information, see “— Legal and Regulatory Framework and Relationship with the Argentine Government—“Natural gas export administration and domestic supply priorities.”

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

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 decreased in 2018 compared to 2017 by 4.5% and our reserves replacement ratio (increases in reserves in the year, net divided by the production of the year) was 178% in 2018, compared to 9% in 2017.

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 field 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 or extension of most of our concessions, allowing us to develop certain strategic projects related to water-flooding, enhanced oil recovery and unconventional resources, which represent an important opportunity not only for us 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 economies of scale, de risk undeveloped acreage 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. See “—Our business plan includes future drilling activities for unconventional oil and gas reserves, such as shale oil and gas extraction, and if we are unable to successfully acquire and use the necessary new technologies and other support as well as obtain financing and venture partners, our business may be adversely affected.”

Our oil and natural gas reserves are estimates.

Our oil and gas proved reserves are estimated using geological and engineering data to determine with reasonable certainty whether the crude oil or natural gas in known reservoirs is recoverable under existing economic and operating conditions. The accuracy of proved reserve estimates depends on a number of factors, assumptions and variables, some of which are beyond our control. Factors susceptible

 

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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, 2018, 2017 and 2016 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, we had come from domestic prices for crude oil higher than international benchmark prices, however during 2017 we entered into a convergence process towards to international prices that finally occurred in October 2017 when prices were liberalized. See “Item 5. Operating and Financial Review and Prospects—Factors Affecting Our Operations—Macroeconomic conditions.” Nevertheless, due to various factors (including, but not limited to, the abrupt variation in the exchange rate and the increase in international prices of oil and the consequent difficulties to pass-through the corresponding variation to domestic prices) the intended liberalization could not be fully realized during 2018. Accordingly, we cannot guarantee that the liberalization of oil and fuel prices in the domestic market may finally operate in the future due to various factors such as, domestic demand, macroeconomic and political conditions prevailing in Argentina or potential new regulatory or legal limitations. As a result, for calculations of our net proved reserves as of December 31, 2018, the Company considered the realized prices for crude oil in the domestic market taking into account the effect of export taxes as in effect as of each of the corresponding years (until 2020, in accordance with Decree No. 793/2018). For the years beyond the mentioned periods, the Company considered the unweighted average price of the first-day-of-the-month for each month within the twelve-month period ended December 31, 2018, which refers to the Brent prices adjusted by each different quality produced by the Company. In connection with natural gas prices used for estimation of reserves, the Company considered the realized prices in the domestic market according to the SEC and FASB’s ASC 932 rules, but also taking into account the effect of certain market regulations which were put in place mainly during the second half of 2018.

The international price of crude oil has fluctuated significantly in the past. If these prices decrease significantly in the future or if domestic prices are set lower than in internationals markets, 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. Assuming all other factors remain constant, if commodity reference prices for crude oil used in our year-end reserve estimates were decreased by 10%, our total proved reserves as of December 31, 2018 would decrease by approximately 2%. On the other hand, assuming all other factors remain constant, if market prices for natural gas used in our year-end reserve estimates were decreased by 10%, our total proved reserves as of December 31, 2018 would decrease by approximately 1%. Furthermore, assuming all other factors remain constant, if costs used in our year-end reserve estimates were increased by 10% for crude oil and natural gas, our total proved reserves as of December 31, 2018 would decrease by approximately 2%. However, if we combine the 3 above mentioned effects, our total proved reserves as of December 31, 2018 would decrease by approximately 7%. 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.

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, which could reduce earnings and shareholders’ equity. See “—We are exposed to the effects of fluctuations in the prices of oil, gas and refined products.”

Oil and gas activities are subject to significant economic, environmental and operational risks and to seasonal fluctuation of demand.

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

 

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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 or development objectives. If these risks materialize, we may suffer substantial operational losses and disruptions to our operations and harm to our reputation. Additionally, if any operational incident occurs that affects local communities and ethnic communities in nearby areas, we will need to incur in additional costs and expenses in order to return affected areas to normality and to compensate for any damages we may cause. These additional costs may have a negative impact on the profitability of the projects we may decide to undertake. 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.

Furthermore, historically our results have been subject to seasonal fluctuations of demand during the year, in the case of natural gas, particularly as a result of increased demand during the colder winter months. During 2018, mainly due to the increase in the natural gas supply in the domestic market, and also taking into account that GDP decline had a negative impact in demand, forced us to reduce natural gas output thorough the temporary stop of certain wells gas production, as well as the reinjection of the hydrocarbon. Based on this new scenario, and new regulations and agreements, domestic gas prices were negatively impacted. See “Item 5. Operating and Financial Review and Prospects—Factors Affecting Our Operations—Seasonality” and “Item 4. Information on the Company—Legal and Regulatory Framework and Relationship with the Argentine Government—Market Regulation—Natural Gas—Tariffs.”

We could be subject to fluctuations in non-winter season in our sales volumes and consequently our level of natural gas production could be negatively affected potentially resulting in market prices lower than expected, thus affecting our result of operations and financial conditions.

Our acquisition of exploratory or productive 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 or prospects. As a result, the conditions under which we would be access new exploratory or productive areas could be adversely affected.

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, the drilling and exploitation of 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 to which we are subject.

As discussed under “—Oil and gas activities are subject to significant economic, environmental and operational risks and to seasonal fluctuation of demand” 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.

 

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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.

Our extension of concessions includes, among others, certain level of investment and activity commitment in certain periods. Non-compliance with the obligations and standards set out under the Hydrocarbons Law or agreements with the competent authorities, as applicable, 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 we would submit in the future for the development of the areas as of the date of requesting the extension periods for our relevant areas, 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.

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

Operations in the oil and gas industry in which we participate, including those related to our mining and use of sand for purposes of our oil and gas operations, 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. 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. For instance, on October 2018, we had a major spill in the area of Bandurria Sur caused by a blowout (decontrol of well), see “Item 4. Upstream overview—Exploration & Production Activity in Argentina—Unconventional Region—Bandurria Sur”. In addition, the Company’s sand mining operations and hydraulic stimulation may result in silica-related health issues and litigation that could have a material adverse effect on the Company in the future. See “Item 8. Financial Information—Legal Proceedings” and “Item 4. Information on the Company—Legal and Regulatory Framework and Relationship with the Argentine Government—Argentine 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. Argentina recently issued new rules which began to phase-in more stringent regulations to lower the amount of sulfur contained in diesel and gasoline fuels that will result in an increase in our investments and relative costs for such production in 2019 and following years, thus potentially affecting our results of operations depending on the future prices of fuels. Furthermore, if additional requirements were 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.

Furthermore, water is an essential component of both the drilling and hydraulic fracturing processes. Consequently, the Company regularly disposes of the fluids produced from oil and gas production operations directly or through the use of third party vendors. Increased regulation or limitations to the use of water for our operations, or increased scrutiny or limitations on the injection of produced water through injection wells (which could also result in increased litigation), could adversely affect our operation and our financial condition.

 

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We may be responsible for significant costs and liabilities depending on the outcome of the reorganization proceedings involving our YPF Holdings subsidiaries and the alter ego claims filed by the Liquidating Trust.

As discussed in Note 27 to the Audited Consolidated Financial Statements, on June 17, 2016, Maxus Energy Corporation, Tierra Solutions Inc., Maxus International Energy Company, Maxus (US) Exploration Company and Gateway Coal Company (collectively, the “Maxus Entities”), subsidiaries of YPF Holdings, Inc., filed for reorganization proceedings in Wilmington, Delaware under Chapter 11 of the U.S. Bankruptcy Code. In conjunction with those proceedings, the Maxus Entities entered into an agreement with YPF along with its subsidiaries YPF Holdings Inc., CLH Holdings Inc., YPF International S.A. and YPF Services USA Corp (collectively, the “YPF Entities”) to settle any and all claims held by Maxus against the YPF Entities, including any alter ego claims, all of which claims the YPF Entities believe are without merit, and to release the YPF entities of any and all claims held by the Maxus Entities (the “Agreement”).

The Agreement provided for a payment of U.S.$ 130 million to the Maxus Entities (“Settlement Payment”) and for the provision of a U.S.$63.1 million debtor-in-possession loan (“DIP Loan”) by YPF Holdings Inc.

However, on March 28, 2017 the Maxus Entities and the Creditors’ Committee submitted an alternative restructuring plan (the “Alternative Plan”) which does not include the Agreement with the YPF Entities. Under the Alternative Plan, a Liquidating Trust may submit alter ego claims and any other claim belonging to the insolvent’s estate against the Company and the YPF Entities. The liquidating trust would be financed by Occidental Chemical Corporation in its capacity as creditor of the Maxus Entities. As YPF did not approve such Alternative Plan and the Alternative Plan did not contemplate the implementation of the originally submitted Agreements, on April 10, 2017 YPF Holdings, Inc. sent a note informing that this situation constituted an event of default under the loan granted under the Agreement with YPF and the YPF Entities.

Together with the approval of the financing offered by Occidental under the Alternative Plan, the Judge ordered the repayment of the outstanding amounts (approximately U.S.$ 12.2 million) under the terms of the DIP Loan, which were subsequently received.

On May 22, 2017, the Bankruptcy Court of the District of Delaware issued an order confirming the Alternative Plan submitted by the Creditors’ Committee and the Maxus Entities. The effective date of the Alternative Plan was July 14, 2017, as the conditions set forth in Article XII.B of the Alternative Plan were met. On July 14, 2017, the Maxus Energy Corporation Liquidating Trust (the “Liquidating Trust”) was created.

On June 14, 2018, the Liquidating Trust filed a lawsuit against the Company, YPF Holdings, CLH Holdings, Inc., YPF International and other companies not-related to YPF, claiming alleged damages in an amount up to US$ 14 billion, principally in connection with alleged claims purportedly related to corporate restructuring transactions the Company engaged in several years ago (the “Claim”). The lawsuit was filed before the United States Bankruptcy Court for the District of Delaware.

On October 19, 2018, the Company, together with the other companies of the Group that are part of the Claim, filed a motion requesting dismissal of the Claim (“Motion to Dismiss”).

On November 21, 2018, the Liquidating Trust filed its objection to the Motion to Dismiss filed by the Company together with the other companies of the Group that are part of the Claim, and to the one filed by the companies not related to YPF and which are part of the Claim.

On December 10, 2018, the Company, together with the other companies of the Group that are part of the Claim, exercised their right of reply regarding the presentation made by the Liquidating Trust

On January 22, 2019, the hearing regarding the Motion to Dismiss was held in the Bankruptcy Court.

On February 15, 2019, the Bankruptcy Court ordered the dismissal of the Motions to Dismiss filed by the Company, together with the other Group companies and the other defendant companies not related to YPF.

On March 1, 2019, the Company, together with the other companies of the Group that are part of the Claim, filed an appeal to the resolution dated February 15, 2019.

 

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As described in Note 27 to the Audited Consolidated Financial Statements, according to the preliminary status of the lawsuit, the complexity of the demand and the evidence that has to be submitted by both parties, the Company will continuously reevaluate the evolution of the described circumstances as they happen and its impact on the results and the financial condition of the Company.

Depending on the final outcome of these matters, including the alter ego claims, our financial condition and results of operation could be materially and adversely affected. See “Item 8. Financial Information—Legal Proceedings.”

We face risks 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 be materially 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, 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 during certain days.

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. The new oil treatment plant was put into production in December 2016.

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, especially in the context of activity reduction. 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 “—We are exposed to the effects of fluctuations in the prices of oil, gas and refined products.” and “Item 5. Operating and Financial Review and Prospects—Factors Affecting Our Operations—Macroeconomic conditions.”

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

On April 29, 2016, our shareholders approved a dividend of Ps. 889 million (Ps. 2.26 per share or ADS), which was paid during July 2016. On April 28, 2017, our shareholders approved a dividend of Ps. 716 million (Ps.1.82 per share or ADS), which was paid during December 2017. On April 27, 2018, our shareholders approved a dividend of Ps. 1,200 million (Ps.3.05 per share or ADS), which was authorized and paid during December 2018. On March 7, 2019, our Board of Directors proposed the creation of a reserve for dividend of Ps. 4,800 million. Our

 

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next shareholder’s meeting, to be held on April 26, 2019, will consider this proposal. Notwithstanding the foregoing, our ability to pay, maintain or increase dividends is based on many factors, including our net income, capital expenditures required under our investment plans, future debt service payments, working capital needs, legal or contractual restrictions, and general economic and financial conditions. A change in any of these factors 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.

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 it to appoint the majority of members of our board of directors at the General Shareholder’s meeting. See “—The Argentine Republic owns 51% of the shares of the Company” 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.

We could be subject to information technology system failures, network disruptions, and breaches in data security which could negatively affect our business, financial position, results of operations, and cash flows.

As dependence on digital technologies is expanding, cyber incidents, including deliberate attacks or unintentional events have been increasing. Computers and telecommunication systems are used to conduct our exploration, development and production activities and have become an integral part of our business. We use these systems to analyze and store financial and operating data and to communicate internally and with outside business partners. Cyber-attacks could compromise our computer and telecommunications systems and result in disruptions to our business operations or the loss of our data. In addition, computers control oil and gas production, processing equipment, and distribution systems and are necessary to deliver our production to market.

Although we are continuously increasing our security policy to the industrial systems, reinforcing the defenses in case of denial of service and increasing the monitoring of suspicious activities, our technologies, systems, networks, and those of our business partners have been and may continue to be the target of cyber-attacks or information security breaches, which could lead to disruptions in critical systems (for example, SCADAs, DCS Systems), 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.

As cybersecurity threats continue to evolve, we may be required to expend additional resources to continue to modify or enhance our protective measures or to investigate or remediate any cybersecurity or information technology infrastructure vulnerabilities. During the second half of 2018, in accordance with international standards, we have organized and implemented a Cyber Risk Management Center and a Computer Security Incident Response Team to monitor and mitigate cyber security threats.

We have also updated our internal cyber incident response procedures and processes, as well as performed on the last quarter of 2018 a major cyber-tabletop exercise that was part of the cyber security awareness program.

The Company’s reputation is an important corporate asset. An operating incident, significant cybersecurity disruption or other similar adverse event, may have a negative impact on our reputation, which in turn could make it more difficult for us to compete successfully for new opportunities or could reduce consumer demand for the company’s branded products.

During 2018, we have been the target of many attempted attacks and were exposed to malware infections like other companies in the industry, which did not result in a significant loss or a negative impact in our operations. There can be no assurance that the Company will not incur such losses in the future. The Company’s risk and exposure to these matters cannot be fully calculated nor mitigated because of, among other things, the evolving nature of these threats.

 

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A cyber-attack involving our information systems and related infrastructure, or those of our business partners, could disrupt our business and negatively impact our operations in a variety of ways, including but not limited to:

 

   

unauthorized access to seismic data, reserves information, strategic information, or other sensitive or proprietary information could have a negative impact on our ability to compete for oil and gas resources;

 

   

data corruption or operational disruption of production-related infrastructure could result in a loss of production, or accidental discharge;

 

   

disruption of our operations, communications, or processing of transactions or the loss of, or damage to, sensitive information, facilities, infrastructure and systems which are essential to our business and operations which, in turn, could have a material adverse effect on our business, financial position, results of operations, and cash flows;

 

   

a cyber-attack on a service provider could result in supply chain disruptions, which could delay or halt our major development projects;

 

   

a cyber-attack on our accounting or accounts payable systems could expose us to liability to employees and third parties if their sensitive personal information is obtained.

Our derivative risk management activities could result in financial losses.

As of the date of this annual report, the Company, through our subsidiary Metrogas, has entered into derivative financial instruments with quotation in active markets (contracts of future exchange rate in dollars). We could be exposed to adverse variations in the price of the assets underlying the derivative contract, which would in turn affect our results of operations and financial condition. In addition, any failure in the performance of their obligations by our counterparties to any of these agreements could also have a material adverse effect on the Company’s results of operations.

Our actual production could differ materially from our forecasts.

From time to time, we provide forecasts of expected quantities of future oil and gas production and other financial and operating results. These forecasts are based on a number of estimates and assumptions, including that none of the risks associated with our oil and gas operations summarized in this “Item 3. Key Information—Risk Factors” occur. Production forecasts, specifically, are based on assumptions such as expectations of production from existing wells, the level and outcome of future drilling activity, the level of gas demand, and the absence of facility or equipment malfunctions, adverse weather effects, or downturns in commodity prices or significant increases in costs, which could make certain drilling activities or production uneconomical. Should any of these estimates prove inaccurate, or should our development plans change, actual production could be materially and adversely affected.

We have limited control over the day to day activities carried out on properties which we do not operate.

Some of the properties in which we have an interest are operated by other companies and involve third-party working interest owners. As a result, we have limited ability to influence or control the day to day operations of these companies and third-parties, including their compliance with environmental, safety and other regulations, which, in turn, could have a material adverse effect on our business, financial position, results of operations, cash flows and/or our reputation.

We could be affected by violations to anticorruption, anti-bribery, anti-money laundering and other national and international regulations.

We are subject to anticorruption, anti-bribery, anti-money laundering and other national and international regulations. We are required to comply with the regulations of Argentina and various jurisdictions where we conduct operations. Although we have internal policies and procedures designed to ensure compliance with applicable anti-fraud, anti-bribery and anti-corruption laws and sanctions regulations, potential violations of anti-corruption laws could be identified on occasion as part of our compliance and internal control processes. In case such issues arise, we plan to attempt to act promptly to learn relevant facts, conduct appropriate due diligence, and take any appropriate remedial action to address the risk. Given the size of our operations and the complexity of the production chain, there can be no assurance that our internal policies and procedures will be sufficient to prevent or detect all inappropriate practices, fraud or violations of law by our employees, directors, officers, partners, agents and service providers or that such persons will not take actions in violation of our policies and procedures (or otherwise in violation of the relevant anti-corruption laws and sanctions regulations) for which we or they may be ultimately held responsible. Violations of anti-bribery and anti-corruption laws and sanctions regulations could have a material adverse effect on our business, reputation, results of operations and financial condition. In addition, we may be subject to one or more enforcement actions, investigations and proceedings by authorities for alleged infringements of these laws. These proceedings may result in penalties, fines, sanctions or other forms of liability and could have a material adverse effect on our reputation, business, financial condition and results of operations.

 

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If we fail to comply with the covenants set forth in our credit agreements and indentures, or upon the occurrence of a change of control, we may be required to repay our debt.

Under the terms of our credit agreements and indentures, if we fail to comply with the covenants set forth thereunder or if we fail to cure any breach thereof during a specified period of time, we will be in default of our obligations, which in turn would limit our capacity of borrowing. To the extent we default on any of our obligations, we would expect to actively pursue formal waivers from the corresponding counterparties to these agreements, in order to avoid the acceleration of any amounts owed thereunder. However, if the corresponding waivers are not timely obtained, in accordance with the terms of our credit and indentures certain creditors may declare the principal and accrued interest on amounts owed to them as due and immediately payable, resulting in acceleration of other outstanding debt due to cross default provisions, which in turn could have a material adverse effect on our business, financial condition and results of operations.

In addition, upon the occurrence of a change of control, we may be required to make an offer to purchase certain outstanding notes at a price of 101% of their principal amount plus accrued and unpaid interest, and our other debt may be subject to mandatory prepayment. Our source of funds for any such mandatory prepayment will be available cash or other sources, including borrowings, sales of assets or sales of equity. The sources of cash may not be adequate to permit us to immediately prepay our indebtedness upon a change of control, which in turn may result in an event of default under certain agreements governing our indebtedness.

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 “—Risks Relating to Argentina—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. During 2017 the price of our ADSs reached a maximum of U.S.$ 26.16 but, mainly due to the Argentine economic conditions, decreased to a minimum value of U.S.$ 12.31 on December 24, 2018. As of March 28, 2019, our ADSs reached a price of 13.69 U.S.$. See “Item 9. The Offer and Listing.” We cannot assure you that concerns about factors that could affect the market price of our ordinary shares as previously mentioned may have a material adverse effect on the trading values of our securities.

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

Under our by-laws, the approval of the Argentine government, the sole holder of our Class A shares, is required to undertake certain strategic transactions, including a (i) merger; (ii) the transfer to third parties of all the exploitation rights granted to YPF pursuant to the Hydrocarbons Law, applicable regulations thereunder or the Privatization Law- if such transfer would result in the total suspension of the Company’s exploration and production activities-;(iii) the voluntary dissolution of the Company, (iv) the transfer of the legal or fiscal domicile of the Company outside Argentina. This approval would also be necessary in connection with an acquisition that would result in the purchaser holding 15% or more of our capital stock, 20% or more of the outstanding Class D shares, or a majority of our capital stock.

According to our by-laws, the transactions described in (iii) and (iv) above also require the prior approval of the Argentine congress through enactment of a law.

In addition, our by-laws also provide that in order to carry out an acquisition that results in the purchaser holding 15% or more of our capital stock or 20% or more of the outstanding Class D shares, such purchaser would be required to make a public 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 Argentine 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.

 

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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.

We are traded on more than one market and this may result in price variations; in addition, investors may not be able to easily move shares for trading between such markets.

Trading in the ADSs or Class D Shares underlying ADSs in the United States and Argentina, respectively, will use different currencies (U.S. dollars on the New York Stock Exchange (“NYSE”) and Argentine pesos on the Mercado de Valores de Buenos Aires (“S&P MERVAL”), and take place at different times (resulting from different trading platforms, different time zones, different trading days and different public holidays in the United States and Argentina). The trading prices of the Class D Shares underlying ADSs on these two markets may differ due to these and other factors. Any decrease in the price of the Class D Shares underlying ADSs on the S&P MERVAL could cause a decrease in the trading price of the ADSs on the NYSE. Investors could seek to sell or buy the Class D Shares underlying ADSs to take advantage of any price differences between the markets through a practice referred to as “arbitrage.” Any arbitrage activity could create unexpected volatility in both our share prices on one exchange, and the ADSs available for trading on the other exchange. In addition, holders of ADSs will not be immediately able to surrender their ADSs and withdraw the underlying Class D Shares for trading on the other market without effecting necessary procedures with the depositary. This could result in time delays and additional cost for holders of ADSs.

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.

Holders of ADSs may not be able to exercise the preemptive or accretion rights relating to the shares underlying the 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, holders may receive only the net proceeds from the sale of their preemptive rights by the depositary or, if the preemptive rights cannot be sold, they will be allowed to lapse. As a result, U.S. holders of Class D shares or ADSs may suffer dilution of their interest in our company upon future capital increases.

In addition, under the Argentine General Corporations Law, foreign companies that own shares in an Argentine corporation are required to register with the Superintendence 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 ADSs. A holder of ADRs representing the ADSs being held by the depositary 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

 

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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 on how to vote with regards to 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, if no such instructions are received, the depositary shall vote the Class D shares represented by ADSs in accordance with the recommendations of the Board of Directors made to all holders of shares.

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 Argentine pesos. The peso has historically and recently fluctuated significantly against many major world currencies, including the U.S. dollar. A devaluation of the Argentine 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, downstream and gas and power 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 and in power generation through YPF Energía Eléctrica S.A. (“YPF EE”), a company that we jointly control with GE EFS Power Investments B.V. (“GE”), a subsidiary of EFS Global Energy B.V. (both corporations indirectly controlled by GE Energy Financial Services, Inc.) (see “Item 4. Information on the Company—Gas and Power—YPF in Power Generation.”). In 2018, we had consolidated revenues of Ps. 435,820 million and consolidated net profit of Ps. 38,606 million.

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

In January 1999, Repsol YPF acquired 52,914,700 Class A shares (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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Repsol YPF owned approximately 99% of our capital stock from 2000 until 2008, when Petersen Energía (“PEISA”) acquired 15% of our capital stock, from Repsol YPF. 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 “—Legal and 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 Argentine Republic 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 Republic owns 51% of the shares of the Company.” 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 “—Legal and 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 Our Business—We face risk relating to certain legal proceedings”.

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 and YPF GAS S.A.

We are strongly committed to the country’s energy development and seek to lead the transformation of the industry within the context of industry change at an international level.

In order to achieve our vision of being a company that generates sustainable, profitable and accessible energy for our customers, YPF’s strategy is based on the following pillars:

 

   

Extract the maximum value from conventional fields

 

   

Develop and achieve efficient costs in shale operations

 

   

Partner with leading companies worldwide

 

   

Expand our power generation capacity in order to become a major player in the sector

 

   

Maintain a financial management discipline of the corporate portfolio

 

   

Create a new supply chain organization in order to modernize the procurement processes, contracts and associated logistics

 

   

Incorporate technology and innovation in all business segments to improve productivity and service to our customers

 

   

Implement a transformation program that modernizes the company, enhances efficiency and seeks growth initiatives that support our vision

 

   

Reduce the company’s specific CO2 emissions in the upcoming years as part of our commitment to sustainability

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,

 

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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 2018 activity.

Upstream Operations

 

   

As of December 31, 2018, we held interests in 132 oil and gas fields in Argentina. According to the Ministry of Energy and Mining, in 2018 these assets accounted for approximately 46.4% of the country’s total production of crude oil, excluding NGLs, and approximately 37.4% of its total natural gas production, including NGLs.

 

   

We had proved reserves, as estimated as of December 31, 2018, of approximately 638 mmbbl of oil, including condensates and NGLs, and approximately 2,481 bcf of gas, representing aggregate reserves of approximately 1,080 mmboe as of such date, compared to approximately 480 mmbbl of oil, including condensates and NGLs, and approximately 2,520 bcf of gas, representing aggregate reserves of approximately 929 mmboe as of December 31, 2017.

 

   

In 2018, we produced approximately 83 mmbbl of oil (approximately 227 mbbl/d), including condensates, approximately 14 mmbbl of NGLs (approximately 39 mbbl/d), and approximately 542 bcf of gas (approximately 1,484 mmcf/d), representing a total production of approximately 193 mmboe (approximately 530 mboe/d), compared to approximately 83 mmbbl of oil (approximately 228 mbbl/d), including condensates, approximately 19 mmbbl of NGLs (approximately 50 mbbl/d), and approximately 567 bcf of gas (approximately 1,556 mmcf/d), representing a total production of approximately 202 mmboe (approximately 555 mboe/d) in 2017.

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, 2018 consisted of 1,591 YPF-branded service stations, of which we own 113 directly and through our 100%-owned subsidiary Operadora de Estaciones de Servicios S.A. (“OPESSA”), and we estimate we held approximately 35.8% of all gasoline service stations in Argentina.

 

   

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

Gas and Power Operations

 

   

We are the largest producer of natural gas in Argentina with total natural gas sales of 14,486 mmcm in 2018. As of November 2018, our market share was 29.9%, according to ENARGAS.

 

   

We participated in eight power generation plants with an aggregate installed capacity of 1,819 MW with YPF EE, a company that we jointly control with GE EFS Power Investments B.V. (“GE”), a subsidiary of EFS Global Energy B.V. (both corporations indirectly controlled by GE Energy Financial Services, Inc).

 

   

We are the operator of UTE Escobar (a joint venture formed by YPF and IEASA), which operates an LNG Regasification Terminal (“LNG Escobar”). Additionally, the gas liquefaction services agreement was signed with the barge called “Tango FLNG”, which will operate in Bahía Blanca and is expected to start operating in the second quarter of 2019. See “—Gas and Power—Argentine natural gas supplies.” We also distribute natural gas through our subsidiary 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 2018, Metrogas distributed approximately 20.8 mmcm (or 733.4 mmcf) of natural gas per day to 2.4 million customers. See “Item 4—Information on the Company—Gas and Power—Natural Gas Distribution.”

For a chart illustrating our organizational structure, including our principal subsidiaries, please see Note 1 to the Audited Consolidated Financial Statements.

 

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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, 2018.

 

LOGO

 

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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 2017 production, according to the 2018 edition of the BP Statistical Review of World Energy, published in June 2018.

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.

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 using 2004 as the base reference year (as opposed to 1993, which was the base reference year under the prior method of calculating GDP). 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 since 2006 its administration has been irregular and due to that they revised the published data from 2005 to 2015. As a result of this revision, the GDP growth rate for 2013 and 2014 was revised from 2.9% to 2.4% and from 0.5% to a decline rate of 2.5%, respectively. As of the date of this annual report, Argentina’s provisional GDP growth rate for 2016, the provisional GDP growth rate for 2017 and the preliminary GDP growth rate for 2018 published by INDEC were negative 1.8%, positive 2.7% and negative 2.5%, respectively.

Driven by economic expansion and stable domestic prices, energy demand has increased significantly during last years, 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 National Executive Office 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, the Ministry of Energy and Mining established new seasonal reference prices for power and energy in the Wholesale Electricity Market (“MEM”). See “Item 4—Legal and Regulatory Framework and Relationship with the Argentine Government—Market Regulation—Electricity.”

In 2003, Argentina’s net exports of diesel amounted to approximately 1,349 mcm, while in 2018 its net imports of diesel amounted to approximately 2,170 mcm, according to preliminary information provided by the SGE. 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 full capacity.

Demand for diesel in Argentina exceeds domestic production. In addition, prior to the 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 in the past, service stations experience temporary shortages and are required to suspend or curtail diesel sales.

With regard to the analysis of prior periods, until recently, the applicable domestic prices of petroleum products were established for the short term mainly on the basis of negotiations between Producers and Refiners of the country, without keeping a direct or specific reference with respect to the international quotations of such products. That is, the domestic market was decoupled from the international market in terms of prices, which was evidenced in certain periods with movements of prices in meanings (or values) substantially different from those observed in the international market. Notwithstanding the foregoing, the local market started a process to achieve an orderly transition towards international prices.

In January 2017, the Producers and Refiners reached a new agreement (the “Transitional Agreement”) for the aforementioned transition, in which a price path was established for the commercialization of oil in the domestic market, with the objective of achieving parity with international markets during the course of 2017. This took place during the last quarter of 2017, taking into account the internalization costs in the domestic market of the referred products, the expected margins and the demand, among other factors. After the completion of the 2017 Transitional Agreement, according to Argentina’s Ministry of Energy and Mining, the hydrocarbons market in Argentina became a liberalized market, and oil and fuel prices must be set by the free market and, thus, fluctuate. This decision formally ended the transition to international oil price parity. Nevertheless, due to various factors (including, but not limited to, the abrupt variation

 

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in the exchange rate and the increase in international prices of oil and the consequent difficulties to pass-through the corresponding variation to domestic prices) the intended liberalization could not be fully realized during 2018. Accordingly, we cannot guarantee that the liberalization of oil and fuel prices in the domestic market may finally operate in the future due to various factors such as, domestic demand, macroeconomic and political conditions prevailing in Argentina or potential new regulatory or legal limitations.

In connection with the matters set forth above, during the second quarter of 2018, the MINEM and the refining companies entered into a price stability agreement with a compensatory account, whereby refining companies undertook not to make changes in the prices of their products -net of fuel taxes- in force as of the date of the agreement, during the months of May and June. Moreover, at the beginning of June, a supplemental agreement was entered into, which established a Brent referent price for oil purchase transactions between refining and producing companies, and an increase in the final prices of fuel and gasoil as of June 2, 2018, which included the variation of tax on liquid fuels, carbon dioxide tax and the prices of biofuels in force at that date.

However, in view of the volatility and significant change in the variables which gave rise to the price stability agreements, YPF informed the MINEM of its decision to implement, as of 1 July, 2018, the commercial policies applicable to the changes in the applicable variables, both for the determination of its products’ sale prices and for the purchase of crude oil, in a manner consistent with the evolution of the business environment in general and that of customers in particular, in accordance with the regulatory framework and applicable regulations. Consequently, on June 30, 2018, the price stabilization agreements ceased to be in force for YPF.

On December 6, 2018, YPF requested that the SGE set the guidelines to implement the mechanics necessary for the recovery of the margins not reflected in the fuel price for the term during which the price stabilization agreement was in effect. As of the date of this annual report, the Company has not received a response to such request.

See “Item 5. Operating and Financial Review and Prospects—Factors Affecting Our Operations—Macroeconomic conditions,”

Business Organization

As of December 31, 2018 we conducted our business according to the following organization:

 

   

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

 

   

Downstream segment, which consists of our “Refining and Marketing”, “Chemicals” and “Logistic” activities;

 

   

Gas and Power segment, which consists of our “Natural Gas Distribution and Electricity Generation” activity; and

 

   

Central Administration and other segment, which consists of our remaining activities.

For a description related to the activities developed by each business segment see Note 5 to our Audited Consolidated Financial Statements.

Substantially all of our operations, properties and customers are located in Argentina. See “—Upstream Overview—Main properties.” Additionally, we market lubricants and specialties in Brazil and Chile, and carry out exploration activities in Chile and Bolivia.

 

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The following table sets forth revenues and operating profit for each of our business segments for the years ended December 31, 2018, 2017 and 2016:

 

     For the year ended December 31,  
     2018      2017      2016  
     (in millions of pesos)  

Revenues (1)

        

Upstream

        

Revenues from sales

     3,108        739        18,745  

Revenue from intersegment sales (2)

     207,480        115,955        95,398  
  

 

 

    

 

 

    

 

 

 

Total Upstream

     210,588        116,694        114,143  

Gas and Power

        

Revenues from sales

     91,176        56,805        26,514  

Revenue from intersegment sales

     7,862        4,075        3,212  
  

 

 

    

 

 

    

 

 

 

Total Gas and Power

     99,038        60,880        29,726  

Downstream

        

Revenues from sales

     338,042        195,321        162,538  

Revenue from intersegment sales

     1,688        988        925  
  

 

 

    

 

 

    

 

 

 

Total Downstream

     339,730        196,309        163,463  

Central Administration and Others

        

Revenue from sales

     8,363        2,534        2,303  

Revenue from intersegment sales

     13,186        7,133        7,447  
  

 

 

    

 

 

    

 

 

 

Total Central Administration and Others

     21,549        9,667        9,750  
  

 

 

    

 

 

    

 

 

 

Less inter-segment sales and fees

     (235,085      (130,737      (106,982
  

 

 

    

 

 

    

 

 

 

Total Revenues

     435,820        252,813        210,100  
  

 

 

    

 

 

    

 

 

 

Operating profit (Loss)

        

Upstream

     22,483        3,877        (26,845

Gas and Power

     16,786        3,259        2,008  

Downstream

     7,818        15,813        3,093  

Central Administration and Others

     (6,055      (4,400      (1,615

Consolidation adjustments

     2,748        (2,476      (887
  

 

 

    

 

 

    

 

 

 

Total Operating Profit (loss)

     43,780        16,073        (24,246
  

 

 

    

 

 

    

 

 

 

 

(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 21 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 2.b.15 to the Audited Consolidated Financial Statements.

(2)

Intersegment revenues of crude oil to Downstream are recorded at transfer prices that reflect our estimate of Argentine market prices.

Upstream overview

YPF Upstream is focused on actively managing the decline of the conventional fields and delivering profitable growth driven by unconventional projects.

Smoothing the decline rate in conventional fields is based on reservoir management improvement, accelerated implementation of improved oil recovery (IOR) and enhanced oil recovery (EOR) and the deployment of technology to optimize operations in real time while reducing downtime. We plan to continue to de-risk projects based on recent successful results in tertiary recovery.

 

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During recent years, we have been working in mature areas that present profitable opportunities to increase the recovery factor by employing techniques including infill wells, 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 water-flooding in mature reservoirs in the Golfo de San Jorge, Cuyana and Neuquina 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.

Staying the Path of Unconventional Resources

In line with the production growth objective driven by unconventional projects, we continued extending our leadership in this area with the full development in La Amarga Chica block announced on December 2018. La Amarga Chica has become the third project where YPF and its partners successfully achieve massive development, after Loma Campana and El Orejano. Planning for a growth in production is supported by a strong portfolio with competitive breakeven prices.

The international and local scenarios challenge us to adjust our efficiency and costs to be competitive. To drive down the breakeven price of our projects we are focused on increasing well productivity and improving operation efficiency in order to reduce development cost and operative expenses.

During 2018, we reaffirmed our commitment to the objective of growing our production and reserves through the development of unconventional resources, which we began in 2013. More than 600 wells were drilled with Vaca Muerta shale as the target, mostly in the Loma Campana field in association with Chevron, continuing the massive development that began in 2013. The remaining wells were targeted to continue the development phase in the El Orejano block in association with Dow Chemical, the Narambuena project in association with Chevron, the La Amarga Chica pilot in association with Petronas, the Bandurria Sur pilot in association with SPM Argentina S.A., the Bajada de Añelo pilot in association with Shell, and the Rincon del Mangrullo, Aguada de la Arena and La Ribera pilots where YPF holds 100% of the working interest in those blocks. The purpose of these projects is to determine the potential of Vaca Muerta as a shale oil/gas reservoir.

The development of unconventional resources in the Vaca Muerta formation demands significant capital investment. As we rapidly progress on our learning curve, substantially improving productivity and reducing well cost by 7% in 2018 compared to 2017, we expect to continue yielding savings due to operational optimizations, economies of scale and increasing well productivity through a better understanding of the subsurface and the use of new technologies.

In this context, our controlled technological-based company of YPF (Y-TEC) has contributed providing: innovative laboratory and operational techniques and protocols; better understanding of the rocks behavior; improvements in reservoir simulation and modelling tools; drilling and completion products; among others. See “Research and Development.”

Nevertheless, the financial viability of these investments and resource 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 2019 activity.

Tight sands in Rincón del Mangrullo and Aguada de la Arena also contributed to the increase of natural gas production and reserves in 2018. Six wells were drilled in these marine tight sands, maintaining gas production at 3.8 mmcm/d.

Since 2016, we have been supplying domestic sand as proppant (to be injected in the hydraulic stimulation that allows for the development of unconventional hydrocarbons) and finalized the sand processing plant.

In order to guarantee the self-supply of sand for YPF and facing a scenario of increasing demand in the domestic market, we have made investments to improve and expand our existing productive capacities (such as the construction of a new classification and furnace for drying said product), increase our transportation capacity (through the extension of railway terminals) to supply the production and comply with the new product mix (as part of our geology research and development plan).

 

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During 2017, we commenced testing of dissolvable plugs, chemical and mechanical diverters, frac sleeves, and different types of stimulation fluids, in connection with the completion of our shale gas/oil wells, seeking improved operational efficiency and well performance. We are continuing to study the data from these tests, analyzing the results of productivity in the medium term. Many of these activities were carried out, and continue to be supported by Y-TEC.

Main properties

Our production is concentrated in the following basins in Argentina: Neuquina, Golfo San Jorge, Cuyana, Noroeste and Austral.

Our domestic operations are subject to certain risks. See “Item 3. Key Information—Risk Factors.”

In 2018, 2017 and 2016, we finalized agreements related to the acquisition and development of properties that are part of our core business. In connection with those agreements, see Notes 3 and 29.b to the Audited Consolidated Financial Statements.

In addition, in connection with the extension of concessions, see Note 29.a to the Audited Consolidated Financial Statements.

The following table sets forth information regarding our developed and undeveloped acreage by geographic area as of December 31, 2018:

 

     As of December 31, 2018  
     Developed(1)      Undeveloped(2)  
     Gross(3)      Net(4)      Gross(3)      Net(4)  
     (thousands of acres)  

South America

     1,258        953        31,891        17,645  

Argentina

     1,258        953        31,346        17,322  

Rest of South America(5)

     —          —          545        323  

Total

     1,258        953        31,891        17,645  

 

(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, Bolivia and Chile. In the case of Colombia, YPF and its partners notified the Colombian National Hydrocarbons Agency (“ANH”) of the decision to relinquish the COR 12 and COR 33 blocks. In Bolivia, YPF’s net undeveloped surface acreage totaled 147,000 acres. Finally, in Chile, YPF’s net undeveloped surface acreage totaled 3,000 acres needed to finish the testing of one exploration well.

Except for the information provided in the next paragraph, as of December 31, 2018, none of our exploration permits considered as a whole, which include undeveloped acreage, will expire in 2019 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 SGE. 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. On December 29, 2017 YPF filed a note before the Ministry of Energy confirming its willingness to negotiate the conversion of association agreement related to the Area identified as “ENARSA 1”. In the same note, YPF informed that it communicated its decision not to convert the association agreements related such Areas to the Operators of Areas “ENARSA 2” and “ENARSA 3”. On October 19, 2018 YPF officially filed another note to the SGE to negotiate the conversion of the association agreement related to the area identified as “ENARSA 1”; as of the date of this annual report, negotiations related to this note are ongoing. YPF currently participates in three offshore blocks

 

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in association with ENARSA, which represent approximately 55% of our net exploratory undeveloped acreage. We cannot guarantee that as a result of such negotiations we would not decide to relinquish to the SGE 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 “—Legal and Regulatory Framework and Relationship with the Argentine Government—Law No. 27,007 (amendment of the Hydrocarbons Law)—Exploration and Production.”

However, as a result of the expiration in 2019 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 2019, we would be required to relinquish approximately 3,542 km2 of exploratory undeveloped acreage (approximately 8.2% of our 43,055 km2 of net exploratory undeveloped acreage as of December 31, 2018) during 2019.

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 6,126 km2 of exploratory undeveloped acreage (approximately 14.2% of our 43,055 km2 of net exploratory undeveloped acreage as of December 31, 2018) during 2020 and 2021.

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 “—Legal and Regulatory Framework and Relationship with the Argentine Government—Law No. 27,007 (amendment of 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

Based on 2017 production, Argentina is the second largest producer of natural gas and the fourth largest producer of crude oil in Central and South America, according to the 2018 edition of the BP Statistical Review of World Energy published in June 2018. 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.

The following table shows our gross and net interests in productive oil and gas wells in Argentina by basin, as of December 31, 2018:

 

     Wells(1)  
     Oil      Gas  

Basin

   Gross      Net      Gross      Net  

Onshore

     13,487        11,923        2,135        1,563  

Neuquina

     4,733        3,798        1,908        1,381  

Golfo San Jorge

     7,770        7,228        75        75  

Cuyana

     818        753        0        0  

Noroeste

     46        24        90        45  

Austral

     120        120        62        62  

Offshore

     0        0        91        46  

Total

     13,487        11,923        2,226        1,609  

 

(1)

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

 

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As of December 31, 2018, we held 132 exploration permits and production concessions in Argentina. We directly operate 99 of them, including 20 exploration permits and 79 production concessions.

Exploration permits: As of December 31, 2018, we held 24 exploration permits in Argentina, 21 of which were onshore exploration permits and 3 of which were offshore exploration permits. We had 100% ownership of 11 onshore permits, and our participating interests in the remainder varied between 50% and 70%. Our participating interests in the 3 offshore permits varied between 30% and 35%.

Production concessions: As of December 31, 2018, we had 108 production concessions in Argentina. We had a 100% ownership interest in 63 production concessions, and our participating interests in the remaining 45 production concessions varied between 7% and 98%.

In addition, we have 36 crude oil treatment plants and 12 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 Our Business—Our business depends to a significant extent on our production and refining facilities and logistics network.”

In connection with our principal properties, see “—Exploration & Production Activity in Argentina.” Production for each of the last three fiscal years by geographic area and by field containing 15% or more of our total proved reserves are set forth under “—Oil and gas production, production prices and production costs.”

Approximately 92% of our proved crude oil reserves in Argentina are concentrated in the Neuquina (52%) and Golfo San Jorge (40%) basins, and approximately 85% of our proved gas reserves in Argentina are concentrated in the Neuquina (75%), and Austral (10%) basins.

Joint ventures and contractual arrangements in Argentina

As of December 31, 2018, we participated in 8 exploration and 36 production joint ventures and contractual arrangements (26 of which were not operated by us) in Argentina. Our interests in these joint ventures and contractual arrangements ranged from 7% to 93%, 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, 2018, see Note 24 to the Audited Consolidated Financial Statements. We are also a party to a number of other contractual arrangements that arose through the renegotiation of service contracts and risk contracts and their conversion in exploitation concessions and exploration permits, respectively.

Oil and Gas Reserves

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

Information on net proved reserves as of December 31, 2018, 2017 and 2016 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, to calculate our net proved reserves as of December 31, 2018, the Company considered the realized prices for crude oil in the domestic market taking into account the effect of export taxes as in effect as of each of the corresponding years (until 2020, in accordance with Decree No. 793/2018). For the years beyond the mentioned periods, the Company considered the unweighted average price of the first-day-of-the-month for each month within the twelve-month period ended December 31, 2018, which refers to the Brent prices adjusted by each different quality produced by the Company.

 

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Additionally, since there are no benchmark market natural gas prices available in Argentina, the Company considered the realized prices in the domestic market according to the SEC and FASB’s ASC 932 rules, but also taking into account the effect of certain market regulations which were put in place mainly during the second half of 2018.

Notwithstanding the foregoing, commodity prices have changed significantly since 2016. See “Item 3. Key Information—Risk Factors—Risks Relating to Our Business—Our oil and natural gas reserves are estimates” and “Item 3. Key Information—Risk Factors—Risks Relating to Our Business—Our reserves and production are likely to decline.”

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, 2018 are based on estimates generated through the integration of available and appropriate data, utilizing well-established technologies that have been demonstrated in the field to yield repeatable and consistent results. Data used in these integrated assessments include information obtained directly from the subsurface via wellbore, such as well logs, reservoir core samples, fluid samples, static and dynamic pressure information, production test data, and surveillance and performance information. The data utilized also include subsurface information obtained through indirect measurements, including high quality 2-D and 3-D seismic data, calibrated with available well control. Where applicable, geological outcrop information was also utilized. The tools used to interpret and integrate all this data included both proprietary and commercial software for reservoir modeling, simulation and data analysis. In some circumstances, where appropriate analog reservoir models are available, reservoir parameters from these analog models were used to increase the reliability of our reserves estimates.

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

Net Proved Developed and Undeveloped Reserves as of December 31, 2018

The following table sets forth our estimated net proved developed and undeveloped reserves of crude oil, NGLs and natural gas at December 31, 2018.

 

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Proved Developed Reserves

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

Consolidated Entities

           

South America

           

Argentina

     339        41        1,915        722  

North America

           

United States

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Consolidated Entities

     339        41        1,915        722  

Equity-Accounted Entities

           

South America

           

Argentina

     —          —          —          —    

North America

           

United States

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Equity-Accounted Entities

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Proved Developed Reserves

     339        41        1,915        722  
  

 

 

    

 

 

    

 

 

    

 

 

 

Proved Undeveloped Reserves

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

Consolidated Entities

           

South America

           

Argentina

     243        15        566        358  

North America

           

United States

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Consolidated Entities

     243        15        566        358  

Equity-Accounted Entities

           

South America

           

Argentina

     —          —          —          —    

North America

           

United States

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Equity-Accounted Entities

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Proved Undeveloped Reserves

     243        15        566        358  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Proved Reserves (2) (3)

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

Consolidated Entities

           

Developed Reserves

     339        41        1,915        722  

Undeveloped Reserves

     243        15        566        358  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Consolidated Entities

     582        56        2,481        1080  

Equity-accounted entities

           

Developed Reserves

     —          —          —          —    

Undeveloped Reserves

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Equity-Accounted Entities

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Proved Reserves

     582        56        2,481        1080  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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 NGL reserves of consolidated entities include an estimated approximately 83 mmbbl of crude oil and 8 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 288 bcf in respect of such payments.

 

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For information regarding changes in our estimated proved reserves during 2018, 2017 and 2016, see Note 35 to the Audited Consolidated Financial Statements.

The paragraphs below explain in further detail the most significant changes in our proved undeveloped reserves during 2018, 2017 and 2016.

Changes in our proved undeveloped reserves during 2018

YPF had estimated a volume of net proved undeveloped reserves of 358 mmboe at December 31, 2018, which represented approximately 33% of the 1080 mmboe total reported proved reserves as of such date. This compares to estimated net proved undeveloped reserves of 266 mmboe as of December 31, 2017 (approximately 29% of the 929 mmboe total reported proved reserves as of such date).

The 35% total net increase in net proved undeveloped reserves in 2018 is mainly attributable to:

 

   

Extensions and discoveries, which added 149 mmboe (238 bcf of Gas and 107 mmbbl of Oil) of proved undeveloped reserves mainly from shale oil and gas projects from Vaca Muerta formation at Neuquina basin.

 

   

New economic conditions with higher gas and oil average prices and lower operating costs which resulted in a 48 mmboe Proved Undeveloped Reserves incorporation mainly from oil and gas fields of Neuquina basin (15 mmboe) and oil fields from Golfo San Jorge basin (33 mmboe).

 

   

New improved recovery projects, adding approximately 9 mmboe of proved undeveloped secondary recovery reserves. Most important additions belong to Golfo San Jorge and Neuquina basins.

This was partially offset by:

 

   

Ongoing successful development activities related to proved undeveloped reserves projects, which allowed a transfer of approximately 67 mmboe to proved developed reserves. The main contributions are related to Development Wells (58 mmboe) mainly in Neuquina basin and improved recovery projects (9 mmboe) mainly in Golfo San Jorge and Neuquina basins.

 

   

Change of development strategy in certain areas which resulted in a downwards revision of 43 mmboe from previous projects, mainly from Neuquina, Austral and Golfo San Jorge basins.

 

   

Some primary and improved recovery oil projects development schedules were modified or canceled, resulting in a 5 mmboe proved undeveloped reserves reduction, mainly in Austral, Golfo San Jorge and Cuyana basins.

 

   

Changes in gas compression projects which resulted in a 5 mmboe reduction of proved undeveloped reserves, mainly from Neuquina basin.

YPF’s total capital expenditures to continue the development of reserves was approximately U.S.$ 936 million during 2018, of which U.S.$ 655 million was allocated to projects related to proved undeveloped reserves.

As of December 31, 2018, 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 2017

YPF had estimated a volume of net proved undeveloped reserves of 266 mmboe at December 31, 2017, which represented approximately 29% of the 929 mmboe total reported proved reserves as of such date. This compares to estimated net proved undeveloped reserves of 298 mmboe as of December 31, 2016 (approximately 27% of the 1,113 mmboe total reported proved reserves as of such date).

The 11% total net decrease in net proved undeveloped reserves in 2017 is mainly attributable to:

 

   

Ongoing successful development activities related to proved undeveloped reserves projects, which allowed a transfer of approximately 82 mmboe to proved developed reserves. Main contributions are related to development wells (62 mmboe) mainly in Neuquina basin, improved recovery projects (9,5 mmboe) mainly in Golfo San Jorge and Neuquina basins, and Gas Compression Projects (9,5 mmboe) in Austral and Neuquina basins.

 

   

New economic conditions with lower gas and oil average prices and higher operating costs affected scheduled projects economics, resulting in a 20 mmboe proved undeveloped reserves reduction mainly from oil fields of Neuquina basin (-16 mmboe) and Golfo San Jorge basin (-3 mmboe).

 

   

Some primary and improved recovery oil projects development schedule was modified or canceled, resulting in a 2,5 mmboe proved undeveloped reserves reduction, mainly in Neuquina and Golfo San Jorge basins.

 

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This was partially offset by:

 

   

Extensions and discoveries, which added 54 mmboe (219 bcf of Gas and 12 mmbbl of Oil) of proved undeveloped reserves mainly from Neuquina and Austral basins.

 

   

New improved recovery projects, adding approximately 21 mmboe of proved undeveloped secondary recovery reserves. Most important additions belong to Golfo San Jorge and Neuquina basins.

 

   

New project studies in Golfo San Jorge and Neuquina basins added approximately 5 mmboe of proved undeveloped reserves.

 

   

The extension of Rincón del Mangrullo and Magallanes fields’ concessions resulted in approximately 4 mmboe reserves addition in proved undeveloped reserves.

YPF’s total capital expenditure to continue the development of reserves was approximately U.S.$1,113 million during 2017, of which U.S.$ 693 million was allocated to projects related to proved undeveloped reserves.

As of December 31, 2017, 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 2016

YPF had estimated a volume of net proved undeveloped reserves of 298 mmboe at December 31, 2016, which represented approximately 27% of the 1,113 mmboe total reported proved reserves as of such date. This compares to estimated net proved undeveloped reserves of 337 mmboe as of December 31, 2015 (approximately 27% of the 1,226 mmboe total reported proved reserves as of such date).

The approximately 11% net decrease in net proved undeveloped reserves in 2016 is mainly attributable to:

 

   

Ongoing successful development activities related to proved undeveloped reserves projects, which allowed a transfer of approximately 116 mmboe to proved developed reserves. Main contributions are related to development wells (75 mmboe), mainly in the Neuquina basin, improved recovery projects (14 mmboe), mainly in the Golfo San Jorge and Neuquina basins, and gas compression projects in the Neuquina basin (12 mmboe).

 

   

New economic conditions with lower average oil prices that affected the economics of scheduled projects, resulting in a reduction of proved undeveloped reserves of 45 mmboe, mainly from the oil fields of the Golfo San Jorge basin (-16 mmboe), the Neuquina basin (-14 mmboe) and the Austral basin (-12 mmboe).

 

   

In the Golfo San Jorge basin, the development schedules of several primary and improved recovery oil projects were modified or canceled, resulting in a reduction of proved undeveloped reserves of 20 mmboe.

This was partially offset by:

 

   

Extensions and discoveries, which added 80 mmboe (242 bcf of gas and 29 mmbbl of oil) of proved undeveloped reserves, mainly from the Neuquina basin.

 

   

New project studies, which added approximately 12 mmboe of proved undeveloped reserves, mainly from the Neuquina basin.

 

   

New improved recovery projects, adding approximately 30 mmboe of proved undeveloped secondary recovery reserves. The most important additions belong to the Golfo San Jorge and Neuquina basins.

The acquisition of interests in the Rio Neuquén gas field located in the Neuquina basin resulted in the addition of approximately 11 mmboe of proved undeveloped reserves.

YPF’s total capital expenditure to continue the development of reserves was approximately U.S.$ 2,930 million during 2016, of which U.S.$ 1,214 million was allocated to projects related to proved undeveloped reserves.

As of December 31, 2016, 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.

Internal controls on reserves and reserves audits

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

 

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

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

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

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

To control the quality of reserves booking, a process has been established that is integrated into the internal control system of YPF.

This process to manage reserves booking is centrally controlled and has the following components:

 

(a)

The Reserves Audit (“RA”) is separate and independent from the Upstream 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 estimation of reserves 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 June 2017, is responsible for overseeing the preparation of the reserves estimates and reserves audits conducted by third party engineers. The current Reserves Auditor has over 35 years of experience in geology and geophysics, reserves estimate, project development, finance and general accounting regulations. Prior to becoming the Reserves Auditor, he was the general manager in E&D, and before that he worked as the Director for Exploration at YPF. He holds a degree in geology from the National University of Patagonia, 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 Upstream business segment and associated with properties where technical, operational or commercial issues have arisen.

 

(d)

A Quality Reserve Coordinator (“QRC”) is assigned to each Upstream business segment of YPF to ensure that there are effective controls in the estimation of proved reserves 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.

 

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(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 2018, Gaffney, Cline & Associates audited certain YPF operated and non-operated areas in the Neuquina, Golfo San Jorge, Austral and Cuyana basins of Argentina. These audits were performed as of December 31, 2018, and the audited fields contain in aggregate, according to our estimates, approximately 365 mmboe proved reserves (161 mmboe of which were proved undeveloped reserves) as of such date, which represented approximately 34% of our proved reserves and 45% of our proved undeveloped reserves as of December 31, 2018. Copies of the related reserves audit reports are filed as an exhibit to this annual report.

We are required, in accordance with Resolutions No. 324/06 and 69/16 of the Argentine Secretariat of Hydrocarbon Resources, to annually file by March 31 details of our estimates of our oil and gas reserves and resources with the Argentine Secretariat of Hydrocarbon Resources, as defined in that resolution and certified by an external auditor. The aforementioned certification and external audit only have the meaning established by Resolutions No. 324/06 and 69/16 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, 2017. Estimates of our oil and gas reserves filed with the Argentine Secretariat of Hydrocarbon Resources 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 Hydrocarbon Resources 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 Hydrocarbon Resources 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 Resolutions No. 324/06 and 69/16 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)

   2018      2017      2016  
            (mmbbl)         

Consolidated Entities

        

South America

        

Argentina

     83        83        90  

North America

        

United States

     —          —          *  
  

 

 

    

 

 

    

 

 

 

Total Consolidated Entities

     83        83        90  

Equity-Accounted Entities

        

South America

        

Argentina

     —          —          —    

North America

        

United States

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Total Equity-Accounted Entities

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Total Oil Production (2)

     83        83        90  
  

 

 

    

 

 

    

 

 

 

NGL Production  (1)

   2018      2017      2016  
            (mmbbl)         

Consolidated Entities

        

South America

        

Argentina

     14        19        19  

North America

        

United States

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Total Consolidated Entities

     14        19        19  

Equity-Accounted Entities

        

South America

        

Argentina

     —          —          —    

North America

        

United States

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Total Equity-Accounted Entities

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Total NGL Production (3)

     14        19        19  
  

 

 

    

 

 

    

 

 

 

Natural Gas Production (1)

   2018      2017      2016  
            (bcf)         

Consolidated Entities

        

South America

        

Argentina

     461        475        457  

North America

        

United States

     —          —          *  
  

 

 

    

 

 

    

 

 

 

Total Consolidated Entities

     461        475        457  

Equity-Accounted Entities

        

South America

        

Argentina

     —          —          —    

North America

        

United States

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Total Equity-Accounted Entities

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Total Natural Gas Production (4) (5)

     461        475        457  
  

 

 

    

 

 

    

 

 

 

 

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Oil Equivalent Production (1) (6)

   2018      2017      2016  
            (mmboe)         

Consolidated Entities

        

Oil and Condensate

     83        83        90  

NGL

     14        19        19  

Natural Gas

     82        85        81  

Equity-Accounted Entities

        

Oil and Condensate

     —          —          —    

NGL

     —          —          —    

Natural Gas

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Total Oil Equivalent Production

     179        187        190  
  

 

 

    

 

 

    

 

 

 

 

*

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 17% of our total proved reserves expressed on an oil equivalent barrel basis. Oil and condensate production in these fields was approximately 8, 6 and 6 mmbbl for the years ended December 31, 2018, 2017 and 2016, respectively. NGL production in these fields was approximately 5, 8 and 8 mmbbl for the years ended December 31, 2018, 2017 and 2016, respectively. Natural gas production in the Loma La Lata field was 109, 127 and 132 bcf for the years ended December 31, 2018, 2017 and 2016, respectively.

(2)

Crude oil production for the years ended in December 31, 2018, 2017 and 2016 includes an estimated 12, 12 and 13 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, 2018, 2017 and 2016 includes an estimated 2, 2 and 2 mmbbl, respectively, in respect of royalty payments which are a financial obligation or are substantially equivalent to a production or similar tax. Equity-accounted entities production of NGL in respect of royalty payments which are a financial obligation or are substantially equivalent to a production or similar tax is not material.

(4)

Natural gas production for the years December 31, 2018, 2017 and 2016 includes an estimated 61, 64 and 60 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 2018, 2017 and 2016:

 

Production costs and sales price

   Total      Argentina      United States  
     (Ps/boe)  

Year ended December 31, 2018

        

Lifting costs

     348.68        348.68        —    

Local taxes and similar payments (1)

     22.92        22.92        —    

Transportation and other costs

     97.77        97.77        —    
  

 

 

    

 

 

    

 

 

 

Average production costs

     469.37        469.37        —    
  

 

 

    

 

 

    

 

 

 

Average oil sales price

     1,774.87        1,774.87        —    

Average NGL sales price

     1,052.96        1,052.96        —    

Average natural gas sales price (2)

     739.49        739.49        —    

Year ended December 31, 2017

        

Lifting costs

     228.68        228.68        —    

Local taxes and similar payments (1)

     7.49        7.49        —    

Transportation and other costs

     48.19        48.19        —    
  

 

 

    

 

 

    

 

 

 

Average production costs

     284.36        284.36        —    
  

 

 

    

 

 

    

 

 

 

Average oil sales price

     888.48        888.48        —    

Average NGL sales price

     368.07        368.07        —    

Average natural gas sales price (2)

     477.00        477.00        —    

Year ended December 31, 2016

        

Lifting costs

     195.80        196.30        121.66  

Local taxes and similar payments (1)

     8.35        8.37        —    

Transportation and other costs

     38.93        39.02        32.81  
  

 

 

    

 

 

    

 

 

 

Average production costs

     243.08        243.70        154.47  
  

 

 

    

 

 

    

 

 

 

Average oil sales price

     861.74        863.25        510.01  

Average NGL sales price

     222.71        223.35        50.35  

Average natural gas sales price (2)

     417.95        418.00        193.08  

 

(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. 162.08 per boe, Ps. 89.67 per boe and Ps. 86.82 per boe for the years ended December 31, 2018, 2017 and 2016, 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.

 

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Wells Drilled  in Argentina

   For the Year  Ended December 31,  
     2018      2017      2016  

Gross wells drilled (1)

        

Exploratory productive

     15        17        19  

Oil

     10        10        14  

Gas

     5        7        5  

Dry

     6        2        12  
  

 

 

    

 

 

    

 

 

 

Total

     21        19        31  
  

 

 

    

 

 

    

 

 

 

Development productive

     444        483        697  

Oil

     313        325        504  

Gas

     131        158        193  

Dry

     1        4        2  
  

 

 

    

 

 

    

 

 

 

Total

     445        487        699  
  

 

 

    

 

 

    

 

 

 

Net wells drilled (2)

        

Exploratory productive

     11        14        14  

Oil

     7        7        11  

Gas

     4        6        3  

Dry

     5        1        9  
  

 

 

    

 

 

    

 

 

 

Total

     16        15        23  
  

 

 

    

 

 

    

 

 

 

Development productive

     321        363        548  

Oil

     237        247        409  

Gas

     84        116        139  

Dry

     1        4        2  
  

 

 

    

 

 

    

 

 

 

Total

     322        367        550  
  

 

 

    

 

 

    

 

 

 

 

(1)

“Gross” wells include all wells in which we have an interest.

(2)

“Net” wells equal gross wells after deducting third-party interests.

Exploration & Production Activity in Argentina

During 2018, our main exploratory and development activities in Argentina have had the following principal focus:

1. Operated Areas—Exploratory Activities

During 2018, our exploratory activities in Argentina were mainly focused on:

1.1 Onshore

Unconventional activities

We continued the regional exploration of shale oil and gas to determine its productivity in different areas of the Neuquina Basin. During 2018, five wells targeting Vaca Muerta Formation (Fm), one well to Agrio Fm and one workover to Los Molles Fm. have been drilled. The workover was positive and as of the date of the annual report, three Vaca Muerta wells and one Agrio well are pending completion and the other two wells are currently being drilled.

 

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Continuing the exploration of different source rocks, two workovers were done to evaluate the potential of the shale oil and gas in Tierra del Fuego Province. The result of the first one was below expectation and the second workover is still ongoing.

Tight gas: Exploration of tight gas continued during 2018 in Estación Fernández Oro, Loma La Lata-Sierra Barrosa and Los Caldenes Blocks. Positive results were obtained in three wells and the other two are pending completion.

Conventional activities

 

   

Neuquina Basin:

 

   

A total of seven wells targeting conventional oil and gas reservoirs were drilled in the basin, obtaining two positive results in Chachahuén Block and one in Valle del Río Grande (all of them oil wells).

 

   

Results in two other wells were below expectations (Los Caldenes Block and Malargüe). As of the date of this annual report, two others are pending completion.

 

   

From the results obtained in Chachahuén, we have notified the Mendoza Province of our decision to convert the Chachahuén Exploration Permit into an Evaluation Area and to extend the permit until February 2020. We are still waiting for the final approval from the province.

 

   

Having fulfilled all commitments in Payún Oeste Block, in 2017 we requested that the Mendoza province allow commercial exploitation of the area. However, in 2018, considering all results obtained, we decided not to continue with the exploratory periods. Consequently, we sent a new note to the Mendoza Province informing of our decision to relinquish the block.

 

   

During 2018, five new exploration blocks have been awarded in this basin:

 

   

Mendoza Province: Puesto Pozo Cercado Occidental, CN III Norte, CN VII/A and Los Parlamentos.

 

   

Río Negro Province: Cerro Manrique

 

   

Golfo San Jorge basin

 

   

During 2018, eight exploration wells were drilled in the Golfo San Jorge basin. The exploration activity targeted conventional oil and gas and tight gas reservoirs with negative results in two tight gas wells in Los Perales Block (gas) and positive results in one conventional well in El Trébol-Escalante Block. There are five wells pending completion.

 

   

Cuyana basin

 

   

3 wells targeting conventional oil were drilled in Mesa Verde Block, two showing positive results and one below expectation.

 

   

Having fulfilled all commitments in CCyB 17/B and considering the obtained results, we decided not to continue with the exploratory periods and, as a result, the block was relinquished to the Mendoza Province. As of the date of this annual report, we are still awaiting response from the province.

 

   

Austral basin

 

   

Drilling activities took place in Tierra del Fuego Province:

 

   

Positive results were obtained in one oil well drilled in Tierra del Fuego “Fracción E” Block.

 

   

Negative results came from one well drilled in Los Chorrillos Block (conventional oil).

 

   

Two oils and one gas wells are pending completion as of the date of this annual report.

 

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During 2018, one new exploration block has been awarded in Tierra del Fuego: CA-12 Bloque I.

 

   

Seismic

During 2018, seismic 3D data covering 450 km2 was recorded in Cerro Manrique Block and 580 km of 2D seismic was registered in Chelforó (both in Río Negro Province, Neuquina basin).

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

 

1.2

Offshore:

According to the amendments to the Hydrocarbons Law adopted by Law No. 27,007, all exploration permits owned by ENARSA will be transferred to the Secretariat of Energy. YPF currently participates in three offshore blocks in association with ENARSA (E1 block: YPF 35%, E2 block: YPF 33% and E3 block: YPF 30%) with 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. On December 29, 2017 YPF filed a note before the Ministry of Energy confirming its willingness to negotiate the conversion of association agreement related to the Area identified as “ENARSA 1”. In the same note, YPF informed that it communicated its decision not to convert the association agreements related such Areas to the Operators of Areas “ENARSA 2” and “ENARSA 3”. On October 19, 2018 YPF officially filed another note to the SGE to negotiate the conversion of the association agreement related to the area identified as “ENARSA 1”; as of the date of this annual report, negotiations related to this note are ongoing. As of December 31, 2018, we do not have registered assets in these blocks. See “—Legal and Regulatory Framework and Relationship with the Argentine Government—Law No. 27,007 (amendment of the Hydrocarbons Law)” for a description of new terms which apply to new production concessions or exploitation permits.

Non-Operated Areas—Exploratory Activities

During 2018, one workover and nine exploration wells have been drilled in non-operated blocks:

CNQ-7 and CNQ-7A: a total of six conventional oil wells were drilled by Pluspetrol: three with positive results, two below expectations and one is still pending completion.

Agua Salada: two wells were drilled by Tecpetrol with positive results.

Aguaragüe: one gas well targeting the Noa Paleozoica Formation was drilled by Tecpetrol with negative results.

Aguada Pichana Este: one exploratory workover was done by Total showing negative results.

Development Activities

During 2018, our development activities in Argentina were mainly focused, according to the organizational structure in force in 2018, on the following regions and blocks:

Unconventional Region

During 2018, Unconventional Regional production was 98.6 mboe/d, representing 18.6% of YPF’s total production.

 

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Unconventional Region and Vaca Muerta Formation

 

LOGO

1 Aguada de Castro; 2 Aguada Pichana Occidental; 3 Aguada Pichana Oriental; 4 Bajada de Añelo; 5 La Calera; 6 Lindero Atravesado; 7 Loma del Molle; 8 Pampa Las Yeguas I; 9 Pampa de las Yeguas II Norte; 10 Pampas de las Yeguas II Sur

 

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Loma Campana Area:

On July 16, 2013, YPF and Chevron signed an investment project agreement for the joint exploitation of unconventional hydrocarbons in Neuquén Province.

During 2018, 37 horizontal wells were put into production, achieving a performance that, on average, met the expectations set by the Type Well for the Organico target and above expectations for the Cocina target (the deeper productive interval within Vaca Muerta formation). The well design ranges, from 1,500 m of lateral length and 18 frac stages to 3,200 m of lateral length and 40 frac stages (while the space between frac stages was maintained at 80 m).

The current development strategy consists of drilling Cocina and Organico targets in order to maximize drainage area (Cocina target had been set aside until 2017). Also, the first infill well to the Cocina was put on production with promising early performance, opening an opportunity to develop this target in areas where only wells to the Organico (productive interval within Vaca Muerta formation) were drilled. A longer lateral well of 3,200 m of lateral length was successfully completed (40 stages) and put into production in August 2018.

Geosteering has been included as a standard in order to determine the incremental productivity gain from navigating within a desired target zone.

Due to continued improvements in our drilling performance, drilling time was reduced by 26% between 2015 and 2018. An average drilling time of 35 days to drill a 4,700 m measured depth (“MD”) well was achieved during 2015, with an improvement to 29 days for a 4,800 m MD in 2016 and an improvement to 22 days for a 5,000 m MD in 2017 and further improvement to 26 days for a 5,500 m MD in 2018. This reduction in drilling time is also reflected in drilling costs of an average well cost reduction of 2% between 2017 and 2018 for horizontals wells and a reduction in development cost of 15% during the same period.

In 2018 various pilots were executed in an effort to reduce our development cost through economically improving EUR (Estimated Ultimate Recovery) or reducing well cost with a minimal or negligible impact to well EUR. The executed key pilots to achieve this objective were:

High Density Completion: a two well pilot was executed on a single location to understand the impact on well productivity and well cost of reducing distance between frac stages to 60m (increasing number of stages per well), reaching 10 clusters per stage and the injection of 100% of Slick Water (SW).

Well Spacing: A three well pilot was executed to understand the impact on well productivity and interference by increasing well spacing from 300m to 400m within the same target and 200m between different targets.

Cocina Infill: As mentioned above, a Cocina well between depleted Organico wells was completed and put into production with results according to the expected curve of the well type. The success of this type of strategy could lead to an increase in drilling and completion activity of more than 50 wells in the field.

Activity in this area in 2018 involved a gross investment of U.S.$ 376 million in drilling and completion (D&C) and U.S.$ 39 million in production facilities.

La Amarga Chica Area:

On December 10, 2014, YPF and PETRONAS E&P ARGENTINA S.A., 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 Neuquén province. YPF will be the operator of the area.

The Pilot Plan, comprising 30 wells in three years, started in May 2015. At the end of the first phase, a total of six horizontal and three vertical wells were drilled, with results over performing previous expectations. Based on those positive results, PETRONAS E&P ARGENTINA S.A. agreed to continue co-investing in a second phase of the pilot project. By the end of 2016, four additional horizontal wells from this phase were drilled, reaching a total of nine drilled wells during 2016, with a drilling rig fully dedicated to the project. During 2017, 12 horizontal wells were drilled, completing phase 2 of the project and paving the way for the final phase of the project. Six of those wells were put into production with the expected performance. All of the drilled horizontal drains were standardized at 1,500m long except for two wells that reached 2,000m. An improvement in performance of drilling (time and cost) is still observed, with drilling time and well cost being reduced by 22% and 11%, respectively, between 2017 and 2018. This drilling and completion activity developed during 2018 comprised a total gross investment of U.S.$ 138 million, with an additional U.S.$ 38 million expended on production facilities.

 

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During the pilot phase, the lateral length of the wells was increased to 2,500m in PAD33 and a new landing zone was drilled (LZ 2.5). A pilot of High Density Completion was executed in PAD30, increasing the number of fracture stages in two wells (spacing between stages was reduce to 60m), and larger fluid volumes (2,000cm per stage). The LACh-49 well drilled in a zone considered as low maturity, performed above expectations, opening new drilling prospects in this sector of the field. An intensive data acquisition plan that considers Pressure, Volume, Temperature (“PVT”), Diagnostic Fracture Injection Testing (“DFITs”), static gradients and fluid samples for geochemistry studies is ongoing. The first water disposal well was put into operation as part of the water management plan for the field.

At the beginning of 2018, YPF and PETRONAS E&P ARGENTINA S.A., an affiliate of PETRONAS E&P Overseas Ventures Sdn. Bhd (“PEPOV”) of Malaysia, ratified their intention to continue with the pilot in the area. During 2018, the pilot phase of the LACh project was completed (7 wells were drilled, initial results behave according to expectations) and the third phase was initiated, where both companies considered the drilling of 10 horizontal wells and the construction of new facilities and installations in order to transport the shale oil production derived from the area.

By December 2018, the development phase of the Shale Oil Field started, reaching a production curve higher than expected.

By the end of 2018, the total oil production increased to 1,599 cm/d (135% higher than December 2017) with a total of 35 wells in production.

In 2019, a pilot test of five wells will evaluate five different landing zones and well spacing and stimulation design.

Bandurria Sur Area:

On July 5, 2017, YPF and SPM Argentina S.A. executed an agreement defining the main terms and conditions for the joint development of a shale oil pilot in two phases. YPF will be the operator of the area.

Prior to the agreement, between 2012 and early 2016, YPF drilled and completed three vertical and two horizontal wells.

Three additional horizontal wells were drilled during 2017 in the South East (“SE”) area of the block. The objective of these wells was to test productivity in different landing zones within the Vaca Muerta organic-rich section. Two of the wells were completed with performance exceeding expectations.

During 2018, YPF and SPM drilled one vertical well, one vertical plus side track, and six horizontal wells distributed in three pads located in the northwest, center and southeast of the block. The objective of the vertical well/section was data acquisition (core and full suite of logs) for reservoir characterization. The objective of the horizontal wells was to test Vaca Muerta productivity across different fluid windows in different landing zones. The horizontal wells have between 1,500m and 2,000m of lateral length and between 20 and 38 frac stages.

On July 18, 2018, by means of Decree No. 1,020/18, the National Executive Office of the Province of Neuquén, authorized the assignment of participation foreseen in the definitive agreements.

All horizontal wells were recently connected for production. Initial results are in line with the estimated type curve.

On October 10, 2018, we had a major spill in the area of Bandurria Sur caused by a blowout (decontrol of well). For this reason, the provincial government decided to revoke the environmental licences for the pad 8 and 9 (this last one containing the uncontrolled well). As of the date of this annual report the pad 8 has already normalized and continues the scheduled perforation activities and with respect to the pad 9 we continue the remediations activities.

The plan for 2019 is to start factory mode development in the southeast corner of the block while derisking of the center and western areas continues.

 

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Bajo del Toro Area:

Between 2012 and 2015, YPF and its partners (EOG Resources Inc, successor to Enron Oil & Gas Company, and Gas y Petróleo de Neuquén) drilled one slanted and two vertical exploratory wells. One of the vertical wells and the slanted well were completed (with 6 and 8 frac stages respectively) and proved oil production from the whole organic-rich section of the Vaca Muerta Formation. The other vertical well was used for reservoir characterization and for microseismic monitoring of the slanted well. Between 2016 and 2017 the joint venture was dissolved, and part of the block reverted to the province.

On January 17, 2018, YPF, Bajo del Toro I S.R.L. and Statoil Argentina B.V- Sucursal Argentina entered into an agreement defining the main terms and conditions for the joint development of a shale oil pilot in Bajo del Toro block, being YPF as the operator of the area.

During 2018, the joint venture continued with the characterization and evaluation of Vaca Muerta initiated in 2012, placing a pad in the southwestern area of the block. The pad included one vertical pilot section plus a side-track horizontal drain and one horizontal well. The objective of the horizontal drain/well was to test productivity in different landing zones. The objective of the vertical pilot section was data acquisition (core and full suite of logs) for reservoir characterization.

The horizontal drains/wells have 2,000 m of lateral length and are currently being completed. The plan includes 33 frac stages in each of the laterals.

Additionally, on October 12, 2018, by Decree No. 1,755/18, the province of Neuquén approved the assignment of a portion of the concession in favor of Statoil, thereby satisfying the conditions precedent set forth in the agreement.

The plan for 2019 is to evaluate all potential landing zones in the central area of the block. The vertical wells drilled during the initial exploratory phase were used for landing zone selection. The wells will have 2,500 m of lateral drain. Microseismic monitoring is planned for all the wells.

El Orejano Area:

On September 23, 2013, YPF and Dow Europe Holding B.V. and PBB Polisur S.A. (our current 50% partner in the area) signed an agreement relating to the joint development of an unconventional gas pilot project in the Neuquén Province.

The Project has been in the development phase since July 2016, and three targets are being drilled and produced. Through December 2018, 96 wells have been drilled and 81 wells have been put on line. During 2018, 10 horizontal wells were drilled, and 15 wells were put into production with a gross investment of U.S.$ 122 million in D&C and U.S.$ 6 million in production facilities

Drilling time and well cost were reduced by 10% and 11%, respectively, between 2017 and 2018, with a reduction in development cost of 16% in the same period.

February 2017 marked the startup of the UPS2 (Unidad de Separación Primaria 2), with the treatment and the separation capacity being upgraded to 4 mmcm/d. A 16-inch Loop was built in the gas sale pipeline to Gas Pacífico Sale Point to increase gas transport capacity. A wellhead compression pilot began by the end of 2016 (2,900 HP installed) and the central compression is planned for 2019.

Currently, a distance of less than 300m for wells at the same level (Cocina) is under evaluation due to the evidence of lower growth of the fracture wing, according to microseismic monitoring observations.

Due to restrictions in gas treatment and evacuation capacity, in 2018 the production had a cap of 5.2 mmcm/d. The facilities to increase the treatment and evacuation capacity is expected to be available during 2019.

By the end of 2018, the total field gas production was 4.3 mmcm/d (12% higher than December 2017).

 

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Rincón del Mangrullo Area:

In the Mulichinco formation at the Rincón del Mangrullo concession, Pampa Energía S.A. (“Pampa Energía”) acquired 50% of the working interest during 2015. By the end of 2018, 124 wells (109 directed wells and 15 horizontal wells) were drilled in these marine tight sands, achieving an average gas production of 3.5 mmcm/d through a pipeline that connects to the Loma La Lata facilities.

During 2018, five horizontal wells were drilled in a very tight zone and one vertical well in a tight zone was drilled with a standard design of 1,000 m lateral length and 7 frac stages for the first one. Drilling time and well cost were reduced by 10% and 6%, respectively, between 2017 and 2018, with a total investment of U.S.$ 47 million in D&C, and an additional U.S.$ 10 million expended on production facilities.

On the other hand, the Vaca Muerta Formation in this block is 100% owned by YPF. During 2017, one vertical pilot well and three horizontal wells were drilled targeting the Vaca Muerta formation. The objective of the vertical well was data acquisition and landing zone definition. The objective of the horizontal wells was to test productivity in three different landing zones across the Vaca Muerta organic rich section. The three horizontal wells were put into production by the end of September 2017. Two of the wells’ production levels have exceeded expectations and the other one, below expectations while the third has fallen short of meeting expectations.

During 2018, one vertical well was drilled and five more horizontal wells were drilled and stimulated in the block targeting the organic-rich section of Vaca Muerta. All the wells are pending completion, that is expected in 2019. In addition, a four-well PAD began to be drilled in 2018, which we expect to be completed and put into production in 2019.

Aguada de la Arena Area:

On May 13, 2016, YPF and Pampa Energía executed an agreement that subjects them to certain conditions precedent under which, upon closing of the acquisition by Pampa Energía of a controlling stake in Petrobras Argentina S.A (“PESA”). PESA will assign to YPF certain participating interests in two exploitation concessions in areas with gas production and significant gas development potential (tight and shale) located in the Neuquina basin, which shall be operated by YPF. The conditions previously mentioned, and the assignment to YPF of the participating interest were concluded during 2016. As a result, the participating interests acquired were: (i) a 33.33% participating interest in the Río Neuquén block located in the province of Neuquén and the province of Río Negro and (ii) an 80% participating interest in the Aguada de la Arena block located in the province of Neuquén. In addition, on February 23, 2017, YPF and PetroUruguay S.A. signed a definitive agreement for the transfer of a 20% participating interest in the Aguada de la Arena area. As a result, YPF has increased its participating interest in the Aguada de la Arena area to 100%.

By the end of 2016, 14 wells were operating in the Mulichinco formation. During 2017 and 2018 there was no activity in this formation.

During 2018, six horizontal wells were drilled, out of which three were completed with performance exceeding expectations (and the other three are expected to be completed during 2019).

Activity in this area in 2018 involved a gross investment of U.S.$ 51.6 million in drilling and completion (D&C) and U.S.$ 16 million in production facilities.

In 2019, a PAD of one vertical well and three horizontal wells from the pilot phase will be drilled, and nine horizontal wells will be put into production. An extended test is planned in the northeast area in order to evaluate the initial productivity, determine the gas oil ratio (GOR) and to take a PVT sample to characterize the reservoir fluid (Dewpoint and Liquid Drop Out).

The field has restrictions on gas treatment and evacuation capacity. It is expected that the necessary facilities will be built during 2019. The accelerated development of the field was postponed to 2020 due to macroeconomic conditions related to the price of gas.

La Ribera Area:

This block, located in the center on the Neuquina basin, is 100% owned by YPF. The concession area comprises two separated regions: La Ribera I, covering 21.88 km2, and La Ribera II, covering 61.1 km2. Two vertical exploratory wells (one in each region) targeting the Vaca Muerta formation were drilled and completed in 2014. Both wells tested gas and condensate. During 2017, two horizontal wells targeting two landing zones in the Vaca Muerta organic-rich section were drilled and completed. These wells were connected in October 2017 and one of them has obtained results in accordance with expectations.

 

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During 2018, two horizontal wells were put in production showing a better performance than expected. Additionally, one vertical (with a horizontal sidetrack) and one horizontal wells were drilled. The objective of the vertical well was to identify the number of landing zones at the extreme east of the block and the objective of the two horizontal wells was to confirm productivity and test drilling capability for the longest Lateral Length achievable in the block (2,350m). The horizontal wells will be put in production during 2019.

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 Neuquén, within the area Chihuido de la Sierra Negra Sudeste – Narambuena. During 2015, this activity began with the drilling and completion of two vertical wells that allowed for the defining of the location and landing zone for the horizontal well. This well was drilled at the end of 2015 and the beginning of 2016, covering 1,200m of lateral length at 2,400m of vertical depth, within the younger internal sequence of Vaca Muerta and becoming the first well in the basin with this objective. Subsequently, a third vertical well was drilled to delineate the extension of the area to the eastern sector of the block. By the drilling, completion and testing of these wells, the commitment for the initial phase of the project signed in April 2014 was fulfilled. During the second half of 2016, the joint venture between YPF and subsidiaries of Chevron Corporation continued the exploratory stage by evaluating the long-term tests of the horizontal well and third vertical well in this area located in the black oil window of the area. During 2018, there was no activity in the area.

Non-Operated Areas—Development Activities:

Aguada Pichana Este:

This block is operated by Total S.A. YPF holds in this block a 27.2% working interest in the Mulichinco Formation, and a 22.50% working interest in the Vaca Muerta Formation.

Tight gas projects: during 2018, we continued with the tight gas development in Aguada Pichana Norte (“APN”) in the North of the block and three wells were drilled. Two of those wells were put into production in 2018 and produce as expected. The third one is still producing with high water cut and for an artificial lift system.

Shale projects: 19 shale gas wells were drilled in 2018. These wells are part of a pre-development and development project that includes around 60 wells that is expected to continue in the following years. All wells were connected in 2018 and obtained results in accordance with expectations. The drilling development project is planned to continue in 2019.

Aguada San Roque block

This block is operated by Total S.A., and YPF holds a 34.11% working interest.

Shale oil pilot project: two wells were completed and connected during first quarter of 2018 and obtained results in accordance with expectations. Furthermore, two additional shale oil wells were drilled in 2018 and will be connected in 2019.

Aguada Pichana Oeste

This block is operated by PAE, and YPF holds a 30% working interest in this block. One well began drilling operations during November 2017 and was put into production in 2018. Additionally, during 2018, six shale gas wells were drilled, four of them were connected and the other two are planned for 2019. All the wells are producing better than expected. Drilling pilots are planned to continue in 2019.

Pampa de las Yeguas

This block is operated by EXXON, and YPF holds a 50% working interest in this block. One well has been drilled in 2017 and two more wells were drilled in 2018 as part of a pilot project. These three wells are expected to be connected during the first months of 2019.

 

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La Calera

This block is operated by Pluspetrol, and YPF holds a 50% working interest. One exploration well was connected during the first quarter of 2018 and produced better than expected. During the fourth quarter, the pilot project started. It includes the drilling of nine wells, three of them were drilled in 2018, which are not connected yet, and the rest are planned for 2019. On November 2, 2018, the province of Neuquén, by Decree No. 1,834/18, granted a non-conventional hydrocarbons exploitation concession to both companies. Drilling activities during 2019 will also include several predevelopment wells.

Bajada de Añelo Area:

This block is operated by O&G Developments Ltd. S.A., and YPF holds a 50% working interest in this block. On February 23, 2017, YPF and O&G Developments Ltd. S.A. (hereinafter “O&G”), an affiliate of Shell Compañía Argentina de Petróleo S.A., executed an agreement, through which YPF and O&G agreed on the main terms and conditions for the joint development of a shale oil and shale gas pilot in two phases.

Drilling activity in 2017 started in the southeast corner of the block with the first PAD of four wells. Three of the wells drilled in 2017 were abandoned because of operational issues. One of these wells has been connected and is producing better than expected. Eight wells were drilled in 2018 in two different PADs and will be connected in 2019. Drilling pilots are planned to continue in 2019. Their main objective is to study productivity and fluid windows.

 

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Centro Region

During 2018, Centro Region production was 161.3 mboe/d, representing 30.4% of YPF’s total production.

Centro Region

 

LOGO

1 Agua Salada ;2 Aguada Villanueva; 3 Al Norte de la Dorsal; 4 Al Sur de la Dorsal I; 5 Al Sur de la Dorsal II; 6 Al Sur de la Dorsal III; 7 Al Sur de la Dorsal IV; 8 Al Sur de la Dorsal V; 9 Al Sur de la Dorsal VI; 10 Al Sur de la Dorsal VII; 11 Anticlinal Campamento; 12 Dadin - Lote I; 13 Dadin - Lote II; 14 Dadin – Lote III; 15 Dos Hermanas; 16 Estacion Fernandez Oro; 17 La Yesera; 18 Lindero Atravesado; 19 Loma Campana ;20 Loma La Lata – SB; 21 Loma Negra; 22 Los Caldenes; 23 Meseta Buena Esperanza; 24 Octogono; 25 Ojo de Agua; 26 Rio Neuquén – NQN; 27 Rio Neuquén – RN.

 

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Octógono Block:

Continuing with the activity of 2017, during 2018 five wells were drilled in the northern area of the field targeting gas-bearing intervals in Lajas formation. Three had positive results and the other two are being studied for optimization.

In May 2018 we started the waterflooding in Campamento Dos field. We are injecting in two pilots in Challacó formation.

During 2019, we are planning three workovers in Basamento formation.

Al Norte de la Dorsal Block:

Guanaco field: During 2018, two wells were carried out (1 drilled in 2017 and completed in 2018 and one drilled and completed in 2018). One with positive result and the other is under study due to low productivity. No activity is planned for 2019.

Cerro Bandera Block:

On November 22, 2017, YPF entered into an assignment agreement with Oilstone Energia S.A., in respect of 100% of the exploitation concession in the Cerro Bandera area. YPF holds La Via field and the exploration concession in Vaca Muerta and Los Molles formations.

No rig activity was performed in 2018.

Anticlinal Campamento Block

During 2018, the gas well drilled in 2017 in Chachil formation, was completed with negative results. No drilling activity is expected during 2019.

Loma La Lata – Sierra Barrosa Block:

Loma La Lata field: During 2018 we drilled 10 gas wells in Sierras Blancas formation (six vertical and four horizontal wells), of which six wells were completed, and four of which are already in production, with an achieved production rate according to expectations. The other four remaining completions are planned to be finished in the first quarter of 2019.

During 2019, we are planning to drill 17 wells targeting gas-bearing intervals in Sierras Blancas.

The goal of this project is to design a field development plan for Vaca Muerta formation in the western area of Loma La Lata – Sierra Barrosa block. It was divided into stages. The first stage includes the drilling of six wells aiming to investigate a) the number of productive layers and their productivity, b) the type of fluid (oil or gas) and c) to get data to reduce uncertainty for future development. During 2018, the first two wells were drilled, and their completion in scheduled for the first quarter of 2019.

Aguada Toledo–Sierra Barrosa field: Tight gas segment 5 (Lajas formation)

During 2018, seven wells were drilled in Lajas formation (1 was horizontal). One of the wells is in study phases and therefore not producing, while the rest are already in production.

Additionally, one well was drilled in Pre-Cuyano and Lajas formations. It produces from Pre-Cuyano and results were below than expectations.

No drilling activity is expected during 2019.

 

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Barrosa Norte tight gas field (Lajas formation)

One vertical gas well was drilled with positive results. This well is in production and its productivity is above the type well. No activity is planned for 2019.

Los Caldenes Block:

Manzano Grande field, oil target: In order to continue with the activity in the oil block, in 2018 we drilled two wells in the Manzano Grande block. They are currently in production.

Los Caldenes field, gas target: two developing wells were drilled during 2017. One completion was achieved during the first quarter of 2018.

Due to the lack of gas demand, the facilities to extract the gas (consisting of a connection with Pta. Entre Lomas) which were scheduled for 2019, were postponed to 2020.

Estación Fernández Oro (“EFO”)

During 2018, several projects were completed that allowed an increase in production, treatment and compression capacities. With respect to drilling activity, we completed 28 gas wells targeting the Lajas formation, in general with positive results for the development wells.

The main objective of the activities conducted during 2018 was the expansion of the gas treatment capacities, the compression and transport plants. The most relevant projects were the following:

 

   

Construction and assembly of an LTS (Low Temperature Separator) EFO plant

 

   

Construction of a new gas pipeline for the sale of EFO plant to NEUBA I trunk gas pipeline

 

   

Expansion of the low and ultra-low pressure compression plant

 

   

Separator Revamp in Battery 2 ultra-low pressure Compressor Entry Scrubber and Expansion of the Gathering Network

The development of the gas field will continue during 2019, focusing on drilling activity, where 21 new wells are scheduled to be completed.

Rio Neuquén block:

During 2017, the four wells drilled in 2016 were completed, all of them above the average estimated production. An Integral Field Development Plan (FDP) was defined, considering appraisal, infill and development sub-projects. The goal of these projects is to define the optimum production rate. In any case, from the proposed plan investments will be made in facilities to increase the production capacity from 3.5 up to 5.5 million cubic meters per day. As a result of the FDP six wells were drilled during 2017 (2 of them were already completed, one of them with initial production rate above the expected average and the other was an appraisal with results under expectations).

Following a proposed Integral FDP, during 2018, four wells were drilled and completed in 2017 (one well was for delimitation and the other three for development, all with positive results). During 2018 a total of 12 wells were drilled: (four of which were drilled in 2017 and completed in 2018, and the remaining eight were drilled and completed in 2018). Of those wells, there were three delineation wells, with satisfactory results and nine development wells, three with results according to the type well, three with few data production up to date, one currently in process of completion and two of them were finished in 2019 with positive results.

Works were carried out in the area that allowed to increase the compression capacity. The LP (low pressure) gathering network was built partially, following the development and location of new wells. The Gathering Ultra Low-Pressure Network will continue in 2019.

Non-Operated Areas - Development Activities:

Lindero Atravesado block:

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

 

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During 2018, one well with the Vaca Muerta formation objective, and three wells, in the Lajas Formation target, were connected and produced in accordance with expectations. In addition, two more wells were drilled in Quintuco Formation, where one of the wells is producing better than expected and the other is producing below expectations.

Loma Negra block:

This block is operated by CAPEX S.A. YPF holds a 35% working interest in this block.

During 2018, three wells were drilled and completed in the Loma de Maria Gas formation. These wells have been tested with gas production results over expectation, but none of them have been connected as of the date of this annual report. An additional well was drilled in the same area, but it is still pending completion.

In 2019, two wells are planned for El Latigo Field Oil Block as part of a Secondary Recovery Pilot Project. Finally, another well is planned to be drilled in the Loma de Maria Gas Block.

La Yesera block

This block is operated by CAPEX. YPF holds a 35% working interest in this block. During 2018 no drilling activity was performed. In 2019, one Side Track well is planned in Precuyo formation.

Agua Salada block

This block is operated by Tecpetrol. YPF holds a 30% working interest in this block.

During 2018 two wells were drilled in Cuyo Inferior, Punta Rosada and Loma Montosa formations: LA.a-6 and JdMo.a-2. The first one is producing better than expected while the second one is performing below expectations.

In 2019, two more appraisal wells will be drilled. One in Loma Azul block based on LA.a-6’s positive results, and the other one in Loma Cortada block due to the positive results obtained from LCa.x-1 exploratory well.

 

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Norte Region

During 2018, Norte Region production was 136.6 mboe/d, representing 25.8% of YPF’s total production.

Norte Region

 

LOGO

1 Altiplanicie del Payún; 2 Barrancas; 3 Cajón de los Caballos - Sector Oriental; 4 Cañadón Amarillo; 5 Ceferino; 6 Cerro Fortunoso; 7 Cerro Hamaca; 8 Cerro Morado Este; 9 Chachahuén Sur; 10 Chihuido de la Salina; 11 Chihuido de la Salina Sur; 12 Chihuido de la Sierra Negra; 13 Confluencia Sur; 14 Don Ruiz; 15 El Manzano; 16 El Manzano Oeste (resto); 17 El Portón; 18 Filo Morado; 19 Gobernador Ayala; 20 Jagüel Casa de Piedra; 21 Jagüel Casa de Piedra; 22 Jagüel de Bara; 23 Jagüel de los Milicos; 24 La Ventana; 25 Las Manadas; 26 Llancanelo; 27 Llancanelo R; 28 Loma Amarilla; 29 Loma de la Mina; 30 Mesa Verde; 31 Paso de las Bardas Norte; 32 Puesto Hernández; 33 Puesto Molina Norte; 34 Puesto Pinto; 35 Puntilla del Huincan; 36 Rio Tunuyán; 37 Señal Cerro Bayo; 38 Señal Picada - Punta Barda; 39 Valle del Rio Grande; 40 Vizcacheras; 41 Volcán Auca Mahuida; 42 Zampal (zampal oeste);

 

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Operated Areas

Barrancas block:

The drilling activity during the last years focused in the following fields:

Barrancas: During 2018, the development of the northwest zone continued in order to expand the area discovered in 2014. The objective is the Barrancas formation. Three wells were drilled, but the results were below expectations. Given these results, this development project has been temporarily suspended to re-evaluate the opportunities of the field. In turn, the activity for the optimization of secondary recovery continued through three conversions to water injector and the re-intubation of a one injector well.

Ugarteche: The area restarted its activity in 2015 after 10 years without drilling. Until 2017, the project included four wells drilled in the Ugarteche Occidental area. During 2018, ten wells targeting oil were drilled and three workovers were made. The results were better than expected. The total remaining project activity is expected to be executed between 2019 and 2021.

Estructura Cruz de Piedra: During 2018, two oil wells were drilled, with results below expectations. Likewise, we continued the execution of the project of secondary recovery expansion towards the southwest of the field by repairing two producing wells and one water injector conversion. As results had been below expectations, the project has been temporarily suspended, while a re-evaluation is carried out.

Mesa Verde block:

In 2014, exploration well MV.x-1 revealed the Río Blanco formation to be a productive horizon. The exploitation concession of this block was obtained during the second half of 2016. This allowed us to drill an appraisal well, which confirmed the expansion of the field.

In 2017, the delineation and development continued with the drilling of nine wells (between advanced and development wells) with results according to expectations.

During 2018 the development of Zone 1 (Middle Zone) was completed through the drilling of seven wells and two workovers, with results as expected.

The mineralized area is not yet fully delineated. The project includes the study, delineation and development of Zone 2 (Eastern area of the block) and includes the future drilling of oil wells.

La Ventana block:

Between 2015 and 2017, a new integrated static-dynamic model of La Ventana Central was developed in Vacas Muertas. Through this study, a Secondary Recovery Optimization Project was created. The objective of the project aims to improve both the aerial and vertical efficiency of the Secondary Recovery Project through the drilling of 21 wells and 45 workovers during the upcoming years. The project began its first phase in 2018, with the drilling of three wells. In these wells, were made special profiles (log profiles) and crowns were made, to capture new information and reduce uncertainties of the project. Depending on the results obtained from these wells and the analysis of the information obtained, the rest of the drilling and workover activity will be carried out during the upcoming years, as well as the adequacy and revamping of the surface facilities.

Additionally, La Ventana was selected as part of a regional study to the Barrancas formation to develop EOR (tertiary recovery) with the objective of determining if it is convenient to start with a pilot project. During 2016, the identification of the SP formulation (Surfactant Polymer) compatible with the temperature and salinity of the formation was made. In 2018 the activity of SWTT (Single Well Tracer Test) was carried out, in order to test the SP formulation identified. Positive results were obtained confirming that a reduction in the range of 40% to 50% of the residual oil saturation can be achieved. A pilot of four patterns of secondary recovery with a five spot arrangement will be carried out, initiating well activity during 2019 and the injection of SP from 2020.

 

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Vizcacheras block:

During 2018, one well was drilled in Vizcacheras Mainfield with the objective of Papagayos Fm. whose productive results were as expected. In addition, one producer well targeting oil was drilled in the northern area of Cañada Dura, which was abandoned due to its classification as unproductive.

Additionally, Vizcacheras was selected as part of a regional study to the Barrancas formation to develop EOR (tertiary recovery) with the objective of determining whether it is convenient to start a pilot project. During 2016 the identification of the SP (Surfactant Polymer) formulation compatible with the temperature and salinity of the formation was made. During 2017 and 2018, two single well tracer tests were carried out to test the potential of the formulation. Positive results were obtained confirming that a reduction in a range of 40 to 50% of the residual oil saturation can be achieved. According La Ventana SP pilot results, other SP pilots are expected to start in Vizcacheras Block during 2021.

Llancanelo Block:

During 2018, there was no drilling activity in this heavy oil field since the new corporate agreement within the joint venture was not achieved.

The behavior of the bottom heater in the well Ll-2012(h), installed in 2017, continued to be evaluated. The aim of the heater is to improve the productivity of the well by increasing the mobility of the oil. The initial preliminary results were above productivity expectations, so we are evaluating to install heaters in other wells.

In 2019, we plan to drill four horizontal oil wells, two advanced horizontal oil wells and two multilateral oil wells of five horizontal branches each.

Cerro Fortunoso Block:

During 2018, the development for secondary recovery of the Northern Block of the field was completed by drilling four water injector wells, three oil wells and two water conversions. The results obtained are in accordance with those expected.

In the Central East South Block, one injector well was drilled, five oil wells were repaired, and four wells were converted to injectors. The results obtained are in accordance with those expected.

In 2019 we plan to drill one well and the conversion of six more wells to complete the secondary recovery arrangement.

Valle del Río Grande Block:

During 2018, after visualizing the development opportunity for the productive formation “Neuquén Group” in the Malal del Medio Oeste field, three advanced oil wells were drilled during the conceptualization stage to obtain information and delineate the size of the opportunity. The two wells that were drilled in the Northern Plunge of the structure were unproductive, while the well located in the South Sector was productive for oil.

With the results obtained in this stage of conceptualization, the project of delineation and development of this field is being reinterpreted and reformulated, and no activity is planned for 2019.

Chihuido Sierra Negra Block:

Desfiladero Bayo:

The Secondary Optimization project that started in 2016, which included injection well workovers, wellhead acids, the adequacy of the injection facilities (with the installation of a Water Injection Plant) to guarantee the water quality required, allowed the recovery of

 

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production to the expected volumes. During 2018, two producing wells were drilled and 14 workovers were made and the results obtained are in accordance with those expected. At the same time, the Polymer Injection Pilot Project continues. It started in 2016 and included drilling of producing wells, injector conversions, and the construction and assembly of a polymer injection plant. Polymer injection began in August 2016. As of the date of this annual report, a change in the vertical injection profile has been observed and is awaiting the oil response of this pilot. During 2018, in the Desfiladero Bayo East area, four wells were drilled to optimize the development and expand it to the northern part of the field. The results were as expected. Three appraisal wells were also drilled, but with negative results. As of the date of this annual report, another Polymer Injection Pilot is also being implemented. The drilling activity has been completed, and as of the date of this annual report the secondary recovery production baseline is being prepared. It is expected that the Polymer Injection Plant will be installed by the beginning of 2019.

Puesto Molina:

During 2017, the first appraisal well was drilled, achieving completion in 2018 in the Eastern Flank of the field where there is no production. As of the date of this annual report, the well is in production but with a high-water percentage, so the project is being reviewed and activity has been temporarily suspended.

Chihuido Sierra Negra:

During 2017, in this mature field, a 3D seismic survey on the western area was carried out and its results are still under review. Additionally, to evaluate tertiary recovery potential, a single well chemical tracer test (SWCTT) and log-inject-log operation (assay technique) was performed during 2018. It confirmed the prior positive results achieved in 2015 in displacing post water-flooding residual oil by an Alkali Surfactant Polymer formulation (ASP). During 2018 the main activities consisted of surveillance and maintenance of secondary recovery production project.

Chachahuén Sur Block:

During 2018, to complete the development of productive formations Rayoso Clástico Cycle 1, Cycle 2a and Cycle 3a, the drilling activity in the block continued with 52 new wells: 32 development oil producers, eight horizontal oil producers, three appraisals well, two extension wells and seven water injectors. The results were as expected, except in Cycle 1 which was below expectations. The secondary recovery project for Cycle 2a and Cycle 3a is also under execution and results continue to be as expected.

Cerro Morado Este Block:

In 2016, YPF discovered the Cerro Morado Este field with the drilling of the CMoE.x-1 well, which was productive in the Centenario formation.

During 2017 the delineation of the Cerro Morado Este field continued by drilling five extension wells.

In 2018 YPF obtained the exploitation concession of this field. Four evaluation wells were drilled with positive results to delimit and estimate the productivity of block. Other evaluation wells are scheduled to be drilled in 2019.

Cañadón Amarillo Block:

During 2018, three wells targeting oil were drilled corresponding to the Cañadón Amarillo Somero project (La Tosca and Chorreado in both the North and the South areas). The wells were drilled at the end of 2018 and are under evaluation. In addition, one gas appraisal well was drilled with positive results. Drilling of five new wells is planned for 2019.

Volcán Auca Mahuida and Las Manadas blocks:

The development of the Centenario and Mulichinco formations continued. Five wells targeting oil were drilled during 2018 with results below expectations. Further appraisal and development wells are scheduled to be drilled in 2019.

 

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Señal Picada – Punta Barda block:

Señal Picada Field: During 2018, four wells were drilled with results as expected (3 oil development producers and one water injector). Drilling of nine new wells is planned for 2019.

Punta Barda Field: During 2018, 14 wells were drilled with results as expected (10 oil development producers and four water injectors). 13 new wells are planned to be drilled during 2019.

Non Operated Areas

Puesto Pinto (CNQ7/A) and Jagüel Casa de Piedra Blocks:

During 2018, 29 oil producing wells and 10 water injection wells were drilled to the Centenario Formation with results as expected, to continue with the water flooding project started in 2006. Most of the new wells were located in border zones, to expand the productive area of the project. For 2019, 38 oil producer wells and 13 water injector wells are planned to be drilled. It is also planned to finish the construction of surface facilities for the expansion of the Polymer Injection Project, whose pilot was implemented in 2012.

Gobernador Ayala (CNQ7) Block:

During 2018, 17 oil producing wells and nine water injection wells were drilled to the Centenario Formation with results as expected, to continue with the development of secondary recovery project in the area, and the development of the new field Jagüel Casa de Piedra Sur.

In 2019 we plan to drill 17 oil producer wells and four water injection wells in the block. During 2019, surface facilities are scheduled to be completed, and we also plan to start the injection of water in Jagüel Casa de Piedra Sur field.

Campo Durán – Madrejones Block:

In the period October 2017 - May 2018, two gas development wells were drilled in the Block and aimed at the Tupambi Bajo II Formation. The two wells resulted in the production of gas and condensate, as we expected.

Due to these results, Tecpetrol, the partner of the Joint Venture Aguaragüe in which YPF holds a 53% working interest, proposes to drill two additional gas wells in 2019.

Confluencia Sur Block:

Towards the middle of 2017, one well was drilled, with the objective of the Troncoso Inferior Formation with good results. There was no activity during 2018 and no activity is planned for 2019.

Sur Region

During 2018, Sur Region production was 133.4 mboe/d, representing 25.2% of YPF’s total production.

 

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Sur Region

 

LOGO

1 Barranca Yankowsky; 2 Campamento Central Cañadón Perdido; 3 Cañadón de la Escondida - Las Heras; 4 Cañadón León; 5 Cañadón Vasco; 6 Cañadón Yatel; 7 Cerro Piedra – Cerro Guadal Norte; 8 El Guadal – Lomas del Cuy; 9 El Tordillo; 10 Escalante – El Trébol; 11 La Tapera; 12 Lago Fuego; 13 Los Chorrillos; 14 Los Monos; 15 Los Perales – Las Mesetas; 16 Magallanes; 17 Manantiales Behr; 18 Pico Truncado – El Cordón; 19 Poseidon; 20 Puesto Quiroga; 21 Restinga Ali; 22 Rio Mayo; 23 Tierra del Fuego – Frac. A (Cdon Piedra); 24 Tierra del Fuego – Frac. B (San Sebastian); 25 Tierra del Fuego – Frac. C (Cabeza de León); 26 Tierra del Fuego – Frac. D (La Sara); 27 Tierra del Fuego – Frac. E (Uribe)

 

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Operated Areas

El Trébol – Escalante

During 2018, in El Trebol - Escalante, seven oil primary deep wells were drilled, with the objective of developing reserves in its three categories and incorporating new volumes, expanding the reserve, with positive results.

Additionally, we began with the implementation of the secondary optimization project in El Trébol Area. This optimization was proposed by drilling 13 wells (producers and injectors) closer to each other, thus improving the areal and vertical efficiency of the area. These drillings were carried out from existing locations, minimizing the environmental impact. Activity on the project started in the second half of 2018.

Additionally, 15 interventions were carried out with workover equipment, for optimizations of both primary and secondary production and injection. These low-cost activities will have an aggregate annual result higher than expected.

During 2019 we expect to continue to develop the area with deep wells and secondary recovery optimization.

Zona Central – Cañadón Perdido

This block is located in the urban area of Comodoro Rivadavia.

Since 2016, there has been no drilling of wells, due to legal issues relating to a claim from a group of neighbors of the city regarding the extension of the Bella Vista Sur drilling project. The project was reformulated so that it can be executed in 2018, from another geographical location.

During 2018 two primary directed wells were drilled. Within the framework of this integral project, activity was carried out with 10 workovers to implement the secondary recovery of the block.

Restinga Alí

During 2018, three horizontal wells that navigate in the Glauconitic formation, were drilled in the offshore zone of the coast. These wells were put into production during 2019.

Manantiales Behr

During 2018, 43 wells were drilled (35 producers and eight injectors). The projected total production (EUR) associated with primary wells exceeds expectation, being positive in both gas and oil.

The Myburg block was one of the blocks with best results (9 producers and one injector). For this reason, activity in this area was accelerated for the year 2019.

The drilling of the eight injectors of the Grimbeek Norte block was ahead of schedule during the first half of 2018.

The activity associated with secondary projects in La Carolina and El Alba blocks was postponed to the last quarter of 2018 due to delays in the issuance of environmental permits by the application authority.

Progress was made with the manufacturing of five mobile Polymer Injection plants and associated facilities, which will allow us to advance the tertiary development of the GBKII and GBK Norte blocks during 2019.

The workover activity was accomplished in 55 primary wells, with positive results.

Cañadón Seco

During 2018, 14 wells were drilled (12 producers, where 3 operated above expectations, two in order with expectations and seven below expectation, and two injectors with positive injectivity). Furthermore, 34 workovers were executed, including 14 conversions into injectors (one of which could not be finalized due to bad well integrity), and 20 producers (nine with results below expectations, and 11 consistent with expectations). The drilling activity was concentrated in Cañadón Seco, Caleta Olivia and Mina El Carmen formation. Additionally, we continue the investigations in the D-129 geological formation (an important formation from which studies are demonstrating its potential and the results of the activities carried out so far encourage us to continue with the planned activities). During 2019 we plan to take samples of rock and fluids to characterize better the D129 Formation and decrease the risk of the area with a new project, to be able to propose a development plan in the medium term. From the point of view of improved recovery, the objective

 

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continues to center on the geological formation of Cañadón Seco. Several projects were executed, some of them still ongoing, in which injection is expanded horizontally as well as vertically, improving the efficiency in the production-injector wells relationship. In addition, we continue to expand the secondary recovery in the Mina El Carmen Formation, which has the challenge of higher depth and injection pressures than those required for the Cañadon Seco formation.

Barranca Baya

During 2018, 51 workovers (mainly secondary recovery objectives) were executed with results as expected.

We deepened the secondary recovery control, in addition to the integrity of the facilities, which allows us to obtain a better quality of the water that is injected into the formations. We also began expanding the deeper injection in Castillo formation, as well as the usual Bajo Barreal zone.

Las Heras

During 2018, 11 workovers were executed, which include six conversions (one of which could not be finalized due to bad well integrity) into injectors with positive injectivity, and five producers (two with lower production than expected and three which met expectations). The activity was focused on the secondary recovery projects. The projects continued to be expanded both horizontal and vertically, incorporating both new layers to be flooded and optimizing the existing secondary recovery, with activity in cleaning injectors, re-layering and maintenance of the installation in the well.

Lomas del Cuy

During 2018, in order to continue the development of D-129 formation in El Guadal Sur field, three advanced wells were drilled and tested, and we plan to drill three more during 2019.

Additionally, 29 workovers were executed with primary and secondary recovery objectives and we continue improving quality of water injection. The results were below expectations.

In 2019, we plan to conduct three new secondary recovery optimization studies in Estancia San Justo, Anticlinal Perales Sur and El Guadal Bat.2 aimed to be implemented in 2020.

Los Perales - Las Mesetas

During 2018, two wells (including one injector and one producing well of polymer project) were drilled and 106 workovers were executed, with results as expected. The potential of this polymer project is important for the area and the company overall because the potential of production, the associated resources and the capacity for expansion is promising, not only in this field but also in other fields.

Secondary activity is present in all blocks; although we have injected water only in the Bajo Barreal geological formation. We have focused on maintaining the existing secondary and expanding projects from the vertical and aerial point of view, incorporating new layers and completing existing meshes. During 2018 17 water supply wells were intervened in order to provide the necessary water for the development of the field with mixed results.

The first polymer injection project was started in the Santa Cruz region in Los Perales Central Block III block. The project began on December 2017 with a first phase: “Injectivity Test”, aimed to reduce critical uncertainties. The injection test was performed during 2018, using injection units provided by the companies TIORCO and NALCO. The project continues in 2019 to the next phase with two pilots, which include: drilling of 12 new wells, the workover of another 23 wells, the installation of two full modular Polymer Injection Units (constructed in France) and a water treatment unit (constructed by Water tectonics). Drilling activity started in January 2019 and injection activity is expected to begin during the second half of 2019.

Cañadón Yatel

During 2018, 23 wells were completed, 22 were drilled, and seven workovers (six of them initiated in 2017) were executed with results below expectations. Drilling activity was concentrated at the Estancia Cholita field mainly in southern and central blocks where the development of a new area that targets an oil zone in D-129 formation. We also changed the strategy of well completions, increasing from three to six hydraulic fractures per well on average.

 

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The electrification of the block began in 2016 and continued during 2017 and 2018 allowing us to exploit the wells with greater reliability, minimizing downtime and reducing lifting costs. Electrification activities are planned to continue during 2019.

Tierra del Fuego

Since 2016, the drilling activity in Tierra del Fuego focused on gas in the Lago Fuego field.

The main objective was the exploitation of the Springhill formation and the exploration of the Tobífera series. We drilled four wells during 2018 (2 core samples were taken during drill operation), and we completed four (1 depleted well was closed), where fracking and flow back programs are being analyzed in order to improve productivity. The results were below expectations. Additionally, source rock “Pampa Rincon” and “Margas Chicas” was studied.

Other activities in the San Sebastian field were aimed at improving the production of gas through the installation of compressors, dewatering artificial lift systems such as capillary injection and the optimization of the vertical performance with high water gas ratio wells. These activities slowed the declining output in the field, as expected.

Non-Operated Areas - Development Activities:

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 “—Main Properties.”

During 2017, we continued to develop an incremental production project, known as the “PIAM-Magallanes Block Incremental Project.” This project aims to increase the production capacity of the area by approximately 1.6 mmcm/d of gas with the startup originally expected in 2017, but effectively began in June 2018. During 2017, we signed an Engineering and Procurement Contract (EPC) to manage the engineering tasks. This project involves laying a marine pipeline and expanding compression capacity. The total value of the project was U.S.$ 401.3 million.

El Tordillo and La Tapera-Puesto Quiroga blocks:

Beginning in January 2014, under an agreement with the province of Chubut related to the negotiation of an extension of YPF concessions there, we transferred 41% of our working interest in the joint venture, El Tordillo and La Tapera-Puesto Quiroga, to Petrominera Chubut S.E. As a result, our interest in the joint venture will decrease from 12.196% to 7.196% in 2020.

During 2016 and 2017, no Wells were drilled due to the low price of oil.

In 2017 a new agreement was signed with Chubut Province, in which the future compliance scheme of pending investments was established, under the agreement for the implementation of an activity commitment and investment in hydrocarbon areas of Chubut Province.

During 2018, in order to restore activity in the area, nine wells were drilled. In 2019 we plan to drill 17 wells incorporating additional drilling equipment, with a total of two drilling rigs.

Properties and Exploration and Production Activities in Rest of South America

 

  1.

Bolivia: On July 26, 2017, the formalization of the contract with YPFB originally signed in January 2017 was signed, to begin exploration work in Charagua, Bolivia, in a block that has a potential in natural gas resources. In addition, one exploration block was awarded in 2017 (Charagua Block). Activities to fulfil commitments have already started in 2018. YPF holds a 100% working interest in the Charagua Block. However, a partnership agreement has been signed by YPF and YPFB Chaco, whereby YPF would operate holding a 60% working interest and YPFB Chaco would hold 40%. As of the date of this annual report, both parties are still waiting for the Legislative Assembly of Bolivia to formalize the agreement.

 

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  2.

Colombia: Blocks COR 12 and COR 33 are located in the Cordillera Oriental basin, which we operate pursuant to authorization by the Colombian National Hydrocarbons Agency (Agencia Nacional de Hidrocarburos or “ANH”). Our working interest is 60% in COR 12 and 55% in COR 33. The combined net acreage in these blocks is 700 km2. We and our partners informed the ANH of our decision to relinquish both blocks. As of the date of this annual report, the parties are in the process of formalizing and executing the final agreements for the relinquishment.

 

  3.

Chile: From the results obtained in San Sebastián Block we did not foresee any new exploratory opportunities so we:

 

   

Asked the National Authority for the commercial exploitation concession of only a portion of the area where wells with positive results had been drilled.

 

   

Informed the National Authority of our decision not to enter the Third Exploration Period, and to relinquish the rest of the area except for 3,000 acres needed to finish the testing of one exploration well. For this exception, we have requested a period of two years, starting on December 2017.

 

   

We started well testing during 2018 oil production at Carpintero x1, with results in line with expectations. However, it had to be closed from October 17, 2018 until January 17, 2019 as consequence of the Cullen spill.

 

   

Cullen spill (Chile): in storage facilities of YPF in Chile (Cullen plant), a hydrocarbon spill was detected in a pump room. The spill was controlled, and the sanitation tasks finished on November 18, 2018.

Additional information on our current activities

The following table shows the number of wells in the process of being drilled as of December 31, 2018.

 

     As of December  31, 2018  
Number of wells in the  process of being drilled    Gross      Net  

Argentina

     42        33  

Rest of South America

     —          —    

Total

     42        33  

Downstream

During 2018, our downstream activities included crude oil refining and transportation, and the marketing and transportation of refined fuels, lubricants, LPG, and other refined petroleum products in the domestic wholesale and retail markets and certain export markets.

During 2018, the downstream segment was organized into the following divisions:

 

   

Refining Division (oil refining and petrochemical production);

 

   

Domestic Marketing (commercialization and marketing of refined products);

 

   

Chemicals Division (commercialization and marketing of petrochemical products);

 

   

Logistic (transportation of oil to refineries and distribution of refined and petrochemical products to be marketed in the different sales Channels); and

 

   

Trading Division (trading refined products and crude oil to international markets)

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.

 

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Refining division

We wholly own and operate three refineries in Argentina:

 

   

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

 

   

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

 

   

Plaza Huincul refinery, located in the province of Neuquén.

Our three wholly-owned refineries have an aggregate refining capacity of approximately 319,500 boe/d. The refineries are strategically located along our crude oil pipeline and product pipeline distribution systems. In 2018, our crude oil production, substantially all of which was destined to our refineries, represented approximately 82.3% of the total crude oil processed by our refineries, while in 2017 it was 78.6%. 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, 2018, 2017 and 2016:

 

     For the Year Ended December 31,  
     2018      2017      2016  
            (mmboe)         

Throughput crude

     103.6        107.0        107.4  

Throughput feedstock

     4.7        4.3        4.0  

Throughput crude and feedstock

     108.3        111.2        111.4  

Production

        

Diesel

     41.5        41.0        40.6  

Motor gasoline

     26.1        25.2        24.6  

Petrochemical naphtha

     7.4        7.9        7.6  

Jet fuel

     6.8        6.8        5.9  

Base oils

     0.8        1.0        1.0  

 

     For the Year Ended December 31,  
     2018      2017      2016  
     (thousands of tons)  

Fuel oil

     234        935        1,554  

Coke

     934        925        839  

LPG

     670        644        670  

Asphalt

     215        313        145  

During 2018, our global refinery utilization amounted to 88.81%, compared to 91.73% in 2017, based on a nominal capacity of 319.5 mboe/d.

The La Plata refinery is the largest refinery in Argentina, with a nominal capacity of 189 mbbl/d. The refinery includes three distillation units, two vacuum distillation units, two fluid catalytic cracking units, two coking units, 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 km from the City of Buenos Aires. During 2018, the refinery processed approximately 160.6 mbbl/d, with a capacity utilization rate of 84.96 % compared with 172.3 mbbl/d processed in 2017, with a capacity utilization rate of 91.15 %. The lower capacity utilization compared to the previous year was a result of lower demand of fuel oil from power generation plants as there was more availability of natural gas in the period and scheduled maintenance stoppages in our industrial

 

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complexes. The crude oil processed at the La Plata refinery, 84.83 % of which was YPF-produced in 2018, 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.

A new Coke A facility that allowed for an increase in the conversion capacity was officially started up in September 2016, and the test run was made in October 2016. The capacity of the new unit is 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 of 23,800 bbl/d, representing an increase of almost 12% in the capacity utilization rate. The production of this facility is a component for the blend to be used in the generation of diesel, motor gasoline and coke.

The Luján de Cuyo refinery has a nominal capacity of 105.5 mbbl/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, an FCC naphtha splitter, a hydrocracking unit, an FCC naphtha hydrotreater unit and two gasoil hydrotreating units. During 2018, the refinery processed approximately 99.7 mbbl/d, with a capacity utilization rate of 94.5% compared with 98.0 mbbl/d processed in 2017, with a capacity utilization rate of 92.9%.

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 78.4 % of the crude oil processed at the Luján de Cuyo refinery in 2018 (and 77.5% of the crude oil processed in this refinery in 2017) was produced by us. Most of the crude oil purchased from third parties comes from oil fields located in the provinces of Neuquén and Mendoza.

The Plaza Huincul refinery, located in the province of Neuquén, has an installed capacity of 25 mbbl/d. During 2018, the refinery processed approximately 23.5 mbbl/d, with a capacity utilization rate of 94.1%, compared with 22.8 mbbl/d processed in 2017 with a capacity utilization rate of 91.2%.

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. In 2018, 19% of the refinery’s crude supplies were purchased from other companies, while 100% of such supplies were produced by us in 2017.

According to Ministry of Energy regulations, sales of gasoline and diesel must be blended by biofuels. The gasoline requires a 12% blend of ethanol (Resolution No. 37/2016) and diesel requires a 10% blend of FAME (Resolution No. 1125/2013), the same blend request of 2017 and 2016.

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. Inventories of industrial greenhouse gases and savings of CO2 emissions equivalent (MDL projects) have been verified in accordance with ISO 14064 in the three refineries (2009 La Plata and Lujan de Cuyo; 2017 Plaza Huincul). The refineries maintain their systems under continuous improvement and revision by authorized organizations.

During 2018, the energy produced by renewable energy from the wind farm of Manantiales Behr (located in Chubut Province), represents 12% of the electricity consumption of the Luján de Cuyo and La Plata Refineries. This park was incorporated into the matrix of electricity consumption in July 2018 and is owned by YPF Energía Eléctrica (YPF EE) (“See “Item 4. Information on the Company—Gas and Power—YPF in Power Generation.”).

Marketing Division

Our Marketing Division supplies gasoline, diesel, JET-A1 Fuel, lubricants, asphalts, LPG and other petroleum products throughout Argentina and other countries in the region. We supply several industries such as, retail, transport and agriculture.

 

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During 2018, as a result of the macroeconomic situation in Argentina, there was a change in the performance of fuel sales. See “Item 5. Operating and Financial Review and Prospects—Factors Affecting Our Operations—Macroeconomic conditions.” During the second half, registration of new vehicles (0 Km) decreased by 33% compared to 2017. This resulted in a direct adverse effect on the performance of fuel sales.

YPF maintained its leading position 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. As a result of a change in market behavior, the high values of mix in 2017 (34.7%) were difficult to maintain reaching an annual average mix during 2018 of 31.4%. In the second half of 2018, the mix fell to its lowest value in the month of November (26.0%). In December, the trend reverses, rising to 27.8%.

Our market share of Infinia and Super gasolines, according to our estimates, was 61.5% and 53.8%, respectively, as of December 31, 2018, compared with 61.3% and 52.4%, respectively, as of December 31, 2017. Our sales volume for Infinia was 1,643 mcm in 2018 (7.4% less than in 2017) and 3,590 mcm for Super in 2018 (7.4% higher than in 2017).

With respect to diesel, according to our own estimates, our market share of diesel (500 and 1500 ppm) and Infinia diesel (10 ppm) was 58.9% and 60.1%, respectively, as of December 31, 2018, compared with 56.5% and 57.6%, respectively, as of December 31, 2017. The greatest volume growth was in Infinia Diesel increasing 16.6% compared to 2017, as a consequence of the arrival of new vehicles to the country with the Euro 5 standard (with SCR technology) in the transport segment. Along with Infinia diesel (10 ppm), for which sales volume was 2,041 mcm in 2018 compared to 1,751 mcm in 2017, our diesel (500 and 1500 ppm) decreased sales volume of 5,853 mcm in 2018 compared to 5,946 mcm in 2017. This sales volume does not include bunker sales to the foreign market and sales to other companies. Accounting for such sales, sales volume of diesel (500 and 1500 ppm) increased 1.0% compared to 2017. Finally, sales volume of Infinia diesel reached 25.9% of total diesel sales volumes, up from 22.7% in 2017.

Our main competitors are still active in communication, promotions, loyalty cards and bank discounts.

Consequently, 2018 was a year during which YPF focused its efforts on three strategic pillars: construction of perceived quality, loyalty and closeness to the customer and the offer of a best value proposal for the customer.

In connection with the creation of perceived quality, this was implemented through YPF’s authority program, which focuses its efforts on creating a strong relationship between the advisors and role models of the mobility, fuels and lubricants industry. In August 2018, the Infinia Communication Campaign was carried out. Additionally, we sponsored the main car competition categories in Argentina, with particular focus on GM’s competition team (Super TC 2000).

As to the loyalty and closeness to the client pillar, YPF multiplied the efforts of the Serviclub program with proposals from alliances and special promotions during the World Cup and the creation of a campaign relating to reduced energy consumption through LED lightbulbs during October. In addition, we implemented special promotions during the summer and other regional campaigns aimed at specific targets such as millennials and women.

In connection with the value proposal pillar, in 2018 its main drivers were: alliances with benefit clubs, national and regional banks and discounts in fuel prices for members of the Serviclub program. During the year we also carried out several campaigns impacting three million customers (distribution of soccer balls in exchange for fidelity points or cash, and promotional activities within the Lollapalooza Festival), we sponsored sporting events (car racing, national soccer team), and we furthered our relationship with opinion leaders of fuel matters, automobile care and products for the vehicle.

The Domestic Marketing Division includes six main segments: Retail, Agriculture, Industry, Aviation, Lubricants and Specialties and LPG.

Retail Division

As of December 31, 2018, the Retail Division’s sales network in Argentina consisted of 1,591 retail service stations, compared to 1,563 as of December 31, 2017. Of these, 113 are owned by YPF. The remaining 1,478 service stations are associated service stations. OPESSA, our wholly-owned subsidiary, actively operates 166 retail service stations, of which 88 are owned by YPF, 22 are leased to the Automóvil Club Argentino (ACA) and 56 are leased to independent owners. Additionally, YPF owns 50% of Refinor, a company operating 66 service stations.

 

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According to our estimates, as of December 31, 2018, we were the main fuel retailer in Argentina, with 35.8% of the country’s gasoline service stations, followed by Shell, Axion and Petrobras with 14.4%, 12.3% and 5.4%, respectively. During 2018, our market share in diesel and gasoline, marketed in all segments, increased from 56.1% to 58.0%, from December 31, 2017 to December 31, 2018.

Our convenience stores, YPF Full and YPF Full Express, are present in 492 and 70 points of sale, respectively, as of December 31, 2018. During 2018, we established 22 new sale points and implemented 80 new images in Full stores at service stations. Additionally, a modern oil change service shop called YPF Boxes is present in 299 service stations across the country.

During 2018, YPF successfully renewed contracts with the operators of retail associated service stations expiring within the year. We also signed in advance 31 target contracts with expiration in 2019, assuring a 22% market share for the Company. During this time, an aggressive infrastructure plan was carried out, mainly to install 70% more fuel-tanks and pumps compared to 2017.

In October 2018, YPF signed a new agreement with ACA allowing an extension in the lease of the retail service stations run by ACA through October 2027. This agreement includes 22 service stations owned by ACA and operated by OPESSA. This major event secures the maintenance of the 5.1% market share owned by ACA.

We highlight the opening of 40 new service stations to our net, consisting of 20 new stations built by YPF and 20 new added through lease contracts compared to the 35 incorporations during 2017.

During 2018, the operational process through which our customers have the possibility of requesting “cash back” in our stores, which consists of cash withdrawals from their debit accounts, has gained relevant importance. This cash is withdrawn directly from the employee’s cash register which optimizes cash collection and increases savings by reducing costs of depositing cash in the bank.

As part of the + YPF program, on September, we awarded the best operators in the network with a training trip to Disney (Instituto Disney). This training focused on three pillars: excellence in leadership, employee commitment and quality service. In addition, in May, the POTENCIAR National Convention was held at the Costa Salguero site, where 1,645 people participated, including operators, heads of network stations and retail sales teams. This event was of great importance and it was resumed in 2018 after many years, whose main objective was to attract the network of YPF’s operators to accompany and invest in service stations network for the next 10 years.

Agriculture Division

The Agriculture Division provides an extensive portfolio of products and services to agricultural producers, including agricultural advice, delivery and application of products at the consumption site, under a unified brand image, directly or through a network of 103 sale points (nine owned by YPF) with exclusive commercial areas in 19 provinces, offering diesel, fertilizers, lubricants, phytosanitaries, and ensiling bags, among other products. During 2018, YPF released eight new products (phytosanitaries, fertilizers and adjuvants), under the YPF brand. The agriculture division works through distribution agreements with leading local and international suppliers. This year our market share of fertilizers, according to our estimate, was 9.4% compare to 9.6% (2017).

YPF developed crop financing with instruments such as credit cards with local banks, for more than U.S. $ 128 million. We accept different types of grains as payment (exchange), mainly soybean, but also corn, rice, wheat, sorghum, sunflower, barley and blueberries. Some soybeans are processed by third-party companies to obtain soybean oil, meal and hulls that we generally export. Furthermore, part of the soybean oil is processed into fatty acid methyl esters (“FAME”) (a natural product added to commercial grade diesel), which covers approximately 11% of YPF’s refinery needs. During 2018, we received approximately 1.2 million tons of grains, primarily soybeans (a decrease of 16% compared to 1.5 million tons in 2017, as a consequence of the severe draught in the first quarter of the year. Nevertheless, this decrease was less than in soybean production which was around 35%), that positions YPF among the top five exchangers in Argentina. As December 31, 2018 the revenue from these exports represented approximately U.S.$ 257.6 million, a 30.7% decrease compared with 2017. It is worth noting that in 2018 YPF was the tenth exporter in the Argentine market of soybean meal and oil.

Industry Division

This division supplies the entire national industry and transport (ground) sectors, which require a broad portfolio of products and services to meet customer needs. The division develops specific solutions for mining, oil & gas, transport and general industries. We supply products such as fuels (diesel, gasoline, fuel oil), lubricants, coal, asphalts, paraffin and derivatives (sulfur, CO2, decanted oil, aromatic extract), either directly from our refineries to the point of consumption (more than 10,000 direct customers) through our own ground and waterway network, or through a network of 22 industrial distributors with national coverage (Mining, Oil & Gas and Asphalts).

 

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Our mission is to promote efficiency in the value chains of the industries we serve through energy solutions, supplies and services. Accordingly, our strategy is based on close relationships with our clients and the development of innovative solutions focused on creating value for YPF and the region’s industries.

During 2018 we continued to implement a control and traceability solution for the gasoline and lubricants consumption which was offered to all industrial segments customers to improve efficiency in bulk fuel management.

In the transport segment, we also entered into new commercial agreements (rental of the property and operation) with ConSer, ensuring the continuity of the commercialization of 2,500 cm per month of diesel.

We have entered into a commercial agreement with AGP (General Administration of Ports) in order to install a base of operations in the Port of CABA (Autonomous City of Buenos Aires).

Another highlight in the transport segment in 2018, was the steady growth of sales through the YER (YPF en ruta) fleet card, which resulted in an increase of 27% of volume sales compared to 2017, mainly as a result of certain incentive programs that were released. This card is designed to cover the supply and administration needs of vehicles of cargo and passengers.

In the mining segment, in 2018 we entered into an agreement with Sales de Jujuy S.A., for diesel supply, for a term of one year, with an estimated demand of 600 cm per month of diesel. This year it was possible to close the deal of supply with renewable energies to Mina Aguilar (1400 MW / year). Finally, a pilot test of Veladero (Barrick) supply with LNG is being initiated.

Through the general industries segment, we accompany the implementation of Strategic Special Operations for Argentina, such as: G-20, Youth Olympic Games 2018 and the First Stage Antarctic Campaign 2018-2019.

As a result of a drop in the Argentinian market, during 2018 YPF asphalt sales were 244 thousand tons (68 thousand tons less than in 2017), reaching a market share of 42.1% (2.6% less than 2017).

Aviation Division

The Aviation Division provides JET-A1 Fuel in 52 airports and AVGas-100LL Fuel in 41 airports across Argentina. We have highly developed logistics that include 150 trucks and a pipe line from La Plata Refinery to Ezeiza Airport, the most important airport in Argentina. In 2018 YPF invested approximately U.S.$ 5,000,000 in new trucks and logistics equipment.

YPF has a 57% market share of JET-A1 in Argentina and is the second supplier of JET-A1 in Santiago de Chile’s airport, with an 18% market share. Our sales volume for JET-A1 was 1,146 mcm in 2018, 8.1% higher than in 2017.

During 2018 the company entered into agreements for the supply of JET-A1 with all low-cost companies which started to operate in Argentina (Flybondi, Norwegian Argentina, JetSmart, Avianca Argentina, Grupo LASA). We expect this market to increase in the near future.

We also entered into new agreements with Turkish Airlines, Ethiopian Airlines and Norwegian UK for the supply of 100% JET-A1 volume during 2019. With American Airlines and KLM (with which we already had agreements during 2018) we completed a new agreement for the supply of 100% of their required volume during 2019.

Lubricants and Specialties Division

In the Lubricants market, YPF has a leading position. We manufacture a wide range of products including Motor Oil, Heavy Duty and Industrial lubricants in retail, wholesale and industrial markets through a net of dealers and distributors. In the La Plata industrial complex, we operate a modern and efficient manufacturing facility where we produce lubricants not only for the domestic market, but also for export. Our line of automotive lubricants, including mineral and synthetic oils, 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.

 

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During 2018, our sales of lubricants decreased by 5.7% compared to 2017. Sales to the domestic market fell by 7.3%, and sales to the foreign market increased by 6%. The reason for the drop in Lubricants sales was due to a collapse of the market, as a result of a severe economic recession in Argentina during 2018.

Exports are made to two large groups. On the one hand, we sell to our wholly-owned companies in the main markets of Brazil and Chile, where the volume sold increased 54% in Brazil compared to 2017, because exports were made to cover problems with the supply of premium materials, and increased 1% in Chile compared to the previous year. On the other hand, we export to our network of distributors located in Bolivia, Uruguay, Paraguay and Ecuador, where sales volume was 9% higher than in 2017.

YPF’s strategy is to continue its leadership in the development of lubricants, to meet the latest generation OEMs (original equipment manufacturers) requirements for protection and performance needs in both passenger and heavy-duty vehicles, maintaining the leadership in a high-profitability lubricants market. Our market share as of December 31, 2018 was 39.4% (a decrease of 0.1% compared to 2017) according to information provided by the Secretary of Energy (formerly Ministry of Energy). The critical factors of competitiveness are the usage and referral agreements from the main OEMs (Ford, General Motors, Porsche and Scania) and reaching the customer with the best network and service coverage.

The sales of our passenger car motor oil (PCMO) line (Elaion is the most important brand for the automotive segment) reached 12.5 mcm in 2018, a decrease of 11.6% compared to 2017. With respect to our heavy-duty motor oil (HDMO) line (Extravida), 2018 sales decreased by 8.7% compared to the previous year.

In order to meet the technological update required by new vehicles that comply with the Euro 5 standard (with SCR technology) of mandatory use in the country for all new vehicles and complemented by the launch of Infinia Diesel and XV500 Extravida, we launched our Nitrous Oxides Reducing Agent (ARNox). Azul 32 is the commercial name of a new product used in vehicles that comply with the emission standard EURO 5 (serves to reduce emissions of gases into the environment). The sales of Azul 32 increased 47% compared to 2017.

Our quality controls ensure that the product reaches the customer in optimal conditions and complies with the strict standards determined by ISO 22241 for this product. Since 1995, Lubricants and Specialties has been awarded with ISO 9001: 2008, ISO 14001: 2004, OSHAS 18.001: 2007 ISO / TS 16949-Third certifications. Also, YPF has obtained for our Azul 32 API’s certification as part of the American Petroleum Institute (API) Diesel Exhaust Fluid Certification Program.

LPG Division

We are engaged in the LPG wholesale business, which encompasses LPG storage, logistics and commercialization to domestic and foreign markets. We obtain LPG from natural gas processing 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.

During 2018, we sold approximately 35% of our LPG production to YPF Gas S.A. for the domestic market.

We are the largest LPG producer in Argentina, with sales in 2018 reaching approximately 616 mtn, compared with 579 mtn in 2017. Of this, approximately 371 mtn were sold in the domestic market, compared to 402 mtn in 2017. 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 2018 reached approximately 245 mtn, compared to 177 mtn in 2017. The main destinations were Chile and Paraguay. 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. 9,282 million and Ps. 3,547 million in 2018 and 2017, respectively.

 

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We produced 569 mtn of LPG in 2018, not including LPG destined for petrochemical usage, and purchased LPG from third parties, as detailed in the table below:

 

     Production and
Purchases
(mtn) 2018
 

LPG from Natural Gas Processing Plants (1)

  

El Portón

     110.2  

San Sebastián

Loma Negra

Estación Fernández Oro

    

23.0

22.9

4.9

 

 

 

Total Upstream

     161.0  
  

 

 

 

LPG from Refineries and Petrochemical Plants

  

La Plata refinery

     290.3  

Luján de Cuyo refinery

     93.8  

CIE

     23.8  

Total refineries and petrochemical plants (2)

     407.9  
  

 

 

 

LPG purchased from joint ventures (3)

     16.3  
  

 

 

 

LPG purchased from unrelated parties

     23.4  
  

 

 

 

Total

     608.6  
  

 

 

 

 

(1)

San Sebastian, El Portón, Loma Negra and EFO are 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 187.5 mtn of LPG in 2018.

Regarding sales prices, the butane local market is regulated by the government. In April (Disposition No. 5-E/2018) the government updated Butane’s maximum reference prices for the local market recognizing an improvement in sales prices. In the case of propane, although the market is also regulated by the government, local prices published by the former Ministry of Energy and Mining are referred to export parity.

Chemicals Division

Petrochemicals are produced at our petrochemical facilities in Ensenada and Plaza Huincul.

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.

 

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

 

     Capacity  
     (tons per year)  

CIE

  

BTX (Benzene, Toluene, Mixed Xylenes)

     526,000  

Orthoxylene

     25,000  

Cyclohexane

     95,000  

Solvents

     66,100  

MTBE

     60,000  

Butane I

     25,000  

Oxoalcohols

     35,000  

TAME

     105,000  

LAB (Linear Alkyl Benzene)

     52,000  

LAS (Linear Alkyl benzene Sulphonate)

     32,000  

PIB (Polyisobutylene)

     26,000  

Maleic Anhydride

     17,500  

Plaza Huincul

  

Methanol

     411,000  

Natural gas, the raw material for methanol, is supplied by our Upstream 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.

In 2018 we signed an agreement with Methanex (one of the biggest global methanol producers) to produce nearly 110,000 tons of methanol in their Chilean facility, with YPF’s natural gas as raw material. This additional production of methanol allowed us to increase our methanol sales by 52% compared to 2017, mainly through exports to the Brazilian market.

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

In 2018, 2017 and 2016, 67%, 84% and 80%, respectively, of our petrochemicals sales (including propylene), were made in the domestic market, while we exported to Mercosur countries, the rest of Latin America, Europe and the United States.

The La Plata petrochemical plant was certified under ISO 9001 (2018), ISO 14001 (2014), OHSAS 18001 (2014), ISO 50001 (2015) and the plant verified the inventory of CO2, CH4 and N2O emissions under ISO 14064 (2011). The CIE laboratory was certified under ISO 17025 (2013). The methanol plant was certified under ISO 9001 (2016), ISO 14001 (2016) and OHSAS 18001 (2014).

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.

 

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Management and development of our petrochemical business, planning and economic and commercial control, marketing and post-sale service of petrochemical products.

Additionally, we also own a 50% interest in Profertil, a joint venture with Nutrien, a worldwide leader in fertilizers, which initiated operations in 2001. Profertil has a production facility in Bahía Blanca which produces 1.3 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.

Logistic Division

Crude oil and products transportation and storage

We have available for our use a network of five major pipelines, two of which are wholly-owned by us. The crude oil transportation network includes nearly 2,700 km 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        93,509  

Puerto Rosales

  

La Plata refinery

     100     585        326,541  

La Plata refinery

  

Dock Sud

     100     52        141,006  

Brandsen

  

Campana

     30     168        120,700  

Puesto Hernández/P. Huincul/Allen

  

Puerto Rosales

     37     888        232,000  

We own two crude oil pipelines in Argentina. One connects Puesto Hernández to the Luján de Cuyo refinery (528 km), and the other connects Puerto Rosales to the La Plata refinery (585 km) and extends to Shell’s refinery in Dock Sud at the Buenos Aires port (another 52 km). 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 cm, and three tanks in the city of Berisso, in the province of Buenos Aires, with 90,000 cm of capacity. We own 37% of Oleoductos del Valle S.A., operator of an 888 km pipeline network, its main pipeline being a double 513 km 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 of 36% and 18% respectively, in the 428 km trans Andean 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 cm, and Caleta Olivia (province of Santa Cruz), which has a capacity of 246,000 cm. 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 cm, and of the crude oil pipeline that connects Brandsen (60,000 cm 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 km. We also own seventeen storage terminals for distribution of refined products and seven LPG storage terminals with an approximate aggregate capacity of 1,620,000 cm. Three of our storage and distribution terminals are annexed to the refineries of Luján de Cuyo, La Plata and Plaza Huincul. Ten of our storage and distribution terminals have maritime or river connections. We operate 52 airplane refueling facilities (40 of which are wholly-owned) with a capacity of 22,500 mcm, 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 delivered by an exclusive tanker truck fleet of approximately 2,400 units of which 28 are owned.

During the last year, after a national and international tender, and as the result of a bankruptcy process, YPF and Destilería Argentina de Petróleo S.A. (“DAPSA”) were awarded part of Oil Combustibles S.A. We acquired strategic assets that will be integrated to those already operated by YPF, especially the docks and fuel storage tanks located in the terminal located on the Paraná River that will allow us to expand the logistics capacity for future fuel exports, as well as for possible regional expansion. The network of Oil gas stations was acquired by DAPSA and Delta Patagonia S.A., as the result of the bankruptcy process mentioned before and an agreement with YPF. See Note 3 to the Audited Consolidated Financial Statements for additional information.

 

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As of December 31, 2018, our logistics processes remain certified under ISO 9001, ISO 1400l, OHSAS 1800l, and ISO 39001 Standards.

Trading Division

Our Trading Division trades refined products and crude oil to international customers and purchase crude oil from domestic oil companies. The refined products traded are unleaded gasoline, diesel, fuel oil, LPG, light naphtha, virgin naphtha, MTBE, green coke, decanted oil and AVGAS, among others.

This division exports to different countries, principally to United States of America, Africa and Brazil, as well as to other countries. Sales to international customers for 2018 and 2017 were Ps. 13,244 million and Ps. 4,982 million, respectively. In 2018, refined products accounted for 53% of total sales, up from 49% in 2017. In 2018, 33% of total sales corresponded to marine fuels, down from 48% in 2017. In 2018 and 2017, sales volumes to customers outside Argentina consisted of 5.3 mmbbl and 3.0 mmbbl of refined products, respectively, and 2.0 mmbbl and 2.3 mmbbl of marine fuels, respectively.

For the domestic market, sales of crude oil totaled Ps. 2,073 million, or 1.1 mmbbl, in 2018 and Ps. 995 million, or 1.2 mmbbl, in 2017. Sales of marine fuels totaled Ps. 3,025 million, or 1.2 mmbbl, in 2018 and Ps. 1,726 million, or 1.2 mmbbl in 2017.

In addition, imports of low sulfur diesel, gasoline, alkylate and AVGAS in 2018 totaled 6.9 mmbbl, an increase of 49% compared with 4.6 mmbbl in 2017. The United States of America and Brazil were the principal origin of these imports.

Imports of fertilizers, agrochemicals and paraffin totaled 0.24 million tons in 2018, growing 47% compared with 0.16 million tons in 2017. China and Morocco were the principal origin of fertilizer imports.

In 2018, it was not necessary to import crude oil.

Gas and Power

During 2018, our Gas and Power activities included: (i) the commercialization and distribution of natural gas to third parties; (ii) the technical operation of LNG regasification in Bahía Blanca (until October 31, 2018) and Escobar terminals, through the contracting of two regasification vessels; and (iii) the generation of both conventional thermal electricity and renewable energy projects mainly developed by YPF Energía Eléctrica S. A.

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, 2018, we were not contractually committed to deliver material quantities of crude oil to third parties in the future.

 

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As of December 31, 2018, we were contractually committed to deliver 15.3 mmcm (or 539 bcf) of natural gas in the future, (without considering interruptible export supply contracts) of which approximately 8.8 mmcm (or 311 bcf) will have to be delivered from 2019 through 2021. According to our estimates as of December 31, 2018, 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. On August 2018, the Ministry of Energy and Mining (predecessor to the SGE) (“MINEM”) issued Resolution No. 104/2018 which allows local producers to export to Chile natural gas under new procedures. See “Item 4. Legal and Regulatory Framework and Relationship with the Argentine Government—Market Regulation—Natural gas.”

For information regarding regulations that have been affecting our operations see “Item 4. Information on the Company—Regulatory Framework and Relationship with the Argentine Government—Market Regulation.”

For information regarding claims arising from restrictions in the natural gas market see “Item 8. Financial Information—Legal Proceedings.”

On November 29, 2017, natural gas producers (among them, YPF) and ENARSA, at the request of the MINEM, subscribed the Terms and Conditions.

The Terms and Conditions set forth the basic policies to guarantee the adequate supply of natural gas to Distributors, and consequently to the residential and commercial final consumers, the continuity of the gradual and progressive reduction of subsidies. The Terms and Conditions were entered into within the framework of the normalization process of the natural gas market, which provides that the Terms and Conditions will be effective during the “transition period” to normalization which is currently scheduled to run through December 31, 2019.

Among other provisions, the Terms and Conditions recognize the right to transfer the cost of acquiring gas to the tariff paid by users and consumers and establish the volume that each producer and each basin must make available on a daily basis to the distributors (who in turn may express their lack of interest in receiving such amounts before a certain cut-off date set forth in the Terms and Conditions) during each month. In addition, the Terms and Conditions: (i) set forth penalties for any party’s non-compliance with their obligation to take or deliver gas, (ii) set maximum gas prices in U.S. dollars for each basin for the two-year period from the execution of the Terms and Conditions, which were significantly higher than those prevailing until this agreement, (iii) include payment guidelines for the purchases made by the distributors to the producers and (iv) they include guidelines for early termination in the event of certain breaches by the parties. Pursuant to the Terms and Conditions, during the transition period ENARSA assumed the obligation to supply the demand corresponding to areas where the subsidies of residential gas consumption set forth in section 75 of Law No. 25,565 (corresponding to the areas of lower price of residential gas charged to users and consumers) are applicable.

The Terms and Conditions constitute guidelines for all parties in the negotiation of their respective individual agreements; however, the terms and conditions are guidelines and not obligations of the parties who entered into the Terms and Conditions. Entering the Terms and Conditions allows YPF to have predictability over its demand since natural gas for residential consumers is no longer dispatched according to priorities established in Resolution No. 1410/2010 but following the proportions and maximum quantities set forth in the Terms and Conditions annexes, compelling distribution companies to acquire natural gas for peak demand in the spot market.

On December 29, 2017, MINEM Resolution No. 508-E/2017 was published. This establishes the procedure for the compensation of lower revenues than the Licensees of the Natural Gas Distribution Service for User Networks See “Item 4. Information on the Company—Legal and Regulatory Framework and Relationship with the Argentine Government—Natural Gas.”

During 2018, the natural gas market was deeply affected by the adverse situation of the Argentine economy and was also characterized by excess supply compared to domestic demand at certain times of the year, which impacted the production of natural gas resulting in the temporary closure of production in some locations, as well as in the reinjection of hydrocarbon. Based on this new scenario and new regulations (see “Item 4. Information on the Company—Legal and Regulatory Framework and Relationship with the Argentine Government—Natural Gas—Tariffs.”) and agreements, a reduction in natural gas sales prices in dollar terms, can be seen in relation to the prices stablished in 2017.

See “Item 5. Operating and Financial Review and Prospects—Factors Affecting Our Operations—Macroeconomic conditions” and “Seasonality.”

 

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The devaluation of the Argentine Peso, among other impacts, triggered a renegotiation process of the agreements reached under the Terms and Conditions entered into on November 29, 2017 at request of the MINEM, to partially moderate the impact of passing through the effects of devaluation on tariffs to end users while keeping the contractual relations between parties. See “Item 4. Information on the Company—Legal and Regulatory Framework and Relationship with the Argentine Government—Natural Gas—Tariffs.”

This situation also caused the Local Distribution Companies (“LDC”) to incur debts with producers due to the difference between contractually agreed natural gas prices nominated in U.S.$ and the tariffs that LDCs charge to end users which are denominated in pesos.

As natural gas prices were not passed to end users pursuant to the regulatory framework, the Argentine government issued Decree No. 1053/2018 which set forth that differences caused by the variations in the exchange rate between natural gas prices and tariffs will be assumed by the Argentine Government. Differences and interest were to be paid in 30 installments to LDCs beginning in October 2019, and thereafter the LDCs must make overdue payments to producers. Additionally, LDCs and producers agreed to waive all their claims relating to these differences. ENARGAS is responsible for application of the decree and its regulation is still pending. See “Item 4. Information on the Company—Legal and Regulatory Framework and Relationship with the Argentine Government—Natural Gas.”

The above mentioned decree also set forth that from April 2019 onwards, differences generated as result of exchange rate variation shall not be passed through to final consumers. YPF is analyzing the potential courses of action available to it, in order to protect its rights and obligations under the law and the regulatory framework. See “Item 4. Risk Factors—Risks Relating to Our Business—We are exposed to the effects of fluctuations in the prices of oil, gas and refined products.”

The natural gas market for power generation also suffered different changes:

On August 1, 2018, the MINEM issued Resolution No. 46/2018 lowering natural gas price reference for electric generation by approximately 20% and instructed Compañía Administradora del Mercado Mayorista Eléctrico S.A. (CAMMESA), a government-controlled company, in charge of the electricity dispatch that concentrate the purchase of natural gas and fuels for power generation, to acquire combustibles through competitive processes.

In September 2018, CAMMESA, decided to purchase most of the natural gas to be consumed between September and December through an electronic bidding process. The bids were on a spot basis, not having either Take or Pay or Delivery or Pay obligations therefore there are not penalties for not delivering. Prices further decreased, but the process cannot be taken as a term firm price parameter as there were no obligations to deliver or to take the natural gas and the bidding conditions imposed a maximum price.

On November 6, 2018, the SGE issued Resolution No. 70/2018 that gave back to power generators the ability to purchase their own natural gas supply. Most of the power generator recovered the ability to do so, therefore, prices of natural gas purchased under the bidding processes decreased further because of the competition for demand in the low consumption season and in an environment with oversupply and economic recession.

At the end of December 2018, the government decreased again the natural gas price reference for power generation by between 16% and 8% based on the supply basin of origin, with Neuquina basin being the most affected. Some days later, CAMMESA called for another bidding process under the same conditions. The term of this bidding was one year and again established maximum prices not related to free market pricing mechanisms. This bidding process resulted in even lower natural gas prices for generation. However, this cannot be considered a parameter due to the conditions of the bidding.

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. Our principal supply contracts are briefly described below.

We were committed to supplying a daily quantity of 125 mmcf/d (or 3.5 mmcm/d) to the Methanex plant in Cabo Negro, Punta Arenas, in Chile (under three original agreements entered into on January 5, 1995, March 11, 1997 and November 13, 2001, which expire between 2017 and 2025). Pursuant to instructions from the Argentine government, deliveries have been interrupted since 2007. In connection with these contracts, the Company signed three new agreements with Methanex through which YPF eliminated all contractual obligations and past and future potential claims related to the original agreements through 2018. The first agreement was signed in 2011, through which YPF committed to investments in Upstream. The second one was signed in 2012, through which YPF committed to temporarily exporting gas to Chile and importing methanol as the final product (“Gas Tolling Agreement”), receiving the approval from the Argentine government. A new Gas Tolling Agreement was signed in December 2016, through which YPF committed to supplying a

 

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total volume of 4 bcf (115 mmcm) of gas to Methanex through April 2018. The new Gas Tolling Agreement was signed by YPF and Methanex and presented for approval of the Argentine government to temporarily export gas and import methanol. An addendum to the Gas Tolling Agreement was signed on December 4, 2017 by YPF and Methanex, pursuant to which YPF has the option to supply 1 mmcm/d until September 2018 or until reaching a total amount of 115 mmcm whatever comes first. Each cubic meter delivered, reduces proportionally the commitment of YPF to deliver natural gas according to the 1997 Agreement, from January 1 to December 31, 2019. The Gas Tolling Agreement as well as the addendum (both approved by MINEM through Resolution No. 502/2017) states that if the volumes of the addendum are completely delivered, the commitment stablished in 1997 Agreement, is considered fulfilled. However, no sanction could apply to YPF if the company decides not to fulfill the volumes mentioned in the addendum. During 2018, YPF delivered 113 mmcm of natural gas to Methanex fulfilling the agreement reached during 2017. Because of this operation and various renegotiations agreements with Methanex all contractual obligations and potential claims related to the original agreements entered into on January 5, 1995 and March 11, 1997 and the contractual obligations and potential claims through 2018 were settled, including those related to the agreement entered on November 13, 2001.

Additionally, in November 23, 2018 Methanex and YPF entered into an agreement to suspend through December 31, 2019 the contractual obligations under the 2001 agreement and establishing contractual conditions for deliveries until that date under the provisions of Resolution No. 104/2018, which was approved by SGE on March 6, 2019.We were 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). As regulations changed, this contract was modified to an interruptible contract and subsequently terminated in 2018.

We have a 21-year contract (entered into in 1999) to deliver 93 mmcf/d (or 2.63 mmcm/d) of natural gas to Innergy Soluciones Energéticas, a Chilean distribution company 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 to reduce its deliver or pay obligation, not to exceed an annual quantity of 20 mmcm with a daily basis of 7.1 mmcf/d (or 0.2 mmcm/d).

In 2018, YPF renegotiated the 1999 Agreement with Innergy. The parties agreed to suspend the contract until both parties reach a new natural gas sales agreement.

As a result of these negotiations, the parties entered into an interruptible agreement under the provisions of Resolution No. 104/2018 pursuant to which YPF will deliver to Innergy up to 1.5 mmcm of natural gas per day. For more information, see “— Legal and Regulatory Framework and Relationship with the Argentine Government—Natural gas export administration and domestic supply priorities.”

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 “Item 4. Information on the Company—Exploration and Production—The Argentine natural gas market” and “Item 8. Financial Information—Legal Proceedings.” Because of actions taken by the Argentine government, through measures described in greater detail under “Item 4. Information on the Company—Legal and 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.

In August 2018, MINEM issued Resolution No. 104/2018 which established a new procedure to export natural gas under six different modalities and without the obligation to re-import the exported volumes. This resolution derogates Resolution No. 299/98 and its modifications and establishes that all the export permits, issued under the abovementioned resolution, must undergo the proceedings established under the new ruling and are subject and conditioned to the security of local market supply. Resolution No 104/2018 also derogates Resolution No. 265/2004, Resolution No. 883/2005 and Resolution No. 8/2017. See “Item 4. Legal and Regulatory Framework and Relationship with the Argentine Government—Market Regulation—Natural gas.”

During 2018 YPF has entered into sales agreements with most of the main potential natural gas consumers from Chile (Colbún S. A., Gas VALPO S. A., Aprovisionadora Global de Combustibles S. A., ENEL Generación Chile S. A., Innergy Soluciones Energéticas S. A. and Methanex S. A.) and is currently negotiating with other potential customers from that country and Brazil. Most of the agreements are under the interruptible alternative provided in Resolution No.104/2018. See for more information — Legal and Regulatory Framework and Relationship with the Argentine Government— “Natural gas export administration and domestic supply priorities.”

 

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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 1,801 bcf (or 51.03 bcm) in 2018. We estimate that the number of users connected to distribution systems throughout Argentina was approximately 8.81 million as of October 31, 2018.

In 2018, we sold approximately 28.5 % of our natural gas to local residential distribution companies, approximately 0.5 % to compressed natural gas end users, approximately 30.5 % to industrial users (including our affiliates, Mega and Profertil), approximately 32.7 % to power plants and 7.8 % to YPF downstream operations. Sales were affected by increased consumption by residential consumers during winter months (June to August). During 2018, approximately 80% of our natural gas sales proceeded from the Neuquina basin.

During the past few years, the Argentine government has taken many 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 “Item 4. Information on the Company—Exploration and Production—Delivery commitments—Natural gas supply contracts.” Argentine producers such as YPF complied with the Argentine government’s directions to curtail exports 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. See additionally “Item 4. Information on the Company—Legal and Regulatory Framework and Relationship with the Argentine Government—Natural gas export administration and domestic supply priorities.”

On January 8, 2017, Law No. 26,732, which establishes export duties on hydrocarbon exports, ceased to be in force. As a result, export duties are no longer imposed on natural gas exports.

See “Item 4. Information on the Company—Legal and Regulatory Framework and Relationship with the Argentine Government—Natural gas” 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, 2018) 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 IEASA (formerly ENARSA) under certain agreements since May 2008. The agreement between the parties required YPF to provide a regasification vessel moored in a jetty belonging to Compañía MEGA, S.A. in Bahía Blanca. Such agreement has been further extended and renegotiated to last until October 31, 2018 date on which the agreement has ended and the regasification vessel left the jetty.

Since the beginning of its operations, this regasification vessel has converted 23.54 bcm (or 831.18 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 2018, until completion of the contract on October 31, 2018 natural gas injected into the network amounted to approximately 1.69 bcm (or 59.5 bcf).

 

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In addition to regasification activities, YPF is the operator of UTE Escobar (a joint venture formed by YPF and IEASA, which operates an LNG Regasification Terminal (“LNG Escobar”) located in Escobar at km 74.5 of the Paraná River in the province of Buenos Aires. UTE Escobar has executed agreements with Excelerate Energy to provide and operate a 151 mcm (or 533 mcf) regasification vessel moored at the LNG Escobar terminal with the capacity to supply up to 20 mmcm/d (or 700 mmcf/d) of natural gas.

During 2018, UTE Escobar worked with Excelerate Energy towards increasing the regasification capacity.

Since the beginning of its operations, this regasification vessel has converted 18.35 bcm (or 647.4 bcf) of LNG into natural gas, which has been injected into the Argentine network. In 2018, natural gas injected into the network amounted to approximately 1.85 bcm (or 65.3 bcf).

During 2018, YPF entered into two agreements: a charter agreement for a liquefaction barge, which will be named “Tango FLNG”, with Exmar Energy Netherlands B.V. (“Exmar”); and a liquefaction services agreement with Exmar Energy Services B.V. (both companies are affiliated with Exmar N.V.). The agreements have a term of 10 years, with an investment by YPF of up to approximately U.S.$ 20 million.

Through these agreements, YPF will be able to produce an approximate volume of 500,000 tons per year of LNG by taking natural gas from its deposits throughout the country. It will allow YPF to export this natural resource to different international markets, including Asia, Europe and regional markets. This is the first floating LNG export project in Latin America, the third in the world, which will make Argentina part of the select group of LNG exporting countries. The barge has a storage capacity of 16,100 m3 LNG and liquefaction capacity of 2.5 mm3/d of natural gas.

The Tango FLNG is the first barge of its kind, it will operate in Bahía Blanca and is expected to begin operations during the second quarter of 2019.

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.

Other investments and activities

NGLs

YPF participated in the development of its affiliate Compañía Mega S.A. (“MEGA”) to increase its ability to separate liquid petroleum products from natural gas.

YPF owns 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 field, in the province of Neuquén.

 

   

An NGL fractionation plant, which produces ethane, propane, butane and natural gasoline and is 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 near the fractionation plant.

 

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MEGA’s maximum annual production capacity is 1.62 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 in the petrochemical operations of PBBPolisur, S.A. (“PBB”), owned by Dow Chemical Company, and exported by tanker to Petrobras and other relevant clients.

Pursuant to Decree No. 2067/08 and Resolutions No. 1982/2011 and 1991/2011 of ENARGAS, since December 1, 2011, MEGA had been required to pay, monthly, a fee of Ps. 0.405 per cubic meter of natural gas it purchases. This requirement had a significant impact on the operations of Mega and was challenged in the Argentine federal courts. On October 27, 2015, the Argentine Supreme Court ruled on the legal proceedings filed by Mega covering the period up to the issuance of Law No. 26,784 (November 13, 2012). It ruled that Decree No. 2067/08 was unconstitutional and did not apply to Mega.

In addition, on February 25, 2013, MEGA filed another action requesting that the federal courts declare the unconstitutionality of Articles 53 and 54 of Law No. 26,784, which included within the provisions of Law No. 26,095 the fee created by Decree No. 2067/08 and ENARGAS regulations.

On April 1, 2016, the Argentine Government issued Resolution No. 28, which provided for the suspension of the application of the fee created by Decree No. 2067/08 and related ENARGAS regulations effective as of the date of issuance.

On April 25, 2018, a federal lower court ruled that Articles 53 and 54 of Law No. 26,784 were unconstitutional and were not applicable to MEGA. The Argentine Government appealed such decision before the Federal Chamber of Appeals but later withdrew the appeal. Thereafter, the Federal Chamber issued a resolution confirming the Argentine Government’s withdrawal of the appeal and, consequently, the April 25, 2018 ruling was upheld. Therefore, this conflict has been definitively resolved in favor of MEGA.

Electricity market—generation

The Argentine Electricity Market

Argentina’s energy demand in 2018 was almost like its energy demand in 2017, only increased 0.3% according to CAMMESA. During 2018, domestic consumption increased 1.8% and exports increased more than 405%.

To satisfy this energy demand, Argentina’s overall power generation in 2018 was 0.75% greater than power generation in 2017, according to CAMMESA. In 2018, 63.8% of Argentina’s power generation came from thermal power plants, 29.1% from hydroelectric power plants, 4.7% from nuclear power plants, 2.4% from renewable energy sources and 0.25% from spot imports from Uruguay, Brazil, Paraguay and Chile (343.5 Gwh). Those spot imports were used to satisfy peak demand hours without capacity reserves and non-used wind energy from Uruguay.

Peak capacity demand reached its maximum in February 2018 (26,320 Mw), but maintaining 1,895 Mw of capacity reserve for security of the electrical system.

Thermal power plants consumed 874,773 mmcm of diesel oil, a decrease of 37.4% compared to 2017, 565,022 tons of fuel oil, a 56.1% decrease compared to 2017, and 18.03 bcm of natural gas, an 5.3% increase compared to 2017.

The average electricity price was Ps. 2,117.5/MWh, an 80.4% increase compared to 2017, while the annual average marginal cost of production was Ps. 1,996/MWh, also a 35.49% increase compared to 2017 due to an improvement in the efficiency of power plants and to a lower consumption of liquid fuels.

In 2017, Resolution No. 19/2017 of the Secretariat of Electric Energy replaced Resolution No. 95/13 and defined a new remuneration method for available power and generated energy, allowed the power generation plants to increase the profitability and reliability of the generation of energy. This resolution established remuneration based on the available power by type of technology (gas turbine, steam turbine, combined cycles, hydroelectric) and remuneration for energy generated and operated. Likewise, additional remuneration was established as incentive to efficiency. The payment of these concepts is done in cash and denominated in dollars. This resolution remained in force during 2018.

In Resolution SEE 287 - E / 2017 of May 10, 2017, the Ministry of Energy instructed CAMMESA to call interested parties to offer new thermal generation of technology: a) combined cycle or b) cogeneration, with compromise to be available to meet the demand in the wholesale electric market, contribute to the reduction of costs and to the increase of the reliability in the Argentine Electrical System.

 

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On March 1, 2019, Resolution No. 1/2019 of the Secretary of Renewable Resources and Electric Market which derogated Resolution No. 19/2017 of the former Secretary of Electric Energy, effective as of March 1, 2019, and among other aspects provided for new mechanisms for payment of guaranteed power availability and generation by Generators, Co-generators and Self-generators from MEM (excluding binational hydroelectric generators, nuclear generators and Generators, Co-generators and Self-generators from MEM whose generating units had been committed as part of agreements for purposes of supplying the MEM from such regime). The prices for power and generation during the six months during which electric demand is lower which were approved by Resolution No. 1/2019 are approximately 20% lower in dollar terms than those set forth in Resolution No. 19/2017.

YPF in Power Generation

On August 1, 2013, because of the spinoff of the assets of PlusPetrol Energy S.A., YPF Energía Eléctrica 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.

During 2018, YPF EE participated in the following power generation plants with an aggregate net installed capacity of 1,819 MW:

 

   

a 100% interest in Central Térmica Tucumán (447 MW combined cycle) through YPF EE, in which we have a 100% interest;

 

   

a 100% interest in Central Térmica San Miguel de Tucumán (382 MW combined cycle) through YPF EE, in which we have a 100% interest; and

 

   

a 100% interest in Loma Campana Este (17 MW motogenerators) through YPF EE, in which we have 100% interest;

 

   

a 100% interest in Loma Campana I (105 MW gas turbine) through YPF EE, in which we have a 100% interest;

 

   

a 100% interest in La Plata Cogeneración (128 MW gas turbine) through YPF EE, in which we have a 100% interest;

 

   

a 100% interest in Manantiales Behr (99 MW gas turbine) through YPF EE, in which we have a 100% interest;

 

   

a 100% interest in Loma Campana II (107 MW gas turbine) through YGEN, in which we have a 100% interest;

 

   

a 100% interest in El Bracho (267 MW gas turbine) through YGEN II, in which we have a 100% interest;

 

   

a 30% interest in Central Dock Sud (797.5 MW combined cycle and 72 MW gas turbines), directly and through Inversora Dock Sud S.A., in which we have a 30% interest.

Additionally, YPF EE owns 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, YPF also owns and operates power plants supplied with natural gas produced by itself, which produce power to supply upstream and downstream activities:

 

   

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

 

   

Chihuido de la Sierra Negra Power Plant (40 MW); and

 

   

Plaza Huincul Power Plant (40 MW).

In 2018, YPF EE generated 5,247 GWh with its two combined cycle plants. Central Térmica Tucuman’s production was 3,031 GWh, and Central Térmica San Miguel de Tucumán’s production was 2,216 Gwh. Additionally, Central Dock Sud generated 1,215 GWh considering YPF EE’s stake. Energy produced by both combined cycle plants in Tucumán was 0.9% lower in 2018 compared to 2017. Also, the energy produced by Central Dock Sud in 2018 decreased by 20.11%. Throughout August there was a failure in the DSUDTG09 compressor’s fixed parts which caused important damage both in the compressor itself as well as in the vanes of the gas turbine. The turbine resumed its operation in December 2018.

On November 7, 2017, YPF EE reached the commercial operating date of an important new thermal power generation plant, Central Térmica Loma Campana (105 MW gas turbine), which is in Añelo, Neuquén. This additional generation plant was designed with the objective of supplying YPF’s internal energy demand all over the country. In 2018 this power plant generated 432 Gwh. Throughout February there was a booster stall in the gas turbine LCAMTG01 that caused the failure in the compressor’s fixed and mobile parts, leading to the subsequent replacement of the compressor. Such failure lasted for approximately 20 days. Also, throughout the months of February and March a failure in the cooling system of the gas turbine LCAMTG02 due to low flow appeared, causing the subsequent redesign of the cooling towers. Such failure lasted for approximately 40 days.

 

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At the beginning of 2018 YPF EE bought the cogeneration plant in La Plata from Central Puerto S.A (128 MW), which generated 874 Gwh in 2018.

Within the framework of Secretary of Electrical Energy (S.E.E.) Resolution No. 21/2016, YPF EE, together with a subsidiary of General Electric, decided to engage in two projects for the development and operation of two power plants.

One project consists of a new 107 MW thermal power plant located at Loma Campana in Neuquén Province, Argentina. The project has succeeded in obtaining a purchase price agreement at the second round of the power capacity auction established through S.E.E. Resolution No. 21/2016 and the reference terms issued by CAMMESA. The commercial operating date of this power plant was on November 30, 2017, generating 395 GWh during 2018.

The second project consists of a new 267 MW thermal power plant located at El Bracho in Tucumán Province, Argentina. The project has succeeded in obtaining a purchase price agreement at the first round of the power capacity auction established through S.E.E. Resolution No. 21/2016 and the reference terms issued by CAMMESA. The project reached the commercial operating date on January 27, 2018, generating 545 GWh during that year.

Both projects involved an aggregate investment of U.S.$ 307.9 million, and the total shareholders’ contribution was U.S.$ 88.4 million (approximately U.S.$ 58.9 million payable by YPF EE), with the remainder of the investment amount, U.S.$ 219.5 million financed by financial institutions.

Additionally, in order to, to support YPF’s operations, YPF EE owns Loma Campana East, which consists of 12 Jenbacher engines financed by a bank lease from Supervielle bank. It is located in Añelo, Province of Neuquén, and built on land owned by YPF. During 2018, these engines generated 34 GWh.

As a consequence of Law No. 27,191 related to renewable energy, YPF EE started in 2016 the construction of its renewable generation project, Manantiales Behr Wind Farm (99 MW), near Comodoro Rivadavia in the Chubut province, in order to supply the percentage of YPF total demand with clean generation that will be required by law in 2018. This project reached the commercial operating date of the first 46.2 MW on July 24, 2018, completing on December 24, 2018, generating 150 GWh during this period.

The energy produced by YPF EE and Central Dock Sud (8,891 GWh in total, considering YPF EE’s stake in Central Dock Sud) represented 6.5% of Argentina’s electricity generation in 2018.

In addition, pursuant to Law No. 27,191, the Ministry of Energy and Mining launched in August 2017 the Plan RenovAr 2.0, an auction for 1,200 MW for the construction of renewable energy generation plants, in which YPF EE was awarded with the construction of the Cañadón Leon Wind Farm, a project of another 99 MW of clean generation, in the Santa Cruz province. Under the terms of the auction, this project will allow YPF EE to have another power purchase agreement with CAMMESA. This project is expected to be finished during the second quarter of 2020.

As far as efficient energy generation is concerned, YPF EE won the award of two projects at the second round of the cycle closure and cogeneration plants auction established through S.E.E. Resolution No. 287/2017. One project consists of a new 72 MW cogeneration plant located in the Buenos Aires province. The other implies the closure of the open cycle of the El Bracho thermal power plant in Tucumán (198 MW).

In addition, and pursuant to Resolution No. 281-E/2017, YPF EE was awarded dispatch priority for two additional renewable generation projects, Los Teros Wind Farm (122.6 MW) and Los Teros II Wind Farm (49.8 MW). These projects will allow YPF EE to commercialize renewable energy in the private market (Mercado a Término de Energías Renovables – “MATER”). Los Teros I is expected to be finished by the end of 2019 and Los Teros II during the second quarter of 2020.

With all these projects in its portfolio, among others, YPF EE pursues to be one of the strongest competitors in the electrical generation market in Argentina. For this purpose, YPF EE established negotiations with GE Energy Financial Services during 2017 in order to redistribute its share capital, trusting that the entrance of the strategic partner will hasten the growth of the company in the country.

 

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On December 14, 2017, the Board of Directors of the Company approved the terms of a memorandum of understanding signed with GE Energy Financial Services, Inc. (“GE EFS”) which established the framework conditions under which the parties would agree to the capitalization of YPF EE. This Agreement, established that GE EFS intended to contribute capital through a vehicle company and subscribe for shares of YPF EE in order to have a shareholding of 25% of its capital stock.

On February 6, 2018, the conditions of the definitive and binding agreement entered into by YPF with EFS Global Energy B.V. (“GE”) and GE Capital Global Energy Investments B.V., companies indirectly controlled by GE EFS, which established the conditions for the capitalization of YPF EE (the “Share Subscription Agreement”). The Share Subscription Agreement established that GE, subject to compliance with certain preceding conditions, would subscribe for shares of YPF EE to have a shareholding of 24.99% of its capital stock and jointly control this company with YPF.

The contribution would be U.S.$ 310 million, composed as follows:

 

   

Subscription price of U.S.$ 275 million:

 

   

U.S.$ 135 million as of the closing date of the transaction; and

 

   

U.S.$ 140 million 12 months after the closing date of the transaction.

 

   

Contingent price of up to the maximum sum of U.S.$ 35 million subject to the evolution of the prices of Resolution No. 19/17 (33.33% as of 24 months from the closing date of the transaction and 16.67% each subsequent year).

On March 20, 2018, GE, a subsidiary of EFS Global Energy B.V. (both corporations indirectly controlled by GE Energy Financial Services, Inc.), subscribed for shares of YPF EE in an amount equal to 24.99% of YPF EE’s capital stock through a cash contribution of U.S.$ 275 million, plus a contingent payment for up to U.S.$ 35 million. This cash contribution will allow YPF EE a more accelerated development of its business plan. As of the date of the subscription of YPF EE shares by GE, GE and YPF have joint control of YPF EE.

See Note 3 to the Audited Consolidated Financial Statements for additional information.

Natural gas distribution

We currently hold 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 2018, Metrogas distributed approximately 20.8 mmcm (or 733.4 mmcf) of natural gas per day to 2.4 million customers in comparison to approximately 20.4 mmcm (or 719.7 mmcf) of natural gas per day to 2.4 million customers in 2017. During May 2013, we, through our subsidiary YPF Inversora Energética S.A. (“YPF Inversora Energética”), gained 100% ownership of Gas Argentino S.A. (“GASA”), the controlling company of Metrogas, by acquiring shares representing the remaining 54.7% interest in GASA not already owned by us. In 2016, GASA and YPF Inversora Energética were both merged into us and dissolved without liquidation.

Additionally, on December 28, 2016, YPF has received from Metrogas a copy of the note received by it from ENARGAS, requesting it to adjust Metrogas’ equity structure in line with the term provided for in Emergency Law No. 25,561 and in compliance with Section 34 of Law 24,076. In this regard, it should be noted that YPF indirectly acquired 70% of Metrogas’ equity, which transaction was approved by ENARGAS Resolution No. I/2,566 dated April 19, 2013; and, following the merger with YPF Inversora Energética S.A. and Gas Argentino S.A., is the holder of 70% of Metrogas shares.

On March 30, 2017, YPF filed an appeal for reconsideration requesting to overrule the ENARGAS Note and render a new decision setting a reasonable timeframe consistent with the current reality of the gas market to comply with the provisions set forth article 34 of Law 24,076.

On June 15, 2017, YPF submitted to ENARGAS a tentative schedule for the process of adapting its equity interests in Metrogas, which was expanded in detail on July 3, 2017.

On April 5, 2018, ENARGAS rejected the reconsideration petition filed by YPF on March 30, 2017. Said decision was notified to YPF on April 6, 2018, by means of ENARGAS Resolution No. 313/2018.

YPF requested access to the proceedings, which was granted by ENARGAS on September 10, 2018, which in turn enabled the Company to file a timely appeal.

 

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On October 8, 2018, YPF filed an appeal with the SGE. As of the date of this annual report, this appeal is pending resolution.

Metrogas tariff issues

The Emergency Law published in the Official Gazette on January 7, 2002, modified the legal framework in force for license contracts of public services.

The main provisions of Emergency Law that have an impact on the License duly granted to MetroGAS by the National Government and that modified express provisions of the Gas Law were the following: “pesification” of tariffs that were fixed in convertible dollars at the exchange rate specified in the Convertibility Law (Law No. 23,928), the prohibition of tariff adjustments based on any foreign index, thus not allowing the application of the international index specified in the Regulatory Framework (US Producer Price Index-PPI) and the renegotiation of the License granted to the Company in 1992.

Moreover, the Emergency Law established the beginning of a renegotiation process of public utility services agreements granted by the PEN without detriment to the requirements that utility services companies must go on complying with all their obligations.

The Emergency Law, which was originally to be due in December 2003, was extended several times until December 31, 2017. The terms for renegotiating licenses and public services concessions were also extended. See “Item 4. Information on the Company—Legal and Regulatory Framework and Relationship with the Argentine Government— Public Emergency.” In the framework of the renegotiation process, the Company signed a series of agreements with different entities representing the National Government.

For the agreements signed in 2017 and 2018, see “Item 4. Information on the Company—Legal and Regulatory Framework and Relationship with the Argentine Government—Natural Gas—Tariffs.”

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 Tecnologia S.A. (“Y-TEC”), a highly specialized company focusing on research and development (“R&D”) activities. YPF holds an interest stake of 51% and CONICET, a state-owned research and development organization, holds an equity interest of 49%.

All lines of R&D carried out by Y-TEC are strategically 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 from the National University of La Plata (“UNLP”) were acquired, and a 13,000 m2 building consisting of 47 labs and 12 experimental plants was recently built. The staff and the equipment moved into the new building in June 2016. More than 300 professionals work in the new building creating innovative solutions for the energy sector.

The main goals of Y-TEC are: to generate high-impact technological solutions, provide high quality technical and laboratory support services and lead the fast implementation in the industry of existing innovative technologies.

Y-TEC explores opportunities throughout the actual and future energy sector. This is a broad and diversified strategy approach that covers core areas such as Unconventional Resources, Mature Fields and Petrochemical, as well as New Energies, Future Mobility and Environmental Sustainability.

The new R&D portfolio consists of 51 projects and more than 100 technical assistance and specialized services.

In 2018, U.S.$23.7 million was allocated to R&D activities, and U.S.$0.56 million (YPF’s working interest) was invested in new equipment.

 

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Y-TEC believes in the value of liaising with technological partners to reinforce regional leadership, adopting the open innovation concept. This concept allows us to reduce technological risk, shorten the time to have the product on the market and minimize costs.

Since 2016, we have opened more than twenty “Innovation Spaces.” These are areas promoted by Y-TEC to complement scientific capacities in public and private institutions and allow the development of high impact technological products for the national energy industry. Knowledge, experience and state-of-the-art equipment are brought together by Y-TEC and CONICET.

In exploration and production of unconventional resources, R&D efforts are focused on reducing the development field cost, by the design, development and application of very specific technologies. Our most important challenges include simulation and modeling tools design and development, measuring and monitoring solutions, tailored made fluids and smart proppants, additives and chemical products for optimizing drilling, completion and production operations.

To optimize production from mature fields, we focused on increasing the recovery factor by the development of enhanced oil recovery technologies and the development of new processes and materials to reduce the operational costs of our facilities, to increase their run life and integrity.

Regarding oil products refining and marketing, we applied our technological knowledge to optimize refinery operations and improve product quality, with a strong focus on the achievement of 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 based on li-ion technologies, solar energy (photovoltaics and thermal), hydrogen production, bioenergy and energy efficiency are among the greatest challenges.

Supporting the process of transformation initiated by YPF and in line with the advancement of digital technologies, we created in Y-TEC the first Center of Excellence in Analytics (COE, fully dedicated to running data science projects across all YPF businesses.

The COE combines, under one single department, data scientists, process modeling experts and IT professionals to provide integrated solutions to O&G industry. With this initiative, YPF is set at the forefront of other companies in the country by enhancing the use of the data to improve performance, protect assets and discover new businesses. The main goals of the COE are: to lead the company cultural revolution by making data analytics accessible to all levels of the organization; to promote a vision of “one team” overseeing synergies and the integration of different data science projects and to multiply value by prioritizing projects that can give the highest return on investment.

Competition

In our Upstream business, we encounter competition from major international oil companies and other domestic oil companies in acquiring exploration permits and production concessions. Our Upstream 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 “—Legal and Regulatory Framework and Relationship with the Argentine Government—Overview” and “—Legal and Regulatory Framework and Relationship with the Argentine Government—Law No. 26,197.” However, changes introduced in the Hydrocarbons Law through Law No. 27,007 (2014) limit the ability of provincial companies to possess future exclusive rights over permits and concessions, which supports competition in the Argentine oil and gas industry. See “—Legal and Regulatory Framework and Relationship with the Argentine Government—Law No. 27,007, (amendment of the Hydrocarbons Law).” Moreover, during the last several years we have made a comprehensive move to secure, either by renewing, extending and converting through mechanisms provided in the Law, the majority of such permits and concessions in Argentina considered valuable in the long term.

In our Downstream businesses, we face competition from domestic and international oil companies. In our export markets, we compete with numerous oil and trading companies. We operate in a dynamic market in the Argentine downstream industry and the crude oil and natural gas production industry. Crude oil and most refined products prices are subject to international supply and demand and, in certain cases, to Argentine regulations.

See “Item 3. Key Information—Risk Factors—Risks Relating to Our Business—Limitations on local pricing in Argentina may adversely affect our results of operations”, “Item 3. Key Information—Risk Factors—Risks Relating to Our Business— We are exposed to the effects of fluctuations in the prices of oil, gas and refined products”, and “Item 4. Information on the Company—Legal and Regulatory Framework and Relationship with the Argentine Government—Natural Gas—Tariffs.”

 

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We continuously assess the external environment and our competitive position to adjust our business strategies and plans to create and sustain competitive advantage.

Environmental Matters

YPF-Argentine operations

YPF carries forward its mission to produce and provide energy focus on environmental care, trying to minimize the impact, looking enhance the positive effects associated with its work and prioritizing the protection of workers, the environment and the community in general.

We reaffirmed that commitment on environmental management during 2018 through the approval of our Operational Excellence Policy which replaced and upgraded our Environmental Protection and Health Preservation Policy. Environmental management is built upon a strong corporate culture of security and protection, and it is deployed through a management system focused on occupational risks, the mitigation of industrial risks and integration of the principles of process safety to control the risks and the impacts. This management system and its application is certified according to standards OHSAS 18001 (Safety) and ISO 14001 (Environment) in the major industrial centers of the company.

All the company’s segments are constantly upgrading their integrated management systems and major environmental parameters are subject to reporting and monitoring as a means to evaluate our performance and implement any necessary improvements.

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 and investments in order to warrant the reliability and integrity of our assets and operations and to comply with these laws and regulations as well. 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.

Simultaneously, we have in place comprehensive risk management policies in connection with our assets, processes, businesses and projects, integrating, at all stages of their life cycle, criteria and preventive actions for environmental protection, safety, health, quality, integrity and reliability. We operate not only in strict compliance with policies, rules and procedures, within Argentina’s current legal and regulatory framework, but also proactively adopting reference standards in the absence of legislation.

As an example of our work towards best practices in the industry, we have implemented an investment plan aimed at improving the quality of fuels. Resolution No. 5/2016 of the Secretary of Hydrocarbon Resources set new specifications for sulfur content in fuels. In 2019 the first change in the sulfur content in gasoline will come into effect, for which work in respect of the gasoline blending process in the La Plata Refinery and Luján de Cuyo Refinery is being conducted. This Resolution establishes that as of 2022 sulfur specifications will be adjusted for Degree 2 of Gasoil and Gasoline oil. Hence, investments are being made since 2018 in order to comply with these new specifications: the development of a new unit of coke petrol hydrotreatment, the revamping of the magnaforming units and the FCC petrol hydrotreatment in La Plata Industrial Complex and the revamping of the hydrotreatment of petrol and a new gasoil desulphurizing unit in Luján de Cuyo Refinery. These units are expected to begin estimations by the end of 2021.

In La Plata Industrial Complex an ambitious plan of effluents adequacy is being followed since 2014, including drain fluids segregation and raft building which also allows us to strengthen the resilience of our facilities to the new climatic conditions of the region. Furthermore, connection works for the discharge of security torches are being completed according to the Resolution No. 231/96 of the Environmental Policies Office of Buenos Aires Province.

 

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In Logistics, the integrity plan for tanks and pipelines is developed annually to ensure their tightness.

Annually, plans are developed across business units to comply with different Security and Environmental Resolutions. Works based on Resolutions No. 785/05 and Resolution No. 404/94 are performed on tanks and inspections of pipes according to Resolution No. 1460/06 are carried out as well. Following regulations of the Buenos Aires Province’s Organization for Sustainable Development, we also do pressure container inspections.

In addition to the projects mentioned above, we have begun to implement a broad range of environmental projects in the domestic Exploration and Production, Refining & Marketing and Chemicals segments, such as increasing the capacity of biological treatment in the La Plata refinery, 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. During 2016, we implement a similar program in the Luján de Cuyo area.

In 2018, an agreement was entered into with Oil Spill Response Ltd. enterprise to implement a plan with the purpose of evaluating and reducing the possible environmental impact caused by an oil spill in Argentine surface waters, thus reducing the environmental impact of potential oil spills offshore. This agreement includes technical and operational support in case of oil spills on rivers or seas caused by accidents involving cisterns or exploration and production offshore.

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.

Focusing on the development and research, the company created YPF Tecnología S.A. (see “Item 4. Information on the Company—Research and Development”) which is implementing an Environmental Sustainability Program focused on three strategic areas: reduction of emissions, increase of sustainable production and bioproduct development. This translates into high-impact projects for the industry, namely, effluent treatment, development of new production technologies, soil bioremediation, CO2 capture and valorization, atmospheric contaminant removal, and valorization of agricultural products and waste. With respect to climate change, over the next years we are committed to a lower carbon economy through more efficient oil, gas, fuels and derivatives production, lower intensity in GHG emissions, and cleaner electric power with a higher share of renewable energies.

In this context, during 2018 we reaffirmed our Commitment on Climate Change and Energy Efficiency (which was developed in 2015 and renewed in 2017) which provides the framework for working on mitigation and adaptation activities. The identified lines of action include the following:

 

   

Integrate climate risk analysis methods;

 

   

Become the third electric power generator in the country in the future;

 

   

Encourage and boost energy efficiency by improving performance in our facilities and activities;

 

   

Advance research and development of new related technologies;

 

   

Achieve a reduction of our operations specific GHG emissions in near future.

 

   

Achieve the target of having approximately 70% of our vehicle fuels conform to low-sulphur standards (Euro V) in the near future.

 

   

Develop climate change adaptation strategies for our operations.

Regarding this commitment, we continued working on:

 

   

Improving Energy Efficiency. In 2017 we completed an energy assessment of production processes in the Company’s three main segments (Upstream, Downstream, and Gas and Power). This helped us ascertain YPF’s balance, consolidated and area-specific consumption, establish a baseline, and identify energy efficiency opportunities.

 

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This assessment will be carried out on completed, in-progress and planned projects. In the Downstream business, the most relevant projects are associated with cogeneration in the City of La Plata and revamping of units in La Plata and Luján de Cuyo industrial complexes, while in the upstream business, those related to electrification and generation improvements brought about by changes in equipment in mature oilfields. In Gas and Power, the key to energy efficiency lies in renewable energy projects, which will be the most significant contributors to reducing specific GHG emissions.

As part of this process, at the beginning of 2018, YPF has decided to upgrade the consumption and deficiency logging and monitoring system, and implement a coordinated, company-wide energy management system

 

   

Monitoring our two projects registered under the Clean Development Mechanism (“CDM”), which allow us to reduce the emissions in the different stages and processes of crude oil refining through the recovery of flare gas in La Plata (CILP) and Luján de Cuyo (CILC) industrial complexes. Residual gases are compressed and injected into the fuel system to feed furnaces and boilers, thus avoiding the need to use natural gas and fuel oil for heating. In 2018, CO2 was reduced by around 172,909 tCO2 between both projects.

The methodology developed by YPF 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”. To date, there are six projects registered under the CDM that have implemented this methodology around the world (Argentina, China, Kuwait and Egypt).

 

   

Continuing and strengthening Greenhouse Emissions (“GHG”) Inventorying. Since 2008 we have been gradually introducing management systems into our operations to record emissions through GHG inventories, applying the ISO 14064-1 standard. This inventory has been successfully checked in the Ensenada Industrial Complex since 2008. During 2016, we began to implement the verification of greenhouse gas emissions inventory by a third party in Plaza Huincul refinery. During 2017, we completed an external audit of all of YPF’s industrial complexes: La Plata (Refinery and Petrochemical Plant), Luján de Cuyo, and Plaza Huincul (Refinery and Methanol Plant). We also monitored other air emissions (SO2, NOx, CO, NMVOC, and particulate) in accordance with applicable regulations.

 

   

The forestry projects located in the province of Neuquén which constitute approximately 7,000 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 CO2 equivalents that were captured by the afforestation project activities from 1984 (when the first afforestation activity occurred) through 2014;

 

   

The commitment to minimize gas sent to flares and gas vented, giving compliance to the requirements established in National Resolutions No. 236/93 and No. 143/98 issued by the former Energy Secretariat of the Nation (SEN) and all those applicable provincial regulations. In this sense, there is a new initiative, implemented in Mendoza: the virtual gas pipeline, that implies the liquefaction and transportation of the natural gas associated from remote wells to an electric power plant in order to reduce flaring.

 

   

Developing Electric Power and renewable energy business. See “Item 4. Information on the Company—Gas and Power.”

 

   

Climate Change Adaptation: We moved forward with climate risk assessment projects at the Company’s facilities by implementing the Business Areas Climate Impact Assessment Tool or BACLIAT. In 2017 we also used it at the Logistics Terminal located in Concepción del Uruguay. We looked into past, current and future climate trends; detected primary risks; and identified mitigation actions to reduce vulnerability and encourage early action.

Strengthening the relationship established with the Argentinean Environmental Authority (Ministerio de Ambiente y Desarrollo Sustentable de la Nación), in particular with its Climate Change Unit (CCU - Dirección de Cambio Climático) in order to collaborate with the development of the Third National Communication on Climate Change to the UNFCCC and during 2017 in workshops organized by the CCU for developing the National Climate Change Plans related to the Nationally Determined Contributions (NDCs) committed by the country under the signed Paris Agreement. With respect to this, YPF signed a framework agreement with the Argentinean Environmental Authority for a mutual collaboration on environmental issues, particularly relating to climate change.

 

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Water Management

YPF is committed to an integrated water management approach focused on resource sustainability, as embodied in its corporate regulations. This means not only assessing water resources in terms of use, but also of transportation and storage; consumption optimization, ensuring adequate treatment of process water to enable reuse; and analysis and treatment of liquid effluents.

Along these lines, in 2015 we started a water management benchmarking study on several assets within the Downstream and Gas and Power businesses. The three industrial refining complexes, Tucumán Thermal Power Plant, and La Matanza Terminal had already been surveyed in 2016. In 2017 we finished surveying Dock Sud and La Plata Terminals, Escobar LNG Plant, and Y-TEC. This methodology improved our knowledge of water withdrawal sources and effluent disposal points and provided relevant volumes.

A similar ongoing improvement process is carried out in the Upstream business. Based on a survey performed on all operations in 2015, this area has now an annually updated resource management plan.

In 2018 we also continued implementing the Local Water Tool oriented to the identification of water risks and practices for an adequate management of water and effluents. In 2017 we analyzed Fernández Oro Station in the Province of Río Negro (Upstream) and Escobar LNG Plant, in the Province of Buenos Aires (Gas and Power). As a result, new potential risks were identified and included in the relevant action plans. Furthermore, during 2018 a particular focus has been placed on water management, dedicating personnel and resources exclusively to carry out a detailed study of water management for the different facilities of the Company, which allowed us to establish the water balances captured and produced and the identification of improvement and optimization actions for next years.

Waste Management

In compliance with Argentine regulations and our environmental standards, we develop integrated waste management activities seeking to: (a) phase out waste generation; (b) reduce waste hazardousness and ensuing environmental impacts; (c) ensure proper treatment and final disposal; and (d) establish continuous improvement programs.

Since 2012, we have been working on initiatives in our Upstream business unit in order to systematically reduce the stock of soil with hydrocarbons. This is being performed with the commitment, leadership and responsibility of the entire Company achieving a reduction of 67% of the stock in our repositories from 2012 to October 2018. Some of the activities that allow us to achieve this target were related to actions to the providers, mainly with the development of technical specifications for the contractual arrangements and effective technical supervision of their activities, optimizing the biotreatment times.

During 2017, the treatment of plastic materials contaminated with hydrocarbons began in Santa Cruz, recovery and value has been possible through washing and recycling, prioritizing their reuse and avoiding their incineration, promoting a circular economy and reducing CO2 emissions.

Furthermore, each business unit developed Waste Management Plans in line with the Upstream Waste Management Procedure and the Corporate Norm. Together with these plans the Oil spill cleaning procedure was also developed which is focused on the minimization of waste during remediation activities.

Spill Preparedness and Response

The Company has a Spill Prevention and Control System in place that has helped to reduce the spill frequency rate for the past five years. This system provides an investment plan focused on the integrity, maintenance and improvement of facilities and pipelines. It includes a spill communication and response procedure reporting to a software program that automatically alerts the relevant environmental authority.

In the specific Downstream business, improvement activities were aimed at storage, and truck and pipeline transportation.

Management of biodiversity and ecosystem services

In 2017 a revision on our corporate Biodiversity Management Standard was done with the participation of representatives of each Business Unit. This revision was performed as part of the update of the document.

The management of biodiversity mainly focuses on instances where operations are being performed in ecological sensitive areas. These activities are being documented in the Biodiversity Management Plans. Currently, our Upstream business unit has two of these plans, one for our operations in the Llancanelo Ramsar site in the Mendoza province and another in the Auca Mahuida site in the Neuquén province.

 

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The activities related to biodiversity management in many cases involve changes in operational procedures, such as multiple location development, the camouflage of drilling equipment and even actions that require the adaptation of the operation sites in order to promote the allocation of particular species.

As operations continue to adapt, biodiversity monitoring activities are also being performed under a complex process due to the frequent natural variations that affects the wild populations, ecosystems and ecological processes in the medium and long term. This is done in order to gather information related to the local ecosystem and is focused on its protection and, when necessary, its restoration. This information is also important for the proper and sustainable use of natural resources before operations start.

During 2018, we performed a technical study which analyzed and reported the degree of ecological restoration of sites devoid of vegetation in our Santa Cruz operations. The area under study encompassed 10 blocks, or concession areas, amounting to a total area of 6,943 km2 and 1,968 abandoned locations. This technical study concluded that the vegetal coverage status of the area is similar to the environment, so these areas could be released to stop being an environmental liability.

Environmental activities led by YPF in areas of unconventional exploitation of crude oil and natural gas

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 Our Business—Our domestic operations are subject to extensive regulation” and “Item 3. Key Information—Risk Factors—Risks Relating to Our Business—Oil and gas activities are subject to significant economic, environmental, operational risks and seasonal fluctuation.”

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 health, safety and Operational Excellence 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 developed 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 and (ii) a similar study in the Narambuena area, which was conducted in 2016.

 

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After the hydrogeological studies carried out in 2015 and 2016, during 2017 YPF focused its studies on the gathering of hydrogeological information through electrical profiles and water samples in order to obtain the baseline data for a regional hydrogeological study, aimed at conventional and unconventional areas in Neuquén. This hydrogeological study was completed in November 2018, which covered not only the traditional hydrogeological aspects but also the evaluation of water quality for irrigation and drinking water. The main objective of the study is the identification of the aquifers that must be protected.

Our commitment to sustainability

The oil and gas industry is undergoing a time of profound changes that require the harmonization of the growing energy demand with new challenges in terms of costs and profitability, diversification of the energy matrix and an increasing concern about climate change and the decarbonization of the economy. Each region or country will have to develop its own roadmap for transition based on its specific starting point, resource availability and capabilities.

In this context, YPF has started a transformation process to become an integral energy company and the leader for sustainable energy development in Argentina. YPF understands sustainability as a way of doing business that involves:

 

   

Transparent and responsible work at economic, environmental and social levels.

 

   

Profitability and focus on growth through innovation and new technologies.

 

   

Short and long-term value generation for shareholders, investors, partners, customers, employees, suppliers, the communities where we operate, and our country.

This approach is described in the relevant Sustainability Policy and reflected in both our management system and operational excellence model, and we extend this challenge to our leaders, employees, suppliers and partners.

The Executive Management Committee, through each one of its members and their respective vice presidencies, reviews and monitors relevant sustainability topics. The Board of Directors performs these duties through the Risk and Sustainabil