FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Issuer

Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934

Commission File Number: 001-12102


YPF Sociedad Anónima
(Exact name of registrant as specified in its charter)

Av. Pte. R.S. Peña 777 – 8th Floor
1354 Buenos Aires, Argentina
(Address of principal executive office)

Indicate by check mark whether the registrant files or will file
annual reports under cover of Form 20-F or Form 40-F:
Form 20-F
X
Form 40-F
 

Indicate by check mark if the registrant is submitting the Form 6-K
in paper as permitted by Regulation S-T Rule 101(b)(1):
Yes
 
No
X

Indicate by check mark if the registrant is submitting the Form 6-K
in paper as permitted by Regulation S-T Rule 101(b)(7):
Yes
 
No
X

Indicate by check mark whether by furnishing the information
contained in this Form, the Registrant is also thereby furnishing the information to the Commission
pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934:
Yes
 
No
X

If “Yes” is marked, indicate below the file number assigned to the registrant
in connection with Rule 12g3-2(b): N/A



This Form 6-K is incorporated by reference into the registration statement on Form F-3/A of YPF Sociedad Anónima filed with the Securities and Exchange Commission on March 10, 2008 (File No. 333-149313).



YPF Sociedad Anónima


TABLE OF CONTENTS


Item
 
   
1
Update of Selected Financial and Operating Data
2
Update of Management’s Discussion and Analysis of Financial Condition and Results of Operations
3
Update of Legal Proceedings
4
Other Recent Developments
5
Condensed Consolidated Financial Statements



 
ITEM 1.                      UPDATE OF SELECTED FINANCIAL AND OPERATING DATA
 
The following tables present our selected financial and operating data. You should read this information in conjunction with our audited consolidated financial statements included in our amended Annual Report on Form 20-F/A for the year ended December 31, 2007, as filed on October 20, 2008 (the “2007 20-F”), our unaudited interim financial statements included as Item 5 in this report, and their respective notes, as well as the information under “Update of Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report. All financial data included in this report as of June 30, 2008 and for the six-month periods ended June 30, 2008 and 2007 is unaudited. Results for the six-month period ended June 30, 2008 are not necessarily indicative of results to be expected for the full year 2008 or any other period.
 
The financial data as of December 31, 2007, 2006 and 2005 and for the years then ended is derived from our audited consolidated financial statements included in our 2007 20-F (the “Audited Consolidated Financial Statements”). The financial data as of June 30, 2008 and for the six-month periods ended June 30, 2008 and 2007 is derived from our unaudited interim financial statements, which are included in this report (the “Unaudited Interim Financial Statements”). The Unaudited Interim Financial Statements reflect all adjustments which, in the opinion of our management, are necessary to present the financial statements for such periods on a consistent basis with the Audited Consolidated Financial Statements. Our Unaudited Interim Financial Statements have been prepared in accordance with generally accepted accounting principles in Argentina, which we refer to as Argentine GAAP and which differ in certain significant respects from generally accepted accounting principles in the United States, which we refer to as U.S. GAAP. Notes 6,7 and 8 to our Unaudited Interim Financial Statements provide a description of the significant differences between Argentine GAAP and U.S. GAAP, as they relate to us, and a reconciliation to U.S. GAAP of net income for the six-month periods ended June 30, 2008 and 2007 and shareholders’ equity as of June 30, 2008 and December 31, 2007.
 
In this report, except as otherwise specified, references to “$,” “U.S.$” and “dollars” are to U.S. dollars, and references to “Ps.” and “pesos” are to Argentine pesos. Solely for the convenience of the reader, peso amounts as of and for the six-month period ended June 30, 2008 have been translated into U.S. dollars at the exchange rate quoted by the Central Bank on June 30, 2008 of Ps.3.03 to U.S.$1.00, unless otherwise specified. The exchange rate quoted by the Central Bank on June 30, 2008 was Ps.3.03 to U.S.$1.00. The U.S. dollar equivalent information should not be construed to imply that the peso amounts represent, or could have been or could be converted into U.S. dollars at such rates or any other rate. See “Item 3. Key Information—Exchange Rates” in our 2007 20-F.
 
Certain figures included in this report have been subject to rounding adjustments. Accordingly, figures shown as totals may not sum due to rounding.
 
   
As of and for Six-Month Period Ended June 30,
 
   
2008
   
2008
   
2007
 
   
(in millions of U.S.$, except for per share and per ADS data)
   
(in millions of pesos, except for per share and per ADS data)
 
Consolidated Income Statement Data:
                 
Argentine GAAP(1)
                 
Net sales(2)(3)
    5,427       16,443       13,099  
Gross profit
    1,829       5,542       4,800  
Administrative expenses
    (142 )     (429 )     (361 )
Selling expenses
    (364 )     (1,102 )     (992 )
Exploration expenses
    (72 )     (218 )     (247 )
Operating income
    1,252       3,793       3,200  
Income on long-term investments
    22       67       29  
Other expenses, net
    (80 )     (241 )     (18 )
Interest expenses
    (62 )     (189 )     (145 )
Other financial income (expenses) and holding gains (losses), net
    151       459       319  
Reversal of impairment of other current assets
    -       -       69  
Income before income tax
    1,283       3,889       3,454  
Income tax
    (540 )     (1,635 )     (1,310 )
Net income
    744       2,254       2,144  
 
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Earnings per share and per ADS(4)
    1.89       5.73       5.45  
Dividends per share and per ADS(4) (in pesos)
 
n.a.
      17.26       6.00  
Dividends per share and per ADS(4)(5) (in U.S. dollars)
 
n.a.
      5.45       1.93  
U.S. GAAP
                       
Operating income
    917       2,777       2,742  
Net income
    496       1,504       1,915  
Earnings per share and per ADS(4) (in pesos)
    1.26       3.82       4.87  
Other Consolidated Financial Data:
                       
Argentine GAAP(1)
                       
Fixed assets depreciation
    675       2,046       2,012  
Cash used in fixed asset acquisitions
    929       2,816       2,529  
Current liquidity (Current assets divided by current liabilities)
 
n.a.
      0.902       1.554  
Solvency (Net worth divided by total liabilities)
 
n.a.
      1.410       2.111  
Capital Immobilization (Non-current assets divided by total assets)
 
n.a.
      0.763       0.718  
Non-GAAP
                       
EBITDA(6)
    1,996       6,049       5,451  
EBITDA margin(7)
    37 %     37 %     42 %

 
   
As of June 30, 2008
 
   
(in millions of U.S.$)
   
(in millions of pesos)
 
Consolidated Balance Sheet Data:
           
Argentine GAAP(1)
           
Cash
    35       105  
Working capital
    (312 )     (944 )
Total assets
    12,133       36,764  
Total debt(8)
    1,073       3,252  
Shareholders’ equity(9)
    7,099       21,511  
U.S. GAAP
               
Total assets
    12,466       37,771  
Shareholders’ equity(9)
    7,605       23,043  
 

(1)
The financial statements reflect the effect of changes in the purchasing power of money by the application of the method for inflation adjustment into constant Argentine pesos set forth in Technical Resolution No. 6 of the Argentine Federation of Professional Councils in Economic Sciences (“F.A.C.P.C.E.”) and taking into consideration General Resolution No. 441 of the National Securities Commission (“CNV”), which established the discontinuation of the inflation adjustment of financial statements into constant Argentine pesos as from March 1, 2003. See Note 1 to the Unaudited Interim Financial Statements.
 
(2)
Includes Ps.903 million for the six-month period ended June 30, 2008 and Ps.647 million for the six-month period ended June 30, 2007 corresponding to the proportional consolidation of the net sales of investees jointly controlled by us and third parties. See Note 6( b) to the Unaudited Interim Financial Statements.
 
(3)
Net sales are net to us after payment of a fuel transfer tax, turnover tax and customs duties on hydrocarbon exports. Royalties with respect to our production are accounted for as a cost of production and are not deducted in determining net sales. See Note 2(f) to the Unaudited Interim Financial Statements.
 
 (4)
Information has been calculated based on outstanding capital stock of 393,312,793 shares. Each ADS represents one Class D Share. There were no differences between basic and diluted earnings per share and ADS for any of the years disclosed.
 
(5)
Amounts expressed in U.S. dollars are based on the exchange rate as of the date of payment. For periods in which more than one dividend payment was made, the amounts expressed in U.S. dollars are based on exchange rates at the date of each payment.
 
(6)
EBITDA is calculated by excluding interest gains on assets, interest losses on liabilities, income tax and depreciation of fixed assets from our net income. For a reconciliation of EBITDA to net income, see “—EBITDA reconciliation.”
 
(7)
EBITDA margin is calculated by dividing EBITDA by our net sales.
 
(8)
Total debt under Argentine GAAP includes nominal amounts of long-term debt of Ps.650 million as of June 30, 2008.
 
(9)
Our subscribed capital as of June 30, 2008 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.
 
 
EBITDA reconciliation
 
EBITDA is calculated by excluding interest gains on assets, interest losses on liabilities, income tax and depreciation of fixed assets from our net income. Our management believes that EBITDA is meaningful for investors
 
2

 
 
because it is one of the principal measures used by our management to compare our results and efficiency with those of other similar companies in the oil and gas industry, excluding the effect on comparability of variations in depreciation and amortization resulting from differences in the maturity of their oil and gas assets. EBITDA is also a measure commonly reported and widely used by analysts, investors and other interested parties in the oil and gas industry. EBITDA is not a measure of financial performance under Argentine GAAP or U.S. GAAP and may not be comparable to similarly titled measures used by other companies. EBITDA should not be considered an alternative to operating income as an indicator of our operating performance, or an alternative to cash flows from operating activities as a measure of our liquidity.
 
The following table presents, for each of the periods indicated, our EBITDA reconciled to our net income under Argentine GAAP.
 
   
For the Six-Month Period Ended June 30,
   
2008
   
2007
   
(in millions of pesos)
Net income
    2,254       2,144  
Interest gains on assets
    (75 )     (160 )
Interest losses on liabilities
    189       145  
Depreciation of fixed assets
    2,046       2,012  
Income tax
    1,635       1,310  
EBITDA
    6,049       5,451  

 
Production and other operating data
 
The following table presents certain of our production and other operating data as of or for the six-month periods indicated.
 
   
Six month ended June 30,
 
   
2008
   
2007
 
Average daily production for the period
           
Oil (mbbl)
    307       335  
Gas (mmcf)
    1,653       1,743  
Total (mboe)
    601       645  
Refining capacity
               
Capacity (mbbl/d)(1)
    320       320  
                 
 

(1)
Excluding Refinor, which has a refining capacity of 26 mbbl/d and in which we have a 50% interest.
 
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ITEM 2.      UPDATE OF MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion should be read in conjunction with, and is qualified in its entirety by reference to, our Unaudited Interim Financial Statements.
 
Overview
 
We are Argentina’s leading energy company, operating a fully integrated oil and gas chain with leading market positions across the domestic upstream and downstream segments. Our upstream operations consist of the exploration, development and production of crude oil, natural gas and liquefied petroleum gas. Our downstream operations include the refining, marketing, transportation and distribution of oil and a wide range of petroleum products, petroleum derivatives, petrochemicals, liquefied petroleum gas and bio-fuels. Additionally, we are active in the gas separation and natural gas distribution sectors both directly and through our investments in several affiliated companies. In the six-month period ended June 30, 2008, we had consolidated net sales of Ps.16,443 million (U.S.$5,427 million) and consolidated net income of Ps.2,254 million (U.S.$744 million).
 
Most of our predecessors were state-owned companies with operations dating back to the 1920s. In November 1992, the Argentine government enacted the Privatization Law (Law No. 24,145), which established the procedures for our privatization. In accordance with the Privatization Law, in July 1993, we completed a worldwide offering of 160 million Class D shares that had previously been owned by the Argentine government. As a result of that offering and other transactions, the Argentine government’s ownership interest in our capital stock was reduced from 100% to approximately 20% by the end of 1993.
 
Since 1999, we have been controlled by Repsol YPF, an integrated oil and gas company headquartered in Spain with global operations. Repsol YPF owned approximately 99% of our capital stock from 2000 until February 21, 2008, when Petersen Energía purchased 58,603,606 of our ADSs, representing 14.9% of our capital stock, from Repsol YPF for U.S.$2,235 million. In addition, Repsol YPF also granted options to Enrique Eskenazi, Sebastián Eskenazi, Ezequiel Eskenazi Storey and Matías Eskenazi Storey, shareholders of Petersen Energía, or to companies that are, directly or indirectly, wholly-controlled by any of them (the “Option Beneficiaries”) to purchase up to an additional 10.1% of our outstanding capital stock within four years. On May 20, 2008, Petersen Energía Inversora S.A. (“PEISA”) exercised an option to purchase shares representing 0.1% of our capital stock, which will close upon the fulfillment of certain requirements. Additionally, PEISAlaunched a tender offer to purchase all of the shares of YPF that were not already owned by them at a price of U.S.$ 49.45 per share or ADS. Repsol, pursuant to its first option agreement with Petersen Energía, had stated that it would not tender YPF shares to PEISA. The offer period commenced on September 11, 2008 and expired on October 20, 2008. A total of 461,868 shares, representing approximately 0.117% of our total shares oustanding, have been tendered. The settlement will close upon the fulfillment of certain requirements.   We believe that the Petersen entities’ participation in our capital stock and management will strengthen our Argentine ties and expertise.
 
Upstream Operations
 
·  
We operate more than 70 oil and gas fields in Argentina, accounting for approximately 42% of the country’s total production of crude oil, excluding natural gas liquids, and approximately 42% of its total natural gas production, including natural gas liquids, in 2007, and approximately 40.5% and 41% of total crude oil and natural gas production, respectively, in the six-month period ended June 30, 2008, according to information provided by the Secretariat of Energy.
 
·  
We had proved reserves, as estimated as of December 31, 2007, of approximately 623 mmbbl of oil and 3,708 bcf of gas, representing aggregate reserves of 1,283 mmboe.
 
·  
In 2007, we produced 120 mmbbl of oil (329 mbbl/d) and 635 bcf of gas (1,740 mmcf/d) and, in the six-month period ended June 30, 2008, we produced 56 mmbbl of oil (307 mbbl/d) and 301 bcf of gas (1,653 mmcf/d). In the second quarter of 2008, as a consequence of a strike which affected our operations in the South of Argentina, our oil production decreased by approximately 3.4 mmbbl.
 
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). We also have a 50%
 
4

 
 
·  
interest in 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 June 30, 2008 consisted of 1,663 YPF-branded service stations, which we estimate represented approximately 31.0% of all 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 and Plaza Huincul sites. In addition, Profertil S.A. (“Profertil”), a company that we jointly control with Agrium Investments Spain S.L. (“Agrium”), is one of the leading producers of urea in the Southern Cone.
 
Presentation of Financial Information
 
We prepare our Unaudited Interim Financial Statements in accordance with Argentine GAAP, which differ in certain significant respects from U.S. GAAP. Notes 6, 7 and 8 to the Unaudited Interim Financial Statements provide a summary of the effect of these significant differences on net income and shareholders’ equity under Argentine GAAP and U.S. GAAP.
 
We fully consolidate the results of subsidiaries in which we have a sufficient number of voting shares to control corporate decisions and proportionally consolidate the results of companies that we control jointly. The financial information corresponding to Refinor and Profertil, both jointly controlled entities, includes the last financial information approved by those companies, which in each case corresponds to a date and period ending three months prior to the date of our consolidated financial statements; however, such information, if material, is adjusted according to applicable accounting principles to reflect these companies’ results as of the date of the issuance of our consolidated financial statements.
 
Under Argentine GAAP, we currently are not required to record the effects of inflation in our financial statements. However, because Argentina experienced a high rate of inflation in 2002, with the wholesale price index increasing by approximately 118%, we were required by Decree No. 1269/2002 and CNV Resolution No. 415/2002 to remeasure our financial statements in constant pesos in accordance with Argentine GAAP. On March 25, 2003, Decree No. 664/2003 rescinded the requirement that financial statements be prepared in constant currency, effective for financial periods on or after March 1, 2003. According to the Argentine statistics and census agency (Instituto Nacional de Estadísticas y Censos, or “INDEC”), the wholesale price index increased 7.9% in 2004, 10.6% in 2005, 7.1% in 2006, 14.4% in 2007, and, based on preliminary data, 6.3% in the six-month period ended June 30, 2008. As a result, our results of operations and financial position may not be directly comparable from period to period. We cannot assure you that in the future we will not be again required to record the effects of inflation in our financial statements (including those covered by the financial statements included in this report) in constant pesos. See “—Critical Accounting Policies—U.S. GAAP Reconciliation” for an explanation of how the effect of inflation is treated under U.S. GAAP.
 
Additionally, certain oil and gas disclosures as of December 31, 2007 are included in the Audited Consolidated Financial Statements included in our 2007 20-F under the heading “Supplemental information on oil and gas producing activities (unaudited).”
 
Segment Reporting
 
We organize our business into the following four segments: (i) exploration and production, which includes exploration and production activities, natural gas and crude oil purchases, sales of natural gas, and to a lesser extent crude oil, to third parties and intersegment sales of crude oil, natural gas and its byproducts and to a lesser extent electric power generation (“Exploration and Production”); (ii) the production, transport, purchase and marketing of refined products that we sell to third parties and other segments of our business (“Refining and Marketing”); (iii) the production, transport and marketing of petrochemical products (“Chemical”); and (iv) other activities not falling into the previously described categories (“Corporate and Other”), principally including corporate administration costs and assets, construction activities and environmental remediation activities related to YPF Holdings Inc.
 
Sales between business segments are made at internal transfer prices established by us, which generally seek to approximate market prices.
 
5

 
 
Summarized Income Statement
 
   
For the Six-Month Period Ended June 30,
 
   
2008
   
2007
 
   
(in millions of pesos)
 
Net sales
    16,443       13,099  
Cost of sales
    (10,901 )     (8,299 )
Gross profit
    5,542       4,800  
Administrative expenses
    (429 )     (361 )
Selling expenses
    (1,102 )     (992 )
Exploration expenses
    (218 )     (247 )
Operating income
    3,793       3,200  
Income on long-term investments
    67       29  
Other expenses, net
    (241 )     (18 )
Financial income, net and holding gains
    270       174  
Income from sale of long-term investments
           
Reversal (impairment) of other assets
          69  
Net income before income tax                                                                                                  
    3,889       3,454  
Income tax
    (1,635 )     (1,310 )
Net income
    2,254       2,144  

 
Factors Affecting Our Operations
 
Our operations are affected by a number of factors, including:
 
·  
the volume of crude oil, oil byproducts and natural gas we produce and sell;
 
·  
domestic price limitations;
 
·  
export restrictions and domestic supply requirements;
 
·  
international prices of crude oil and oil products;
 
·  
our capital expenditures;
 
·  
inflation and cost increases;
 
·  
domestic market demand for hydrocarbon products;
 
·  
operational risks;
 
·  
taxes, including export taxes;
 
·  
capital controls;
 
·  
the Argentine peso/U.S. dollar exchange rate;
 
·  
dependence on the infrastructure and logistics network used to deliver our products;
 
·  
laws and regulations affecting our operations; and
 
·  
interest rates.
 
Our margins and, prior to 2008, our consolidated operating profits have recently trended downwards. This has principally been the result of: production declines and increased asset depreciation principally due to the increasing maturity of our oil and gas fields; increases in other operating costs, due in part to higher domestic demand and local market supply obligations (which required us to purchase certain hydrocarbon inputs from third parties); inflation and higher labor costs; and limitations on our ability to offset those increased costs due to, among other things, domestic limitations on the prices at which we sell gas and refined products.
 
6

 
 
Our operating income in the six-month period ended June 30, 2008 increased 18.5% compared to the corresponding period in 2007, mainly as a result of increases in our domestic diesel and gasoline prices, and increased volumes of those products sold, which more than offset significant increases in the cost of our production that were driven by upward price pressures in the Argentine economy, a decline in our production caused by labor strikes in our Southern operations, purchases of crude oil from third parties in order to maintain our level of refining activity, the continuing maturity of our fields, and higher export taxes and declining export volumes driven by requirements to satisfy domestic demand at prices which are substantially lower than international market prices before export taxes.
 
Macroeconomic conditions
 
The Argentine economy has experienced significant volatility in recent decades, characterized by periods of low or negative growth and high variable levels of inflation. Inflation reached its peak in the late 1980s and early 1990s. The annual inflation rate as measured by the consumer price index was approximately 388% in 1988, 4,924% in 1989 and 1,344% in 1990. Due to inflationary pressures prior to the 1990s, the Argentine currency was devalued repeatedly and macroeconomic instability led to broad fluctuations in the real exchange rate of the Argentine currency relative to the U.S. dollar. To address these pressures, past Argentine governments implemented various plans and utilized a number of exchange rate systems.
 
With the enactment of the Convertibility Law in 1991, inflation declined progressively and the Argentine economy enjoyed seven years of growth. In the fourth quarter of 1998, adverse international financial conditions caused the Argentine economy to enter into a recession and GDP to decrease, in real terms, by 3.4% in 1999, 0.8% in 2000 and 4.4% in 2001. By the end of 2001, Argentina suffered a profound deterioration in social and economic conditions, accompanied by high political and economic instability. The restrictions on the withdrawal of bank deposits, the imposition of exchange controls, the suspension of the payment of Argentinas public debt and the abrogation of the pesos one-to-one peg to the dollar (with the consequent depreciation of the peso against the dollar) caused a decline in economic activity. Real GDP declined by 10.9% in 2002, annual inflation rose to 41%, the exchange rate continued to be highly volatile, and the unemployment rate rose to more than 20%. The political and economic instability not only curtailed commercial and financial activities in Argentina but also severely restricted the countrys access to international financing.
 
Strong economic growth in the worlds developed economies and favorable raw material pricing from 2003 through 2008 paved the way for Argentinas economic recovery. Real GDP grew by 8.7% in 2003, 9.0% in 2004, 9.2% in 2005, 8.5% in 2006 and 8.7% in 2007. Real GDP continued to grow in the first half of 2008, though at a slower rate. According to the Central Bank of Argentina estimates, real GDP is expected to grow by 6.5% in 2008.
 
Public finances both at national and provincial levels recorded a consolidated primary surplus of approximately 5.5% of GDP in 2004, 4.5% in 2005, 3.5% in 2006 and 3.2% in 2007.
 
The annual wholesale price index, according to the INDEC, increased by 2% in 2003, 7.9% in 2004, 10.6% in 2005, 7.1% in 2006, 14.4% in 2007 and, based on preliminary data, 6.3% in the six-month period ended June 30, 2008. According to a recent report published by the International Monetary Fund (“IMF”), however, most private sector analysts believe that actual inflation is considerably higher than reflected in official data. The governments main strategy to fight increasing inflation has been the establishment of agreed price controls with private companies.
 
With its economic recovery well under way, in 2005, Argentina successfully completed the restructuring of a substantial portion of its bond indebtedness and cancelled all of its debt with the IMF. The country is working to renegotiate the remaining portion of its external public debt and to resolve the claims brought before international courts by foreign companies affected during the crisis.  The Argentine government recently announced that it would repay U.S.$6,700 million in “Paris Club” debt.
 
Global macroeconomic conditions have a direct effect on economic conditions in Argentina and, in particular, on Argentine domestic energy consumption trends. Global economic growth remained solid during the first half of 2007, but the downside risks and uncertainty surrounding growth prospects have recently increased. Latin America continued to expand vigorously, driven by strong commodity prices and growing domestic demand. However, there are some signs that the improved fundamentals may erode if certain regulatory policies are not strengthened. Fiscal and external surpluses are forecast to weaken in many countries, and inflation has been rising, exacerbated by rising international food prices, as output has come closer to potential.
 
After several years of consistent growth, at the end of 2007 and in the first half of 2008 the global economy has demonstrated preliminary signs of deceleration. Demand deceleration in many developed economies, as well as increasing inflation levels worldwide and financial problems in certain sectors of developed countries’ economies,
 
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including the United States, has resulted in the downward revisions of global economic growth forecasts. During the first half of 2008, liquidity has become tighter in financial markets despite the efforts by the world’s principal monetary authorities, including the United States Federal Reserve, to facilitate liquidity and support certain struggling financial institutions to maintain systemic confidence. According to recent outlooks published by the IMF, global growth is expected to suffer a significant deceleration in the second half  of 2008, with a gradual recovery commencing in 2009.
 
Until August 2008, the U.S. dollar had continued to depreciate against the euro and a broad range of other currencies, including those of emerging market countries. The exchange market pressures in emerging economies have generally been reflected in exchange rate appreciation, rapid accumulation of international reserves and strong domestic credit growth.
 
Worldwide oil prices continued to increase during 2007 and the first half of 2008, reaching a high over U.S.$145 per barrel (WTI) in July 2008, driven by strong demand, the decrease in the United States’ reserves, the decrease in the value of the U.S. dollar, and social and political conflicts in producing areas. Some analysts believe that speculative factors stemming from the increased investment in commodities as a shelter against the financial crisis may also have affected recent commodity price increases. WTI prices have decreased to U.S. $ 66.36 per barrel by October 22, 2008, driven in part by decreasing demand from certain developing countries as well as decreased consumption in certain developed countries.
 
In Argentina, higher WTI market prices (and the higher prices of refined products) have resulted in the highest increase in petroleum import prices in the last decade, according to information published by the Argentine Central Bank. Argentine domestic fuel prices have increased in the six-month period ended June 30, 2008, compared to the same period in 2007, but have not kept pace with the increases in international market prices for petroleum products due to regulatory constraints. See “—Differences between Argentine and international prices for hydrocarbon products.”
 
The recent increases in international petroleum product prices, which have not yet been fully reflected in Argentine prices for petroleum products, may create additional inflationary pressures, as the inflationary effect of such price increases on other consumer sectors has yet to be fully felt. Furthermore, countries that are net importers of hydrocarbon fuels, such as Argentina, could also suffer slower economic growth and deteriorating internal and external fiscal accounts as a result of the increased costs of subsidies and decreased tax collections.
 
During the first half of 2008, conflicts in certain sectors of the Argentine economy, including blockades by agricultural producers in response to an export tax increase and strikes by oil workers, have affected the development and productivity of these and related sectors. Even though economic growth continued in the first half of 2008, it showed signs of weakening, mainly in the second quarter of 2008, as a result of decreasing consumption, according to the Argentine Central Bank.
 
Total exports from Argentina increased by 20% year over year (“YoY”) to U.S.$55,933 million in 2007, mainly driven by an increase in exports of agricultural products, while imports increased by 31% in the same period due to higher growth in consumption and investment. The trade surplus decreased by 9.4%, falling from U.S.$12,306 million in 2006 to U.S.$11,154 million in 2007. According to preliminary INDEC data, in the first half of 2008, the Argentine trade balance continued to post a surplus, though that trade surplus was approximately 6% lower than in the first half of 2007. This downward trend was due mainly to increases in the volume and prices of imported assets, particularly capital assets, fuels and lubricants and passenger vehicles. Argentine exports grew at a slower pace in the first half of 2008 than during the same period of 2007 mainly on account of slower growth in the export of agricultural products resulting mainly from trade disruption caused by the blockades by agricultural producers mentioned above.
 
According to INDEC, the unemployment rate corresponding to the first quarter of 2008 showed that 8.4% of the active population was unemployed, 0.9 percentage points higher than the 7.5% rate in the fourth quarter of 2007. Average real wages of the economy increased by 13% (YoY) between December 2006 and December 2007, according to INDEC’s inflation rate based on the consumer price index (8.5%). During the first half of 2008, salary pressures in the Argentine economy have resulted in wage hikes of approximately 20% (YoY) in nominal terms in several sectors, according to the Argentine Central Bank.
 
The Argentine Central Bank continued its policy of accumulating international reserves and maintaining a competitive exchange rate during 2007. Central Bank reserves were at U.S.$46 billion at the end of the year, and the peso/dollar buying exchange rate increased to Ps.3.15 per dollar, a 2.9% (YoY) nominal depreciation. The real exchange rate of the Argentine peso against a basket of currencies, measured using INDEC’s inflation rate based on the consumer price index, showed a 10% real depreciation throughout the year. As of June 30, 2008, Argentine Central Bank reserves reached U.S.$47.5 billion. The exchange rate of the Argentine peso against the U.S dollar declined from Ps.3.15/ U.S.$1.00 as of December 31, 2007 to Ps.3.03 /U.S.$1.00 as of June 30, 2008.
 
8

 
 
Government fiscal revenues increased by 33% (YoY in nominal terms) in 2007 and extraordinary revenues of Ps.7,814 million were generated as a result of pension reform, but an even higher rise in public expenditures (46%) led to a reduction in the national primary fiscal surplus from 3.5% of GDP in 2006 to 3.2% of GDP, in 2007. According to the Argentine Central Bank, fiscal revenues continued to increase in the first half of 2008 (38% YoY in nominal terms) driven mainly by increased value added tax (“VAT”), export taxes (which were 93% higher YoY, driven both by the increase in international commodity prices and the applicable export rates) and social security collections. In real terms, tax collections decelerated while primary government expenditures continued to increase at a fast pace, albeit slower than in 2007. According to the Argentine Central Bank, fiscal revenues and spending are expected to continue to grow in 2008, with the national primary fiscal surplus expected to exceed the national budget forecasts of 3.15% of GDP for the year.
 
In relation to public debt, two issues remain pending: (i) a portion of the defaulted debt that was not included in the 2005 debt swap (the so-called “Paris Club”), which the Argentine government recently announced it would repay, and (ii) certain government bondholders have not accepted the government’s debt restructuring proposal.  Standard & Poor’s (S&P) recently downgraded Argentina's credit rating one notch to “B” while Moody's recently downgraded its credit watch of Argentina from “positive” to “stable.”
 
According to earlier estimates of the Argentine Central Bank, the Argentine economy was expected to grow at a faster pace in the second half of 2008 compared to the first half of 2008, though at a slower pace than that of recent years, driven by a recovery in exports and higher household spending once expectations and financial conditions become stable. However, we cannot predict the evolution of future macroeconomic events, especially in light of the recent turmoil in international financial markets, or the effect that they are likely to have on our business, financial condition and results of operations. See “Item 3. Key Information—Risks Relating to Argentina” in our 2007 20-F.
 
Energy consumption in Argentina has increased significantly since 2003, driven in part by price limitations that have kept Argentine energy prices substantially below international prices. Continued growth in demand and a particularly harsh winter in 2007 have recently led to fuel shortages and power outages, prompting the Argentine government to take additional measures to assure domestic supply. At the same time, growth in the production of certain hydrocarbon products has slowed, and in the case of crude oil production has recently declined, due to Argentina’s maturing oil and gas fields. As a result of this increasing demand and actions taken by the Argentine regulatory authorities to prioritize domestic supply, exported volumes of hydrocarbon products, especially natural gas, declined steadily over this period. At the same time, Argentina has increased hydrocarbon imports.
 
The table below shows Argentina’s total sales, production, exports and imports of crude oil, natural gas, diesel and gasoline products for the periods indicated.
 
9

 
 
 
   
Year ended December 31,
 
   
2007
   
2006
   
2005
 
Crude Oil in Argentina
                 
Production (mmbbl)
    234.7       240.7       243.0  
Exports (mmbbl)
    20.8       32.0       54.6  
Imports (mmbbl)
    0.3       0.6       1.6  
                         
Natural Gas in Argentina
                       
Sales (mmcm)(1)
    38,532.0       36,362.0       34,685.0  
Production (mmcm)
    51,007.0       51,779.0       51,573.0  
Exports (mmcm)
    1,245.0       2,487.0       6,600.1  
Imports (mmcm)
    1,239.5       1,428.5       1,610.5  
                         
Diesel in Argentina
                       
Sales (mcm)(2)
    14,754.9       13,903.4       13,074.4  
Production (mcm)
    12,915.6       12,570.3       11,673.4  
Exports (mcm)
    46.6       108.8       276.4  
Imports (mcm)
    847.1       446.9       678.7  
                         
Gasoline in Argentina
                       
Sales (mcm)(2)
    5,285.6       4,608.4       4,028.6  
Production (mcm)
    5,965.2       5,889.3       6,043.1  
Exports (mcm)
    1,400.9       1,732.0       2,955.2  
Imports (mcm)
    23.0       33.2       14.1  
 

(1)
Includes total domestic market deliveries.
 
(2)
Includes domestic market sales.
 
 
Sources: Argentine Secretariat of Energy and Ente Nacional Regulador del Gas (ENARGAS)
 
Policy and regulatory developments in Argentina
 
The Argentine oil and gas industry is currently subject to: (i) certain governmental policies and regulations that have resulted in: domestic prices that are substantially lower than prevailing international market prices; (ii) export restrictions; (iii) domestic supply requirements that oblige us from time to time to divert supplies from the export or industrial markets in order to meet domestic consumer demand; and (iv) increasingly higher export duties on the volumes of hydrocarbons allowed to be exported. These governmental pricing limitations, export controls and tax policies have been implemented in an effort to satisfy increasing domestic market demand at prices below international market prices. As discussed in “Item 3. Key Information—Risk Factors” of our 2007 20-F and elsewhere in this report, actions by the Argentine government have had and will continue to have a significant effect on Argentine companies, including us.
 
Policy and regulatory developments relating to the oil and gas industry in Argentina include, among others:
 
·  
Price limitations. In order to support economic growth, the Argentine government has sought to limit increases in hydrocarbons prices through a number of policies and measures. As a result, Argentina’s domestic hydrocarbon prices have not increased at the pace of international and regional prices, as described in “—Differences between Argentine and international prices for hydrocarbon products.”
 
·  
Export restrictions. Since 2004, the Argentine government has prioritized domestic demand and adopted policies and regulations restricting the export of certain hydrocarbon products. These restrictions have impacted our export sales as described in “—Declining export volumes.”
 
·  
Export duties. Since the economic crisis in 2002, the Argentine government has imposed export taxes on certain hydrocarbon products. These taxes have increased substantially in the following years as international prices have surged. For a description of the most recent export duties on hydrocarbon exports, see “—International oil and gas prices and Argentine export taxes.”
 
·  
Domestic supply requirements. The Argentine government has at times issued regulatory orders requiring producers to inject natural gas in excess of contractual commitments and supply other hydrocarbon products to the domestic market. As a result, we have had to limit our exports. In
 
10

 
 
 
addition, we have imported diesel in order to satisfy domestic demand, which has increased our operating costs, as described in “—Increasing cost of sales.”
 
·  
Energy Substitution Program. The Argentine Secretariat of Energy, by Resolution SE No. 459/07 of July 12, 2007, created the “Energy Substitution Program” (Programa de Energía Total), which is designed to mitigate shortages of natural gas and electricity by encouraging industrial users to substitute natural gas and electricity during the Argentine winter with imported diesel, fuel oil and LPG subsidized by the government. Resolution No. 121/08 of the Department of Federal Planning, Public Investment and Services extended the Energy Substitution Program until December 31, 2008, and Rule No. 30/08 of the Sub-Secretary of Coordination and Control, issued on April 1, 2008, approved the general plans for implementation of the Energy Substitution Program. See “Item 4. Information on the Company—Regulatory Framework and Relationship with the Argentine Government—Market Regulation—Refined Products” in our 2007 20-F. Under this program, we and other companies import diesel, fuel oil and LPG that we then sell to industrial users in Argentina at the prevailing domestic natural gas prices, with the difference refunded to us by the Argentine government. As a result, this program has the effect of increasing our net sales and volumes sold, but is operating income-neutral since we do not earn any margin on products sold under this program.
 
·  
Gas Plus. The Argentine Secretariat of Energy, by Resolution SE No. 24/08 of March 13, 2008, created the “Gas Plus” program to encourage the production of natural gas from newly discovered reserves, new fields and tight gas, among other sources. Natural gas produced under the Gas Plus program will not be subject to the prices set forth in the Agreement 2007-2011 regarding the supply of natural gas to the domestic market during the period 2007 through 2011. See “Item 4. Information on the Company—Regulatory Framework and Relationship with the Argentine Government—Market Regulation—Natural Gas” in our 2007 20-F.
 
Declining export volumes
 
The exported volumes of many of our hydrocarbon products have declined significantly in recent years, driven mainly by increasing domestic demand and export restrictions, as well as by declines in production. This shift from exports to domestic sales has impacted our results of operations as the prices for hydrocarbons in the domestic market have, due to price limitations, generally not kept pace with international and regional prices.
 
The table below presents, for the periods indicated, the exported volumes of certain of our principal hydrocarbon products.
 
   
Six-Month Period Ended
June 30,
   
Year Ended
December 31,
 
   
2008
   
2007
   
2007
   
2006
   
2005
 
Product
 
Units Sold
 
Oil (mcm)
    257       231       425       874       1,776  
Natural gas (mmcm)
    285       1,126       1,358       3,090       3,071  
Diesel (mcm)
    91       75       133       149       327  
Gasoline (mcm)
    508       696       1,272       1,695       2,385  
Fuel oil (mtn)
    558       633       1,187       903       696  
Petrochemicals (mtn)
    247       351       689       700       749  

Due to the decreased export product volumes indicated above and increasing export duties, the portion of our net sales accounted for by exports decreased steadily between 2005 and 2008. Exports accounted for 25.3%, 31.8%,  28.9%, 33.7% and 37.7% of our consolidated net sales in the six-month periods ended June 30, 2008 and 2007, and in 2007, 2006 and 2005, respectively.
 
The Argentine government’s current policy is not to allow any exports of natural gas other than to the residential sector in certain other countries. In addition, the Argentine government requires companies intending to export crude oil, diesel and LPG to obtain prior authorization from the Secretariat of Energy by demonstrating that local demand for those products has been satisfied. Since 2005, because domestic diesel production has generally not been sufficient to satisfy Argentine consumption needs, exports of diesel have been substantially restricted.
 
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Differences between Argentine and international prices for hydrocarbon products
 
Domestic prices for our products have fallen significantly below international prices as a result of regulatory policies that have resulted in limitations on our ability to increase domestic prices sufficiently to keep pace with international market prices. The following table sets forth the average prices at which we sold our principal products in the domestic market (net of taxes passed through to consumers, such as value added and fuel transfer taxes) for the periods indicated:
 
   
For the Six-Month Period Ended June 30,
 
   
2008
 
   
Peso
    $ U.S. (1)
Natural gas(2)(3)
    231       74  
Diesel(4)
    1,182       379  
Gasoline products(5)
    1,124       361  
 

(1)
Amounts translated from Argentine pesos at the average exchange rate for the period.
 
(2)
Per thousand cubic meters.
 
(3)
Reflects the average of residential prices (which are generally lower than prices to other segments) and industrial prices.
 
(4)
Per cubic meter. Does not include sales by Refinor, in which we have a 50% interest and which is proportionally consolidated in our consolidated financial statements.
 
(5)
Per cubic meter. Does not include sales by Refinor, in which we have a 50% interest, and which is proportionally consolidated in our consolidated financial statements. The average price shown for each period is the volume-weighted average price of the various grades of gasoline products sold by us in the domestic market during such period.
 
The disparity between the prices at which hydrocarbon products are sold in Argentina and the prevailing international prices for such products has been mainly due to limitations on our ability to pass increases in international prices of crude oil and hydrocarbon fuels and adverse exchange rate movements through to domestic prices or to increase local prices of natural gas (in particular for residential customers), gasoline and diesel. In a framework of increasing international prices, and notwithstanding our leading market position, domestic liquid fuel prices remain well below the level consistent with international prices.
 
For example, in June 2008, diesel import prices were approximately U.S.$1,110/cubic meter, while the average domestic sales prices were approximately U.S.$428/cubic meter before government subsidies. In addition, the price at which Bolivia exports natural gas to Argentina (which is purchased by ENARSA) was approximately U.S.$6/mmBtu in the fourth quarter of 2007 (approximately U.S.$7.8/mmBtu in the second quarter of 2008), while the price at which we purchase natural gas from ENARSA was approximately U.S.$1.84/mmBtu and our average sales price in the six-month period ended June 30, 2008 for such gas in Argentina was approximately U.S.$2.00/mmBtu.
 
In addition, pursuant to Resolution 599/2007 of the Secretariat of Energy dated June 14, 2007 (see “Item 4. Information on the Company—Regulatory Framework and Relationship with the Argentine Government—Market Regulation—Natural gas” in our 2007 20-F), the Argentine government and gas producers, including us, entered into an agreement for the supply of certain volumes of gas to each segment of the domestic market during the period 2007 through 2011. Under this agreement, we have supplied a total volume of 2,674 million cubic meters of gas from August through December 2007 (representing 34% of our total gas volume sales for the same period) to domestic residential and small commercial consumers at a price of approximately Ps.0.50/mmBtu for that period.
 
Relative maturity of our oil and gas assets
 
Argentina’s oil and gas fields are mature and, as a result, our reserves and production are declining as reserves are depleted. Because we mainly have concessions for mature oil and gas fields that are undergoing natural production declines, it is difficult to replace our proved reserves from other categories of reserves. In 2007, our estimated proved oil reserves and oil production declined by 8.38% and 4.76%, respectively, over the preceding year, while our estimated proved gas reserves and gas production declined by 7.65% and 2.46%, respectively, over the same period. As a result, in an effort to maintain our high refinery utilization rates and because of regulatory requirements to supply certain hydrocarbon products to the domestic market, we purchased crude oil and natural gas from third parties. In 2007 and 2006, our crude production, substantially all of which was destined to our refineries, represented approximately 83% and 90%, respectively, of the total crude oil processed by our refineries. In the six-month period ended June 30, 2008, it represented 77%, a 6% decline from the full year 2007, due mainly to a strike that affected our operations in the South of Argentina and caused our production to decrease by approximately 3.4 mmbbl. As adjusted for the lost production
 
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resulting from the strike, we believe our crude oil production would have represented approximately 82% of the crude processed by our refineries. In 2007 and 2006, our natural gas production represented approximately 99% and 93%, respectively, of our total natural gas deliveries, while in the six-month period ended June 30, 2008, almost 100% of such deliveries were satisfied by our production. We expect our oil and gas proved reserves and production rates to continue their decline. See “Item 4. Information on the Company—Exploration and Development Activities—Reserves” in our 2007 20-F for more information on our proved reserves.
 
Increasing cost of sales
 
Our cost of sales accounted for 66.3% and 63.4% of our consolidated net sales in the six-month periods ended June 30, 2008 and 2007, respectively, and 65.3%, 61.7% and 49.2% of our consolidated net sales in 2007, 2006 and 2005, respectively. Our cost of sales increased significantly between 2005 and the first half of 2008, mainly as a result of: increased purchases of crude oil from third parties, driven by our efforts to maintain our high refinery utilization rates in light of our declining production; increased purchases of natural gas and diesel from third parties to fulfill our domestic supply requirements and avoid penalties under certain delivery contracts; higher labor costs; higher costs related to the renegotiation of certain service contracts; and inflation. Due to prevailing Argentine price limitations, we were unable to pass many of these cost increases to our customers in the form of higher hydrocarbon product prices.
 
Critical Accounting Policies
 
U.S. GAAP reconciliation
 
The difference between our net income under Argentine GAAP and our net income under U.S. GAAP for the six-month periods ended June 30, 2008 and 2007 is primarily due to the remeasurement into functional currency and translation into reporting currency, the elimination of the inflation adjustment into Argentine constant pesos, the effects of the reorganization of entities under common control, the impairment of long-lived assets, capitalization of financial expenses, accounting for assets retirement obligations, proportional consolidation of investments in jointly controlled companies, and the consolidation of variable interest entities.
 
Under Argentine GAAP, financial statements are presented in constant Argentine pesos (“reporting currency”). Foreign currency transactions are recorded in Argentine pesos by applying to the foreign currency amount the exchange rate between the reporting and the foreign currency at the date of the transaction. Exchange rate differences arising on monetary items in foreign currency are recognized in the income statement of the period.
 
Under U.S. GAAP, a definition of the functional currency is required which may differ from the reporting currency. Management has determined, for us and certain of our subsidiaries and investees, the U.S. dollar to be the functional currency in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 52. Therefore, we have re-measured into U.S. dollars our Unaudited Interim Financial Statements as of June 30, 2008 and 2007, in each case prepared in accordance with Argentine GAAP by applying the procedures specified in SFAS No. 52. The objective of the re-measurement process is to produce the same results that would have been reported if the accounting records had been kept in the functional currency. Accordingly, monetary assets and liabilities are re-measured at the balance sheet date (current) exchange rate. Amounts carried at prices in past transactions are re-measured at the exchange rates in effect when the transactions occurred. Revenues and expenses are re-measured on a monthly basis at the average rates of exchange in effect during the period, except for consumption of non-monetary assets, which are re-measured at the rates of exchange in effect when the respective assets were acquired. Translation gains and losses on monetary assets and liabilities arising from the re-measurement are included in the determination of net income (loss) in the period such gains and losses arise. For certain of our subsidiaries and investees, we have determined the Argentine peso as the functional currency. Translation adjustments resulting from the process of translating the financial statements of the mentioned subsidiaries into U.S. dollars are not included in determining net income and are reported in other comprehensive income (“OCI”), as a component of shareholders’ equity.
 
The amounts obtained from the re-measurement process referred to above are translated into Argentine pesos under the provisions of SFAS No. 52. Assets and liabilities are translated at the current selling exchange rate of Ps.3.03 to U.S.$1.00, as of June 30, 2008. Revenues, expenses, gains and losses reported in the income statement are translated at the exchange rate existing at the time of each transaction or, if appropriate, at the weighted average of the exchange rates during the period. Translation effects of exchange rate changes are included as a cumulative translation adjustment in shareholders’ equity. For the six-month periods ended June 30, 2008 and 2007, the re-measurement into functional currency and the translation into reporting currency decreased net income determined according to Argentine GAAP by Ps.1,091 million and Ps.641 million, respectively.
 
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Under Argentine GAAP, we have proportionally consolidated, net of intercompany transactions, assets, liabilities, net sales, cost and expenses of investees in which joint control is held. Under U.S. GAAP these investees are accounted for by the equity method. The proportional consolidation mentioned above generated an increase of Ps.530 million in total assets and total liabilities as of June 30, 2008, and an increase of Ps.903 million and Ps.647 million in net sales and Ps.498 million and Ps.331 million in operating income for the six-month periods ended June 30, 2008 and 2007, respectively.
 
Under Argentine GAAP, in order to perform the recoverability test, long-lived assets are grouped with other assets at business segment level, and they would be impaired if the discounted cash flows, considered at business segment level, were less than its carrying value. With respect to assets that were held pending sale or disposal, our policy was to record these assets on an individual basis at amounts that did not exceed net realizable value.
 
Under U.S. GAAP, for proved oil and gas properties, we perform the impairment test on an individual field basis. Other long-lived assets are aggregated, so that the discrete cash flows produced by each group of assets may be separately analyzed. Each asset is tested following the guidelines of SFAS No. 144, “Accounting for the Impairment of Long—Lived Assets,” by comparing the net book value of such an asset with the expected undiscounted cash flow. Impairment losses are measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. When market values are not available, we estimate them using the expected future cash flows discounted at a rate commensurate with the risks associated with the recovery of the assets. There were no impairment charges under U.S. GAAP for the six-month periods ended June 30, 2008 and 2007. The adjusted book value after impairment under U.S. GAAP results in lower depreciation of Ps. 74 million and Ps. 85 million for the six-month periods ended June 30, 2008 and 2007, respectively. Additionally, the reconciliation adjustment of Ps.16 million for the six-month period ended June 30, 2007 includes a loss of Ps.69 million for the elimination of the reversal of an impairment charge made under Argentine GAAP, which is not allowed under U.S. GAAP.
 
Under U.S. GAAP, only interest expense on qualifying assets must be capitalized, regardless of the asset’s construction period. Under Argentine GAAP, for those assets that necessarily take a substantial period of time to get ready for its intended use, borrowing costs (including interest and exchange differences) should be capitalized. Accordingly, borrowing costs for those assets whose construction period exceeds one year have been capitalized, provided that such capitalization does not exceed the amount of financial expense recorded in that period or year.
 
Under U.S. GAAP, SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement cost. The standard applies to the legal obligation associated with the retirement of long-lived assets that results from the acquisition, construction, development and normal use of the asset. Accounting for Assets Retirement Obligations, requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred, if a reasonable estimate of fair value can be made. The asset retirement obligations liability is built up in cash flow layers, with each layer being discounted using the discount rate as of the date that the layer was created. Remeasurement of the entire obligation using current discount rates is not permitted. Each cash flow layer is added to the carrying amount of the associated asset. This additional carrying amount is then depreciated over the life of the asset. The liability is increased due to the passage of time based on the time value of money (“accretion expense”) until the obligation is settled. Argentine GAAP is similar to SFAS No. 143, except for a change in the discount rate is treated as a change in estimates, so the entire liability must be recalculated using the current discount rate, being the change added or reduced from the related asset.
 
Under U.S. GAAP, results on reorganization of entities under common control are eliminated and related accounts receivables are considered as a capital (dividend) transaction. Under Argentine GAAP, results on reorganization of entities under common control and account receivables are recognized in the statement of income and the balance sheet, respectively.
 
FIN No. 46R, Consolidation of Variable Interest Entities, (“FIN 46R”) clarifies the application of Accounting Research Bulletin No. 51 to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The interpretations explain how to identify variable interest entities and how an enterprise assesses its interests in a variable interest entity to decide whether to consolidate that entity. These interpretations require existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among parties involved. Under Argentine GAAP, consolidation is based on having  the votes necessary  to control corporate decisions (Note 1 to the Unaudited Interim Financial Statements).
 
Through May 2008, we had operations with one variable interest entity (“VIE”), which was created in order to structure our future deliveries of oil (“FOS transaction”). Additionally, through September 2005, we had operations
 
14

 
 
with a VIE related to another FOS transaction, which was settled in advance. For a further description refer to “—Transactions with unconsolidated variable interest entities” below.
 
YPF Holdings has a non-contributory defined-benefit pension plan and postretirement and postemployment benefits. Under U.S. GAAP, the Company fully recognized the underfunded status of defined-benefit pension and postretirement plans as a liability in the financial statements reducing the Company’s shareholders’ equity through the accumulated OCI account. Under Argentine GAAP, unrecognized actuarial losses are not considered in the amount of the net liability. For a more detailed discussion of the most significant differences between Argentine GAAP and U.S. GAAP, please refer to Note 6(f) to the Unaudited Interim Financial Statements.
 
Principal Income Statement Line Items
 
The following is a brief description of the principal line items of our income statement.
 
Net sales
 
Net sales include primarily our consolidated sales of unrefined and refined fuel and chemical products net of the payment of applicable fuel transfer taxes, turnover taxes and custom duties on exports. Royalties with respect to our production are accounted for as a cost of production and are not deducted in determining net sales.
 
Cost of sales
 
The following table presents, for each of the periods indicated, a breakdown of our consolidated cost of sales by category:
 
   
For the Six-Month Period
Ended June 30,
 
   
2008
   
2007
 
   
(in millions of pesos)
 
Inventories at beginning of year
    2,573       1,697  
Purchases for the period
    3,924       2,568  
Production costs(1)
    7,135       6,072  
Holding gains on inventories
    123       119  
Inventories at end of period
    (2,854 )     (2,157 )
Cost of sales
    10,901       8,299  
 

(1)
The table below presents, for each of the periods indicated, a breakdown of our consolidated production costs by category:
 
   
For the Six-Month Period
Ended June 30,
 
   
2008
   
2007
 
   
(in millions of pesos)
 
Salaries and social security taxes
    485       395  
Fees and compensation for services
    98       67  
Other personnel expenses
    158       124  
Taxes, charges and contributions
    139       111  
Royalties and easements
    1,138       981  
Insurance
    55       48  
Rental of real estate and equipment
    189       154  
Depreciation of fixed assets
    1,970       1,939  
Industrial inputs, consumable material and supplies
    279       302  
Operation services and other service contracts
    526       279  
Preservation, repair and maintenance
    917       766  
Contractual commitments
    156       232  
Transportation, products and charges
    448       369  
Fuel, gas, energy and miscellaneous
    577       305  
Total
    7,135       6,072  

Other expenses, net
 
Other expenses principally include reserves for pending lawsuits and other claims, provisions for environmental remediation and provisions for defined benefit pension plans and other post-retirement benefits.
 
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Finance income/(expense), net and holding gains
 
Finance income/(expense), net and holding gains consist of the net of gains and losses on interest paid and interest earned, currency exchange differences and the periodic revaluation of inventories.
 
Taxes
 
The statutory corporate income tax rate in Argentina was 35% during each of the periods presented in this report. Our effective tax rates for the periods discussed in this report exceed the Argentine corporate income tax rate mainly due to the non-deductibility of the amortization of the effect of inflation indexation on fixed assets, offset in part by income on non-consolidated long-term investments (which is included in our consolidated financial statements net of corporate income tax as payable by investees) and tax-free income from the sale of hydrocarbons produced in Tierra del Fuego. See Note 2(f) to the Unaudited Interim Financial Statements.
 
Results of Operations
 
Consolidated results of operations for the six-month periods ended June 30, 2008 and 2007
 
The following table sets forth certain financial information as a percentage of net sales for the periods indicated.
 
   
Six-Month Period Ended
June 30,
   
   
2008
   
2007
   
   
(percentage of net sales)
   
Net sales
    100.0 %     100.0 %
Cost of sales
    (66.3 )     (63.4 )
Gross profit
    33.7       36.6  
Administrative expenses
    (2.6 )     (2.8 )
Selling expenses
    (6.7 )     (7.6 )
Exploration expenses
    (1.3 )     (1.8 )
Operating income
    23.1       24.4  

The tables below present, for the periods indicated, volume and price data with respect to our consolidated sales of our principal products in the domestic and export markets, respectively. The data presented below does not include sales by Compañía Mega S.A. (“Mega”), Refinor or Profertil, jointly-controlled companies in which we have 38%, 50% and 50% interests, respectively, and which are proportionally consolidated in our consolidated financial statements. Mega, Refinor and Profertil contributed, after consolidation adjustments, 1.37%, 1.38% and 2.75%, respectively, of our consolidated net sales for the six-month period ended June 30, 2008 and 1.63%, 1.49% and 1.82%, respectively, of our consolidated net sales for the six-month period ended June 30, 2007.
 
Domestic Market
Six-Month Period Ended June 30,
 
 
2008
 
2007
 
 
Product
 
Units sold
 
Average price per unit(1)
 
 
Units sold
 
Average price per unit(1)
 
     
(in pesos)
     
(in pesos)
 
Natural gas
7,939 mmcm
 
231/mcm
 
8,194 mmcm
 
160/mcm
 
Diesel
4,032 mcm
    1,182/m3  
3,936 mcm
    925/m3  
Gasoline
1,414 mcm
    1,124/m3  
1,262 mcm
    911/m3  
Fuel oil (2)
510 mtn
 
1,373/ton
 
206 mtn
 
891/ton
 
Petrochemicals
336 mtn
 
2,094/ton
 
320 mtn
 
1,408/ton
 
 

(1)  
Average prices shown are net of applicable domestic fuel transfer taxes payable by consumers.
 
(2)  
For the period ended June 30, 2008, includes sales under the Energy Substitution Program amounting to 104 mtn.
 
16

 
 
Export Markets
Six-Month Period Ended June 30,
 
 
2008
 
2007
 
 
Product
 
Units sold
 
Average price per unit(1)
 
 
Units sold
 
Average price per unit(1)
 
     
(in pesos)
     
(in pesos)
 
Natural gas (2)
285 mmcm
 
731/mcm
 
1,126 mmcm
 
350/mcm
 
Diesel
91 mcm
    2,789/m3  
75 mcm
    1,650/m3  
Gasoline
508 mcm
    2,473/m3  
696 mcm
    1,645/m3  
Fuel oil
558 mtn
 
1,720/ton
 
633 mtn
 
1,014/ton
 
Petrochemicals
247 mtn
 
2,645/ton
 
351 mtn
 
2,148/ton
 
 

(1)
Average prices shown are gross of applicable export withholding taxes payable by us, and, as a result, may not be indicative of amounts recorded by us as net sales. See “—Factors Affecting Our Operations—International oil and gas prices and Argentine export taxes” for more information on the export tax withholding rates applicable to our principal products.
 
(2)
Average price is based on natural gas actually delivered and does not include fixed charges collected pursuant to certain delivery contracts.
 
Net sales
 
Net sales in the six-month period ended June 30, 2008 were Ps.16,443 million, representing an 25.5% increase compared to Ps.13,099 million in the six-month period ended June 30, 2007. This increase was primarily attributable to increases in domestic prices for diesel and gasoline as well as in sales volumes of those products in the domestic market. As a result, our domestic sales increased 37.6% to Ps.12,288 million in the six-month period ended June 30, 2008 from Ps.8,927 million in the same period in 2007. Export sales, despite an increase in international prices of substantially all of our exported products, declined by 0.4% to Ps.4,155 million in the six-month period ended June 30, 2008 from Ps.4,172 million in the same period in 2007, driven mainly by the increase in the export tax withholding rates applicable to petrochemical and refined products. Our export sales in both periods were made mainly to the United States, Brazil and Chile.
 
For further information on our net sales for the periods discussed above, see “—Results of operations by business segment for the six-month periods ended June 30, 2008 and 2007.”
 
Cost of sales
 
Cost of sales in the six-month period ended June 30, 2008 was Ps.10,901 million compared to Ps.8,299 million in the six-month period ended June 30, 2007, representing a 31.3% increase, which was mainly attributable to the  increase in the total volume of crude oil purchases from third parties, which was necessary to offset our lower crude oil production and maintain the pace of our refinery operations in order to meet the growing domestic demand of refined products. Cost of sales as a percentage of net sales increased to 66.3% in the 2008 period, compared to 63.4% in the same period in 2007. Increased volumes of crude oil purchases adversely affect our margins because we lose the margin earned on our internal exploration and production activities. In addition, we experienced general increases in costs, mainly in preservation, repair and maintenance, and operation services and other service contracts, driven mainly by upward price and wage pressure, and transportation, products and charges, driven mainly by the increase in our domestic sales. Salaries and social security also increased more than 20%, at pace with general price increases in the broader economy.
 
Selling expenses
 
Our selling expenses were Ps.1,102 million in the six-month period ended June 30, 2008 compared to Ps.992 million in the six-month period ended June 30, 2007, representing an increase of 11.1%, mainly attributable to the increase in the amount we paid in tax on debits and credits on bank accounts, due to the higher amounts involved in these transactions in the first half of 2008. The cost of transportation to our distribution network also increased, in this case driven mainly by our higher domestic sales.
 
Operating income
 
Operating income in the six-month period ended June 30, 2008 was Ps.3,793 million compared to Ps.3,200 million in the six-month period ended June 30, 2007, representing an increase of 18.5%. Operating income increased primarily due to the previously mentioned increases in domestic prices, partially offset by our higher cost of sales.
 
Our operating margins (operating income divided by net sales) were 23.1% and 24.4% in the six-month periods ended June 30, 2008 and 2007, respectively.
 
17

 
 
Other expenses, net
 
Other expenses, net increased to Ps.241 million in the six-month period ended June 30, 2008 from Ps.18 million in the six-month period ended June 30, 2007, mainly as a result of increased reserves for lawsuits, due mainly to our reassessment of certain environmental obligations based on new information that became available during the six-month period ended June 30, 2008. See Note 3(h) to our Unaudited Interim Financial Statements.
 
Financial income (expense), net and holding gains
 
In the six-month period ended June 30, 2008, financial income (expense), net and holding gains, increased to Ps.270 million from Ps.174 million in the six-month period ended June 30, 2007. This increase is attributable to positive exchange differences resulting from the depreciation of the U.S. dollar against the Argentine peso, as our outstanding debt is denominated in U.S. dollars, as well as higher holding gains on inventories from stock revaluation. These financial income, net and holding gains were partially offset by a decrease in interest income, and an increase in interest expenses.
 
Taxes
 
Income tax expense in the six-month period ended June 30, 2008 increased 24.8% to Ps.1,635 million from Ps.1,310 million in the six-month period ended June 30, 2007. The effective income tax rates for the six-month period ended June 30, 2008 and the six-month period ended June 30, 2008 were 42% and 38%, respectively, compared to the statutory income tax rate of 35%. The higher effective income tax rate is mainly attributable to higher losses recognized by YPF Holdings and the 100% impairment of the deferred tax assets generated as a result of such losses due to our recovery assesments.
 
Net income
 
Net income for the six-month period ended June 30, 2008 was Ps.2,254 million, compared to Ps.2,144 million in the same period in 2007, an increase of 5.1%. This increase is mainly attributable to our 18.5% increase in operating income, which was partially offset by the increase in other expenses, net, and higher income tax.
 
Results of operations by business segment for the six-month periods ended June 30, 2008 and 2007
 
The following table sets forth net sales and operating income for each of our lines of business for the six-month periods ended June 30, 2008 and 2007:
 
   
For the Six-month Periods Ended June 30,
 
   
2008
   
2007
 
   
(in millions of pesos)
 
Net sales(1)
           
Exploration and production(2)
           
To unrelated parties
    2,198       1,607  
To related parties
    523       331  
Intersegment sales and fees(3)
    5,715       6,057  
Total exploration and production
    8,436       7,995  
Refining and marketing(4)
               
To unrelated parties
    11,279       8,885  
To related parties
    973       1,007  
Intersegment sales and fees
    571       880  
Total refining and marketing
    12,823       10,772  
Chemical
               
To unrelated parties
    1,349       1,213  
Intersegment sales and fees
    542       418  
Total Chemical
    1,891       1,631  
Corporate and other
               
To unrelated parties
    121       56  
Intersegment sales and fees
    203       169  
Total Corporate and others
    324       225  
Less intersegment sales and fees
    (7,031 )     (7,524 )
Total net sales(5)
    16,443       13,099  
Operating income (Loss)
               
 
18

 
     
For the Six-month Periods Ended June 30, 
 
     
2008 
     
2007 
 
     
(in millions of pesos) 
 
Exploration and production
    2,010       2,155  
Refining and marketing
    1,525       1,087  
Chemical
    658       321  
Corporate and other
    (328 )     (301 )
Consolidation adjustments
    (72 )     (62 )
Total operating income
    3,793       3,200  
 

(1)
Net sales are net to us after payment of a fuel transfer tax, turnover tax and customs duties on exports. Royalties with respect to our production are accounted for as a cost of production and are not deducted in determining net sales.
 
(2)
Includes exploration and production operations in Argentina and the United States.
 
(3)
Intersegment sales of crude oil to Refining and Marketing are recorded at transfer prices that reflect our estimate of Argentine market prices.
 
(4)
Includes LPG activities.
 
(5)
Total net sales include export sales of Ps.4,155 million and Ps.4,172 million for the six-month periods ended June 30, 2008, and 2007, respectively.
 
Exploration and production
 
Exploration and Production net sales in the six-month period ended June 30, 2008 were Ps. 8,436, representing a 5.5% increase from Ps. 7,995 million in the six-month period ended June 30, 2007. The volume of crude oil sales decreased by 9.9% in the six-month period ended June 30, 2008, mainly due to a strike which affected our operations in the South of Argentina. The increase in average international crude oil prices (of approximately 80% between periods) was not significantly reflected in local market prices, due to the imposition in November 2007 of higher export tax rates, pursuant to Resolution No. 349/07. Export volumes of natural gas declined approximately 75% in the 2008 period compared to the same period in 2007, due to the priority we are required to give to fulfilling domestic demand. This decrease in exports was more than offset by a 42% increase in the average price of natural gas sold in the domestic market, driven mainly by a partial recovery in prices for the non-residential segments of the market.
 
Exploration and Production operating income declined 6.7% to Ps. 2,010 million in the six-month period ended June 30, 2008 from Ps. 2,155 million in the six-month period ended June 30, 2007 due to operating expenses increases outpacing the 5.5% increase in Exploration and Production net sales. Operating expenses increased 10.0%, primarily due to the effect of cost increases in the wider economy, increases in oil and gas royalties, considering the higher oil and gas prices required to be used as a basis for calculation, as well as in the annual surface fee that is based on acreage of each block and which are payable to the provinces in which the hydrocarbon fields are located or, in the case of offshore and certain other fields, to the Argentine federal government, and which increased almost eightfold in the six-month period ended June 30, 2008 compared to the same period in the prior year.
 
Average oil production during the six-month period ended June 30, 2008 decreased 8.3% to 307 thousand barrels per day from 335 thousand barrels per day in the same period in 2007. Natural gas production in the six-month period ended June 30, 2008 decreased 5.0% to 1,653 million cubic feet per day from 1,743 million cubic feet per day in the same period in 2007. These declines were the consequences of a strike which affected our operations in the South of Argentina and the natural decline in the production curve resulting from the continuing overall maturity of our fields.
 
Refining and marketing
 
Net sales in the six-month period ended June 30, 2008 were Ps.12,823 million, 19.0% higher than the Ps.10,772 million in net sales recorded in the six-month period ended June 30, 2007. This increase was mainly attributable to increases in the volumes sold in the domestic market and in the average domestic prices of diesel and gasoline. Domestic diesel volumes and average prices increased by approximately 2% and 28%, respectively, while domestic gasoline volumes and average prices increased approximately 12% and 22%, respectively. The increases were offset in part by the priority given to the fulfillment of domestic gasoline demand, which resulted in a 27% decrease in the volume of gasoline exported, the segment’s principal export product sold in the international market, where prices (net of export taxes) were on average slightly higher than in Argentina during the six-month period ended June 30, 2008, despite the higher export taxes assessed by the Argentine government, which eroded our margins from export sales compared to the first half of 2007.
 
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Operating profit increased by 40.3% to Ps.1,525 million in the six-month period ended June 30, 2008 from Ps.1,087 million in the same period in 2007. This increase was due to improved margins resulting from the above-mentioned increases in net sales driven by higher prices for diesel and gasoline in Argentina described above and partially offset by an increase in the cost of crude oil purchased from third parties. Additionally, an 18.5% increase in refining costs, primarily in maintenance, energy and industrial inputs, was driven partly by maintenance works which took place in our La Plata and Luján de Cuyo Refineries, and partly by inflation. Refining cost per barrel, which we calculate as the segment’s cost of sales for the period less crude oil purchase costs and depreciation of fixed assets, divided by the number of barrels produced during the period, was Ps.11.78 in the six-month period ended June 30, 2008 compared to Ps.9.79 in the six-month period ended June 30, 2007.
 
Refinery output in the six-month period ended June 30, 2008, including 50% of Refinor’s output (we own 50% of Refinor), reached 334 thousand barrels per day, representing a utilization rate of almost 100% of the existing processing capacity.
 
Chemical
 
Net sales in the six-month period ended June 30, 2008 increased by 15.9% to Ps.1,891 million from Ps.1,631 million in the six-month period ended June 30, 2007, while operating income in the six-month period ended June 30, 2008 increased 105.0% to Ps. 658 million from Ps. 321 million in the six-month period ended June 30, 2007. These increases were attributable mainly to higher operating income of Profertil, in which we have a 50% interest, attributable to increases in the sales of urea and other fertilizers, as well as an increase in the average prices of these products. Additionally, the increase in the operating income of our petrochemical operations was driven by an increase in prices for most of the segment’s products, especially methanol and fertilizers, and was only partially offset by higher production costs and the effects of the higher export taxes pursuant to Resolution No. 394/07.
 
Liquidity and Capital Resources
 
Financial condition
 
Total debt outstanding, net of cash, as of June 30, 2008was U.S.$1,039 million (Ps.3,147 million) consisting of short-term debt (including the current portion of long-term debt) of U.S.$824 million (Ps.2,497 million) and long-term debt of U.S.$215 million (Ps.650 million). As of June 30, 2008, most of our debt was denominated in U.S. dollars (see Notes 3(g) to the Unaudited Interim Financial Statements.)  The use of derivatives is detailed in “—Quantitative and Qualitative Disclosure about Market Risk.”
 
Since September 2001, we have repurchased certain of our publicly-traded bonds in open market transactions on an arms-length basis. As of June 30, 2008, we had repurchased approximately U.S.$159 million of our outstanding bonds. We may from time to time make additional purchases of, or affect other transactions relating to, our publicly-traded bonds if in our own judgment the market conditions are attractive.
 
The following tables set forth our consolidated cash flow information for the periods indicated.
 
   
For the Six-Month Period Ended June 30,
 
   
2008
   
2007
 
   
(in millions of pesos)
       
Net cash flows provided by operating activities
    7,059       4,051  
Net cash flows used in investing activities
    (2,815 )     (2,539 )
Net cash flows used in financing activities
    (4,468 )     (2,214 )
Net increase/(decrease) in cash and equivalents
    (224 )     (702 )
Cash and equivalents at the beginning of period
    847       1,087  
Cash and equivalents at the end of period
    623       385  

 
Net proceeds from outstanding loans were Ps.2,321 million. Net cash flow provided by operating activities was Ps.7,059 million in the six-month period ended June 30, 2008, compared to Ps.4,051 million in the six-month period ended June 30, 2007, mainly as a result of an 18.5% increase in operating income and the collection of loans granted by us to related parties.
 
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The principal uses of cash in investing and financing activities in the six-month period ended June 30, 2008 included Ps.2,816 million in fixed asset acquisitions relating mainly to drilling activities in our Exploration and Production business unit, and Ps.6,789 million in dividend payments.
 
Our current financing policy is to use cash flows provided by operating activities and debt to fund both our investing and operating activities.
 
In addition, Repsol YPF and Petersen Energía have agreed in the shareholders’ agreement entered into by them in connection with the Petersen Transaction to effect the adoption of a dividend policy under which we would distribute 90% of our net income as dividends, starting with our net income for 2007. They have also agreed to vote in favor of requiring us to distribute a dividend of U.S.$850 million in addition to the amount resulting from the distribution of our net income mentioned in the preceding sentence, with payments in 2008 and 2009. We distributed dividends in the amounts of Ps.4,232 million and Ps.2,557 million in February and May 2008, respectively.  See “Item 8. Financial Information—Dividends Policy” and “Item 7. Major Shareholders and Related Party Transactions—Shareholders’ Agreement” in our 2007 20-F.
 
The shareholder’s meeting held on January 8, 2008 approved a notes program for an amount up to U.S.$1 billion, which was also approved by the CNV in September 2008. The proceeds of any offerings under this program must be used exclusively to invest in fixed assets and working capital in Argentina.
 
The following table sets forth our commitments for the periods indicated below with regard to the principal amount of our debt as of June 30, 2008, plus accrued but unpaid interest through June 30, 2008:
 
 
 
Expected Maturity Date
 
 
Total
 
Less than 1 year
 
1 – 2 years
 
2 – 3 years
 
3 – 4 years
 
4 – 5 years
 
More than 5 years
 
(in millions of pesos)
Debt
3,252
2,602
151
303
-
-
196
 
Transactions with unconsolidated variable interest entities
 
Since 1996, we have entered into three forward oil sale agreements, which we refer to as the FOS transactions in this report. These agreements were entered into in order to obtain cash to fund operations in advance of the actual sale and delivery of oil. Under these transactions, we were advanced U.S.$381 million in 1996, U.S.$300 million in 1998 and U.S.$383 million in 2001, against future deliveries of oil. Our obligations under the FOS transactions were recorded as liabilities in the consolidated balance sheet and were taken to income as the physical deliveries were made over the term of the contracts. As of June 30, 2008, the obligations under the respective contracts have been fully complied with and there remain no further obligations to deliver crude oil under the above agreements.
 
As described in “Update of Legal Proceedings” in this report, on March 8, 2004, the Argentine tax authorities formally communicated to us their view that the FOS transactions should have been treated as financial transactions carried out in Argentina and, as such, should have been subject to the relevant tax withholdings. We have presented our defense rejecting the claim and are currently arguing our position.
 
Covenants in our indebtedness
 
Our financial debt generally contains customary covenants for contracts of this nature, including negative pledge, material adverse change and cross-default clauses, as well as customary acceleration provisions.
 
With respect to financial debt totaling Ps. 3,252 million (U.S.$1,073 million), including accrued interest (long- and short-term debt, including overdrafts) as of June 30, 2008, we have agreed, among other things and subject to certain exceptions, not to establish liens or charges on our assets. In the event of a payment default, the creditors may declare due and immediately payable the principal and accrued interest on amounts owed to them. Upon an event of default with respect to other matters, in the case of outstanding negotiable obligations amounting to Ps.515 million (U.S.$170 million) (included in the figure above), the trustee may declare due and immediately payable the principal and accrued interest on amounts owed if required by the holders of at least 25% of the total principal of the outstanding obligations.
 
Almost all of our total outstanding financial debt is subject to cross-default provisions. These provisions generally may be triggered if an event of default occurs with respect to the payment of principal amount or interest on debts equal
 
21

 
 
to or exceeding U.S.$20 million. As a result of these cross-default provisions, a default on our part or the part of any of our consolidated subsidiaries covered by such provisions could result in a substantial portion of our debt being declared in default or accelerated. None of our debt or the debt of our consolidated subsidiaries is currently in default.
 
Credit rating
 
As of June 30, 2008, FITCH Argentina Calificadora de Riesgo S.A. ’s International Rating for our foreign currency denominated debt was BB+, and for our domestic currency denominated debt was BBB-. FITCH’s National Rating is AAA for our Negotiable Obligation Programs. FITCH has a stable outlook on all of our ratings.
 
Standard & Poor’s International Ratings LLC, Sucursal Argentina maintains its rating for our foreign currency denominated debt at BB, and for our domestic currency denominated debt at BB+. Their National Rating is AAA for our Negotiable Obligation Programs. Standard & Poor’s has a stable outlook on all of our ratings. A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating organization.
 
We do not have any ratings downgrade triggers that would accelerate the maturity dates of our debt or trigger any other contractual obligation on our part. However, a downgrade in our credit rating could have a material adverse effect on the cost of renewing existing credit facilities, or obtaining access to new ones in the future. In the past, our main sources of liquidity have been our cash flows from operations, bank financings, issuances of debt securities and the proceeds from our divestment plan. Any future downgrades will not preclude us from using any of our existing credit lines.
 
Guarantees provided
 
As of June 30, 2008, we had signed guarantees in relation to the financing activities of Pluspetrol Energy S.A., Central Dock Sud S.A. and Inversora Dock Sud S.A. which outstanding amounts were approximately U.S.$21 million, U.S.$23 million and Ps.5 million, respectively. The corresponding loans mature in 2011, 2013 and 2009, respectively.
 
Capital investments and expenditures
 
The table below sets forth our capital expenditures and investments by activity for the six-month periods ended June 30, 2008 and 2007.
 
   
Six-Month Period Ended June 30,
 
   
2008
   
2007
 
   
(in millions of pesos)
   
(%)
   
(in millions of pesos)
   
(%)
 
                         
Capital Expenditures and Investments
                       
Exploration and Production
    2,387       82       2,224       82  
Refining and Marketing
    327       11       321       12  
Chemical
    64       2       58       2  
Corporate and other
    147       5       100       4  
Total
    2,925       100 %     2,703       100 %

Off-Balance Sheet Arrangements
 
We have entered into certain off-balance sheet arrangements, as described in  “—Guarantees provided” above.
 
Qualitative and Quantitative Disclosure About Market Risk
 
The following quantitative and qualitative information is provided about financial instruments to which we are a party as of June 30, 2008, and from which we may incur future gains or losses from changes in market, interest rates or foreign exchange rates. We do not enter into derivative or other financial instruments for trading purposes.
 
This discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results could vary materially as a result of a number of factors including those set forth in “Item 3. Key Information—Risk Factors” in our 2007 20-F.
 
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Foreign currency exposure
 
We generally follow a policy of not hedging our debt obligations in U.S. dollars due to the fact that, in 1991, the Argentine government instituted a set of economic reforms known as the “Convertibility Plan,” the centerpiece of which was a fixed one-to-one rate of exchange between the Argentine peso and the U.S. dollar. Although in view of the Argentine economic crisis the Argentine authorities implemented a number of monetary and exchange control measures, including the abolishment of the Convertibility Law, we have still not hedged our U.S. dollar debt obligations to date. In addition, our costs and receipts denominated in currencies other than the Argentine peso, including the U.S. dollar, often do not match. As a result, we are currently exposed to risks associated with changes in foreign currency exchange rates. See “Item 3. Key Information—Risks Relating to Argentina—We may be exposed to fluctuations in foreign exchange rates” in our 2007 20-F.
 
The table below provides information about our assets and liabilities denominated in currency other than pesos (principally U.S. dollars) that may be sensitive to changes in foreign exchange rates, as of June 30, 2008.
 
   
Expected Maturity Date
 
   
Less than 1 year
   
1-3 years
   
3-5 years
   
More than 5 years and undetermined
   
Total
 
   
(in millions of U.S. dollars)
 
Assets
    1,191             168       57       1,416  
Accounts payable
    1,074       253       205       417       1,950  
Debt
    678       151             64       893  
Other Liabilities
    101       10       10       443 (1)     564  
 

(1)
Includes U.S.$420 million corresponding to reserves with undetermined maturity.
 
Interest rate exposure
 
Our objective in borrowing under fixed rate debt is to satisfy capital requirements that minimize our exposure to interest rate fluctuations. To realize our objectives, we have borrowed under fixed rate debt instruments, based on the availability of capital and prevailing market conditions.
 
The table below provides information about our assets and liabilities as of June 30, 2008 that may be sensitive to changes in interest rates.
 
   
Expected Maturity Date
 
   
Less than 1 year
   
1 – 2 years
   
2 – 3 years
   
3 – 4 years
   
4 – 5 years
   
More than 5 years
   
Total
   
Fair Value
 
   
(in millions of pesos)
 
Assets
                                               
Fixed rate
                                               
Other Receivables (Related parties)
    428                                     428       428  
Interest rate
    2.70% - 7.28%                                                          
                                                                 
Liabilities
                                                               
Fixed rate
                                                               
YPF’s Negotiable Obligations
    306                               196       502       539  
Interest rate
    9.13%                                       10 %                
Related Parties
    60       151       303                               514       514  
Interest rate
    4.9%- 15.5%       4.9%- 15.5%       4.9%- 15.5%                                          
Other Short-term debt
    2,201                                     2,201       2,201  
Interest rate
    3.37% - 22%                                                          

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ITEM 3.    UPDATE OF LEGAL PROCEEDINGS
 
Argentina
 
The Privatization Law provides that the Argentine State shall be responsible, and shall hold us harmless, for any liabilities, obligations or other commitments existing as of December 31, 1990 that were not acknowledged as such in the financial statements of Yacimientos Petrolíferos Fiscales Sociedad del Estado as of that date arising out of any transactions or events that had occurred as of that date, provided that any such liability, obligation or other commitment is established or verified by a final decision of a competent judicial authority. In certain lawsuits related to events or acts that took place before December 31, 1990, we have been required to advance the payment of amounts established in certain judicial decisions, and have subsequently been reimbursed or are currently in the process of requesting reimbursement from the Argentine government of all material amounts in such cases. We are required to keep the Argentine government apprised of any claim against us arising from the obligations assumed by the Argentine government. We believe we have the right to be reimbursed for all such payments by the Argentine government pursuant to the above-mentioned indemnity, which payments in any event have to date not been material. This indemnity also covers fees and expenses of lawyers and technical consultants subject, in the case of our lawyers and consultants, to the requirement that such fees and expenses not be contingent upon the amounts in dispute.
 
Reserved, probable contingencies
 
In the ordinary course of our business, we are a party to various actions, including approximately 2,027 labor lawsuits as of June 30, 2008, for which provisions of Ps.47 million have been made.
 
A reserve totaling Ps.1,865 million as of June 28, 2008 has been established to provide for contingencies which are probable and can be reasonably estimated. In the opinion of our management, in consultation with our external counsel, the amount reserved reflects the best estimation, based on the information available as of the date of this report, of the probable outcome of the mentioned contingencies. The most significant legal proceedings and claims reserved are described in the following paragraphs.
 
CNDC anti-competitive activity disputes. On March 22, 1999, we were notified of Resolution No. 189/99 from the former Department of Industry, Commerce and Mining of Argentina, which imposed a fine on us of Ps.109 million, stated Argentine pesos as of that date, based on the interpretation that we had purportedly abused our dominant position in the bulk LPG market due to the existence of different prices between the exports of LPG and the sales to the domestic market from 1993 through 1997. In July 2002, the Argentine Supreme Court confirmed the fine, and we made the claimed payment. Additionally, Resolution No. 189/99 provided for the commencement of an investigation in order to prove whether the penalized behavior continued from October 1997 to March 1999. On December 19, 2003, the CNDC completed its investigation and charged us with abuse of dominant market position during this period. On January 20, 2004, we answered the notification by (i) claiming the application of the statutes of limitations and alleging the existence of defects in the imputation procedure (absence of majority in the resolution that decided the imputation and prejudgment by its signers); (ii) arguing the absence of abuse of dominant position; and (iii) offering the corresponding evidence.
 
Given that the Argentine Supreme Court has previously established under Law No. 22,262 that the statute of limitations for administrative infractions is two years, we believe that our defense based on the statute of limitations is solid.    Since the imputed conduct occurred before September 29, 1999, which is the effective date of the new law, we believe that the law applicable to the proceeding is Law No. 22,262 instead of the new Antitrust Protection Law (No. 25,156). We filed appeals with the National Economic Criminal Court: (i) on July 29, 2003, in view of the rejection by the CNDC of the motion to overturn the resolution that ordered the opening of the preliminary investigations without deciding in advance on the statute of limitations defense claimed by us; and (ii) on February 4, 2004, in view of the rejection by the CNDC of the motion to overturn the resolution that ordered the charge because of a lack of majority and prejudgment. On April 13, 2004, the National Court of Appeals in Criminal Economic Matters sustained the appeal filed by us on the grounds of lack of majority of the CNDC in passing the objected resolution. On August 31, 2004, we appealed the resolution passed by the CNDC that rejected our statute of limitations defense. The CNDC accepted the appeal and referred the proceedings to Chamber II of the National Court of Appeals in Federal Civil and Commercial Matters, which subsequently referred the proceeding to Room B of the National Court of Appeals in Criminal Economic Matters. On March 3, 2006, the CNDC decided on the evidence that we shall produce during this proceeding. During August and September 2007, hearings involving the testimony of witnesses proposed by us took place. Despite the arguments expressed by us, the above-mentioned circumstances make evident that, preliminarily, the CNDC rejects the defenses filed by us and that the CNDC is reluctant to modify the doctrine provided by Resolution No. 189/99. On
 
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August 12, 2008, Room B of the National Court of Appeals in Criminal Economic Matters rejected our statute of limitations argument. We have appealed this decision.
 
Alleged defaults under natural gas supply contracts – Innergy, et al. Since 2004, the Secretariat of Energy and the Undersecretariat of Fuels, through Rule No. 27/04, Resolutions No. 265/04, 659/04, 752/05, 1329/06 and 599/07, have on various occasions instructed us to supply certain quantities of natural gas to the Argentine domestic market, in each case notwithstanding the lack of a contractual commitment on our part to do so. In addition, the Argentine government has, at various times since 2004, imposed direct volume limitations on natural gas exports in different ways. As a result of these measures, from 2004 to the present, 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.
 
We appealed these measures, but, pending favorable final resolution of such appeals, we have been obliged to comply in order to avoid greater losses to us and our export customers that could be occasioned by the revocation of our export permits or other penalties. We informed our natural gas export customers of our position that these governmental measures constitute an event of force majeure that releases us from any contractual or extra-contractual liability deriving from the failure to deliver the agreed upon volumes of gas. Some of our customers have rejected our position and three of them have sought damages and/or penalties for breach of supply commitments under a contractual “deliver or pay” clause, which claims have been rejected by us.
 
Innergy Soluciones Energéticas S.A. (“Innergy”) has filed an arbitral claim against us based on its “deliver or pay” clause, seeking U.S.$87.7 million in damages as of August 2007, plus interest (as calculated by Innergy on September 17, 2007). This amount increases as Innergy invoices “deliver or pay” amounts to us on a monthly basis, beginning in September 2007, for partially missed deliveries. In addition to our claim of force majeure, we have counterclaimed against Innergy for contract termination based upon the “statutory hardship” exemption set forth in Article 1198 of the Argentine Civil Code, in light of recent substantial increases in Argentine export duties on natural gas that make our cost of delivering natural gas to Innergy significantly higher than the price to be paid to us by Innergy for such deliveries. Having previously suspended the arbitration to allow for settlement discussions, on August 29, 2008 the parties extended the suspension for an additional 60 days.
 
We are also currently in pre-arbitral settlement discussions with the other two clients that have sought damages from us under the “deliver-or-pay” clause, Electroandina S.A. and Empresa Eléctrica del Norte Grande S.A. These companies have claimed damages through November 2006 in a total amount of approximately U.S.$41 million and, from December 2006 through September 2007, for an additional total amount of U.S.$52 million. We have opposed such claims.
 
Additionally, on June 25, 2008, AES Uruguaiana Emprendimientos S.A claimed damages in a total amount of U.S.$28.1 million for missed deliveries of natural gas volumes during the period September 16, 2007 through June 25, 2008. On July 16, 2008, AES Uruguaiana Emprendimientos S.A. also claimed damages in a total amount of U.S.$2.7 million for missed deliveries of natural gas volumes during the period January 18, 2006 through December 1, 2006. We have contested both of these claims.
 
Alleged defaults under natural gas supply contracts – Central Puerto. Central Puerto S.A. (“Central Puerto”) has made claims against us for cutbacks in natural gas supply pursuant to its contracts. We have formally denied such breach, based on the fact that, pending the restructuring of such contracts, we are not obligated to confirm nominations of natural gas during certain periods of the year. On March 15, 2007, Central Puerto notified us of the commencement of pre-arbitral negotiations in relation to the agreements for the supply of its plants located in Buenos Aires and Loma de La Lata, province of Neuquén. On May 29, 2007, we and Central Puerto entered into a Termination and Dispute Resolution Agreement regarding the principles of agreement for the supply of Central Puerto’s plant located in Loma de La Lata. On June 6, 2007, Central Puerto notified us of its decision to submit the controversy regarding the agreement for the supply of natural gas to its plants located in Buenos Aires (the “Buenos Aires Gas Supply Agreement”) to arbitration under the rules of the International Chamber of Commerce. On June 21, 2007, we appointed our arbitrator and notified Central Puerto of our decision to submit to arbitration the controversy regarding the amounts due by Central Puerto under the Buenos Aires Gas Supply Agreement. On July 23, 2007, Central Puerto filed an arbitral claim for: (i) our specific performance of the Buenos Aires Gas Supply Agreement by continuing to deliver volumes of natural gas of up to 3,400,000 m3/day, the applicable maximum daily requirement under the contract, to Central Puerto’s plants located in Buenos Aires; (ii) our payment of “deliver or pay” amounts for failure to deliver natural gas (totaling 1,920 mmcm through December 3, 2007), without specifying the amount claimed; and (iii) acknowledgement of Central Puerto’s right to make-up natural gas volumes. On September 24, 2007, we answered Central Puerto’s claim and filed counterclaims asking the tribunal for: (i) a declaration of the termination of the contract; or (ii) as a subsidiary claim in case the tribunal rejects the request for termination of the contract, the restructuring of the contract under the Civil Law principles of “Teoría de la Imprevisión” (hardship provision) and “Sacrificio Compartido” (both-parties-
 
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effort) and (iii) payment by Central Puerto of “take or pay” amounts owed by Central Puerto for certain amounts produced but not taken between 2002 and 2004. On December 3, 2007, Central Puerto submitted a presentation requesting that the tribunal reject all of our claims. On February 11, 2008, a hearing took place among the members of the arbitral tribunal and the parties at which a document setting forth procedures for the arbitration was agreed upon and signed by the parties. In that document, Central Puerto indicated that it could not quantify its damages until its experts had completed their work. We estimated our damages to be approximately U.S.$11 million plus interest, adjusted for inflation (pursuant to the Stabilization Reference Coefficient or CER), though we also indicated that this amount could change based on the results of work being performed by our experts. On April 29, 2008, the tribunal issued an order setting a schedule for the next phase of the arbitration. On October 1, 2008, the parties produced their evidence before the tribunal.  On October 16, 2008, the parties agreed to suspend procedures for 30 days.
 
La Plata refinery environmental disputes. On June 29, 1999, a group of three neighbors of the La Plata Refinery filed claims for the remediation of alleged environmental damages in the peripheral water channels of the refinery, investments related to contamination and compensation for alleged health and property damages as a consequence of environmental pollution caused by YPF prior to and after privatization. We notified the executive branch of the Argentine government that there is a chance that the tribunal may find us responsible for the damages. In such event, due to the indemnity provided by Law No. 24,145 and in accordance with that law, we shall be allowed to request reimbursement of the expenses for liabilities existing on or prior to January 1, 1991 (before privatization) from the Argentine government.
 
On December 27, 2002, a group of 264 claimants who resided near the La Plata Refinery requested compensation for alleged quality of life deterioration and environmental damages purportedly caused by the operation of the La Plata Refinery. The amount claimed is approximately Ps.57 million. We filed a writ answering the complaint. There are three similar additional claims raised by three groups of 120, 343, and 126 neighbors, respectively. The first group has made a claim for compensation of Ps.15.5 million, the second group has made a claim for compensation of Ps.41.7 million and the third one has made a claim of Ps. 14.1 million, in addition to a request for environmental cleanup. As of June 30, 2008, we had established a reserve of Ps.24 million with respect to these personal or property claims.
 
On December 17, 1999, a group of 37 claimants who resided near La Plata Refinery, demanded the specific performance by us of different works, installation of equipment, technology and execution of work necessary to stop any environmental damage, as well as compensation for health damages alleged to be the consequence of gaseous emissions produced by the refinery, currently under monitoring.
 
We have been informally notified that the Secretariat of Environmental Policy of the Province of Buenos Aires has brought criminal proceedings against us on the grounds of the purported worsening of the water quality problems in the Western Channel adjacent to La Plata Refinery, potential health damages (on account of the existence of volatile particles and/or hydrocarbon suspension), non-fulfillment of a remediation schedule of canals, and the existence of allegedly clandestine disposal sites. On September 25, 2008, the Federal Court in Criminal matters decided not to make any formal accusations and dismissed the proceedings.
 
AFIP tax claims. On January 31, 2003, we received a claim from the Federal Administration of Public Revenue (Administración Federal de Ingresos Públicos, or “AFIP”), stating that the forward oil sale agreements entered into by us (see “Updated Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Transactions with unconsolidated variable interest entities”) should have been subject to an income tax withholding. On March 8, 2004, the AFIP formally communicated to us the claim for approximately Ps.45 million plus interest and fines. Additionally, on June 24, 2004, we received a new formal claim from the AFIP, asserting that the services related to these contracts should have been taxed with the Value Added Tax. Management believes, based upon the opinion of its external counsel, that the claim is without merit since those advances were received under crude oil export commitments. Consequently, during 2004, we presented our defense to the AFIP, rejecting the claims and arguing our position. However, on December 28, 2004, we received formal communication of a resolution from the AFIP confirming its original position in both claims for the period 1997 to 2001. We have appealed such resolution in the National Fiscal Court. In 2006, we conditionally paid the amounts corresponding to periods that followed those included in the claim by the AFIP (2002 and subsequent periods) and filed reimbursement summary proceedings so as to avoid facing interest payments or a fine. On March 14, 2008 the AFIP notified us of the rejection of the reimbursement previously mentioned. That decision has been appealed to the National Fiscal Court.
 
In addition, we have received several other claims from the AFIP and from the provincial and municipal fiscal authorities, which are not individually significant.
 
Sale of Electricidad Argentina S.A. and Empresa Distribuidora y Comercializadora Norte S.A. to EDF. In July 2002, EDF Internacional S.A. (“EDF”), initiated an international arbitration proceeding under the Arbitration
 
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Regulations of the International Chamber of Commerce against us, among others, seeking payment from us of U.S.$69 million which was afterward increased to U.S.$103.2 million. EDF claims that under a Stock Purchase Agreement dated March 30, 2001 among Endesa Internacional S.A. and Astra Compañía Argentina de Petróleo S.A. (which was subsequently merged into YPF), as sellers, and EDF, as purchaser, with respect to shares of Electricidad Argentina S.A. and Empresa Distribuidora y Comercializadora Norte S.A. (“Edenor”), EDF is entitled to an adjustment in the purchase price it paid due to changes in the exchange rate of the Argentine peso that EDF asserts to have occurred prior to December 31, 2001. Our position is that the change in the exchange rate did not occur prior to January 2002, and, therefore, EDF is not entitled to the purchase price adjustment. We have filed a counterclaim against EDF in the amount of U.S.$13.85 million as a purchase price adjustment. We believe that EDF’s claim is without merit. The arbitral award dated October 22, 2007 accepted the claim against us awarding damages against us in the amount of U.S.$40 million and also accepted our counterclaim against EDF in the amount of U.S.$11.1 million. Consequently, the amount payable by us should the award become final is U.S.$28.9 million plus costs and interest. We have challenged the award by filing an extraordinary appeal before the Federal Supreme Court and an appeal before the Federal Appellate Court on Commercial Matters. In April 2008 the Federal Appellate Court on Commercial Matters suspended the effects of the arbitral award pending its appeal.
 
Furthermore, EDF is seeking the enforcement of the arbitral award before a court in Delaware, in the United States. We responded to the complaint by seeking its dismissal on the basis that the arbitral award has been suspended by an Argentine court and, consequently, the Delaware complaint is not permitted under Article 5 of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards. EDF is also seeking the enforcement of the arbitral award before a court in Paris, France. We will respond to the complaint by seeking its dismissal based on similar arguments.
 
Quilmes claims. Citizens claiming to be residents living near Quilmes, in the province of Buenos Aires, have filed a lawsuit in which they have requested the remediation of environmental damages and the payment of Ps.47 million plus interest as compensation for alleged personal damages. The plaintiffs base their claim mainly on a fuel leak that occurred in 1988 in a poliduct running from La Plata to Dock Sud that was operated by Yacimientos Petrolíferos Fiscales Sociedad del Estado. The leaked fuel became perceptible in November 2002, resulting in remediation that is now being performed by us in the affected area, supervised by the environmental authority of the province of Buenos Aires. We have requested an extension of the time to answer the complaint to allow us time to evaluate certain documents submitted to the court by the plaintiffs. We have also notified the Argentine government that we will implead it at the time we answer the complaint in order to request that it indemnify us against any liability and hold us harmless in connection with this lawsuit, as provided by Law. No. 24,145.  The Argentine government, through an administrative decision, has denied any responsibility to indemnify us for this matter, and we have sued the Argentine government to obtain a judicial award declaring this administrative decision null and void. There are other 25 judicial claims that have been brought against us based on similar allegations, amounting to approximately Ps. 3.5 million. In these cases, we believe that the Argentine government will contest its obligation to indemnify and hold us harmless by claiming that the alleged damages were not caused by the 1988 leak. Additionally, we are aware of the existence of other actions brought against us that have not yet been served and which are based on similar allegations.
 
Non-reserved, possible contingencies
 
In addition to the probable contingencies described in the preceding paragraphs, we have received several labor, civil, commercial and environmental claims which had not been reserved since management, based on the evidence available to date and upon the opinion of our external counsel, have considered them to be possible contingencies. The most significant of such contingencies are described below.
 
Capital control-related proceedings. On December 9, 2002, we filed a declaratory judgment action (Acción Declarativa de Certeza) before an Argentine federal court requesting clarification as to the uncertainty generated by opinions and statements of several organizations providing official advice that the right of the hydrocarbon industry to freely dispose of up to 70% of foreign currency proceeds from exports of hydrocarbons products and byproducts, as provided by Executive Decree No. 1,589/89, had been implicitly abolished by the new exchange regime established by Executive Decree No. 1,606/01. On December 9, 2002, a federal judge issued an injunction ordering the Argentine government, the Central Bank and the Ministry of the Economy to refrain from interfering with our access to and use of 70% of the foreign exchange proceeds from our hydrocarbon exports. Following the enactment of Decree No. 2,703/02 in December 2002, we expanded the scope of the declaratory judgment action before the federal court to clear any doubts and uncertainty arising after the enactment of this decree. See “Item 4—Information on the Company—Regulatory Framework and Relationship with the Argentine Government—Repatriation of Foreign Currency” in our 2007 20-F. On December 1, 2003, the National Administrative Court of Appeals decided that the issuance of Decree No. 2,703 in 2002, which allows companies in the oil and gas sector to keep abroad up to 70% of the export proceeds, rendered the injunction unnecessary. Nevertheless, the Court of Appeals’ decision was silent with respect to the
 
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availability of the exemption to convert proceeds from export operations carried out by oil and gas companies into domestic currency prior to the issuance of Decree 2,703. On December 15, 2003, we filed a motion for clarification asking the court to clarify whether the exemption was available to oil and gas companies during the period between the issuance of Decree No. 1,606/01 and the issuance of Decree No. 2,703/02. On February 6, 2004, the Court of Appeals dismissed our motion for clarification, indicating that the regulations included in Decree No. 2,703/02 were sufficiently clear, and confirmed the lifting of the injunction that prohibited the Central Bank and the Ministry of Economy from interfering with our access to foreign exchange proceeds, as described above. On February 19, 2004, we filed an extraordinary appeal before the Supreme Court against the dismissal of the motion for clarification by the Court of Appeals and requested the restatement of the injunction against the Central Bank and the Ministry of Economy. The Federal Court of Appeals dismissed the extraordinary appeal. Taking into account the fact that there is a new special system in place allowing for the free disposal of up to 70% of the foreign currency proceeds from the exports of crude oil and its derivatives, it was deemed advisable to abandon the suit as a procedural strategy. If the Central Bank were to reassert and prevail before the courts in the argument that the exemption allowing oil and gas companies to keep up to 70% of export proceeds abroad during the period between the issuance of Decree No. 1,606/01 and the issuance of Decree No. 2,703/02 was not available, we could be subject to material penalties.
 
On October 12, 2007, we were notified of the initiation of an administrative summary proceeding for alleged late repatriation of foreign currency proceeds, and the failure to repatriate the remaining 70%, in connection with some hydrocarbon export transactions made in 2002 (during the period between the issuance of Decree No. 1,606/01 and the issuance of Decree No. 2,703/02). In this administrative summary proceeding, charges were brought against us in the amount of U.S.$1.6 million, and it has been advised that the conduct of a bank that handled other of our export transactions made in 2002 be investigated, which could give rise to the initiation of further proceedings. Administrative summary proceedings have already been brought against the bank. Nevertheless, a final and unchallenged judicial judgment recently issued by a First Instance Court in Criminal Economic Matters in a similar administrative summary proceeding against a different company for alleged violation of the criminal exchange law (lack of repatriation of 70% of foreign currency proceeds) regarding export transactions made in 2002 resolved the matter in favor of that company based on well-founded arguments that were not challenged by the prosecutor. In addition, the Office of the General Prosecutor of Argentina recently issued an opinion in similar administrative summary proceedings involving another oil company stating that no criminal law violations existed in that case due to the lack of willful misconduct and the existence of differing regulations that created uncertainty as to the scope of certain obligations, and stating that the proceeding should be dismissed.
 
CNDC investigation. On November 17, 2003, CNDC requested explanations, within the framework of an official investigation pursuant to Art. 29 of the Antitrust Act, from a group of almost 30 natural gas production companies, including us, with respect to the following items: (i) the inclusion of clauses purportedly restraining trade in natural gas purchase/sale contracts and (ii) gas imports from Bolivia, in particular (a) expired contracts signed by YPF, when it was state-owned, and YPFB (the Bolivian state-owned oil company), under which YPF allegedly sold Bolivian gas in Argentina at prices below the purchase price; and (b) the unsuccessful attempts in 2001 by Duke and Distribuidora de Gas del Centro to import gas into Argentina from Bolivia. On January 12, 2004, we submitted explanations in accordance with Art. 29 of the Antitrust Act, contending that no antitrust violations had been committed and that there had been no price discrimination between natural gas sales in the Argentine market and the export market. On January 20, 2006, we received a notification of resolution dated December 2, 2005, whereby the CNDC (i) rejected the “non bis in idem” petition filed by us, on the grounds that ENARGAS was not empowered to resolve the issue when ENARGAS Resolution No. 1,289 was enacted; and (ii) ordered that the preliminary opening of the proceedings be undertaken pursuant to the provisions of Section 30 of Act 25,156. On January 15, 2007, CNDC charged us and eight other producers with violations of Act 25,156. We have contested the complaint on the basis that no violation of the Act took place and that the charges are barred by the applicable statute of limitations, and have presented evidence in support of our position. On June 22, 2007, without acknowledging any conduct in violation of the Antitrust Act, we filed with the CNDC a commitment according to Article 36 of the Antitrust Act requesting that the CNDC approve the commitment, suspend the investigation and dismiss the proceedings. We are still awaiting a formal response.
 
The CNDC has commenced proceedings to investigate us for using a clause in bulk LPG supply contracts that it believes prevents buyers from reselling the product to third parties and therefore restricts competition in a manner detrimental to the general economic interest. We have asserted that the contracts do not contain a prohibition against resale to third parties and have offered evidence in support of our position. On April 12, 2007, we presented to the CNDC, without acknowledging any conduct in violation of the Antitrust Act, a commitment consistent with Article 36 of the Antitrust Act not to include such clauses in future bulk LPG supply contracts, among other things, and requested that the CNDC terminate the proceedings. We are still awaiting a formal response.
 
Noroeste basin reserves review. The effectiveness after certain specific dates of natural gas export authorizations (related to production in the Noroeste basin) granted to us pursuant to Resolution SE Nos. 165/99, 576/99, 629/99 and
 
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168/00, issued by the Secretariat of Energy, is subject to an analysis by the Secretariat of Energy to determine whether sufficient additional natural gas reserves have been discovered or developed by us in the Noroeste basin. The result of this ongoing review is uncertain and may have an adverse impact upon the execution of the export gas sales agreements related to such export authorizations, and may imply significant costs and liabilities for us. We have submitted to the Secretariat of Energy documentation in order to allow for the continuation of the authorized exports in accordance with Resolutions SE No. 629/1999, 565/1999, and 576/1999 (the “Export Permits”) from the Noroeste basin. These Export Permits relate to the long-term natural gas export contracts with Gas Atacama Generación, Edelnor and Electroandina (collectively, the “Clients”), involving volumes of 900,000 m3/day, 600,000 m3/day and 1,750,000 m3/day, respectively. We have not yet received a response from the Secretariat of Energy. However, on March 29, 2007, an internal memorandum of the technical sector of the Secretariat of Energy addressed this file and concluded, without resolving the question that we have not included the necessary reserves to continue with the Export Permits. The file is currently awaiting decision from the Secretariat of Energy. If the Secretariat of Energy were to determine that the reserves are not sufficient to continue to comply with our export commitments and other commitments, it could declare the expiration or suspension of one or more of the Export Permits, which would have a direct impact on the export contracts, to the injury of the Clients. In the case in which it were determined that we did not act as a prudent and diligent operator and/or did not have sufficient reserves, we could be responsible for the damages that this situation causes to the Clients.
 
Alleged defaults under natural gas contracts – Mega. Mega has claimed compensation from us for failure to deliver natural gas under the contract between us and Mega. We invoked that natural gas deliveries to Mega pursuant to the contract were affected by the Argentine government’s interference. Likewise, we believe that we would not be liable for such natural gas delivery deficiencies pursuant to the doctrines of “force majeure” and “contract impracticability.”
 
New Jersey claims. On December 13, 2005, the New Jersey Department of Environmental Protection and the New Jersey Spill Compensation Fund filed a claim with a New Jersey court against Occidental Chemical Corporation, Tierra, Maxus, Repsol YPF, YPF, YPF Holdings and CLH Holdings. The plaintiffs are claiming for the remediation of environmental damages, punitive damages and other damages including the costs and fees associated with this proceeding, based on alleged violations of the Spill Compensation and Control Act, the Water Pollution Control Act and common law claims relating to a facility allegedly operated by the defendants and located in Newark, New Jersey that allegedly impacted the Passaic River and Newark Bay. NJDEP filed its Second Amended Complaint in April, 2008; YPF’s motion to dismiss for lack of personal jurisdiction was denied in September 2008. YPF appealed this decision. Notwithstanding, the Court denied the plaintiffs’ motion to bar third party practice and allowed defendants to file third-party complaints. See “—YPF Holdings.”
 
Patagonian Association of Land-Owners claims. On August 21, 2003, the Patagonian Association of Land-Owners (“ASSUPA”) sued the companies operating production concessions and exploration permits in the Neuquina basin, including us, claiming for the remediation of the general environmental damage purportedly caused in the execution of such activities or the establishment of an environmental restoration fund, and the implementation of measures to prevent environmental damages in the future. The total amount claimed against all companies is more than U.S.$547.6 million. The plaintiff requested that the Argentine government (Secretariat of Energy), the Federal Environmental Council (Consejo Federal de Medio Ambiente), the provinces of Buenos Aires, La Pampa, Neuquén, Río Negro and Mendoza and the National Ombudsman be summoned. It requested, as a preliminary injunction, that the defendants refrain from carrying out activities affecting the environment. Both the Ombudsman’s summons as well as the requested preliminary injunction were rejected by the Supreme Court of Argentina. Once the complaint was notified, we and the other defendants filed a motion to dismiss for failure of the plaintiff to state a claim upon which relief may be granted. The court granted the motion, and the plaintiff had to file a supplementary complaint. We requested that the claim be rejected because the defects of the complaint indicated by the Supreme Court of Argentina have not been corrected, but such request was denied. However, we have also requested its rejection for other reasons, and impleaded the Argentine government, due to its obligation to indemnify us against any liability and hold us harmless for events and claims arising prior to January 1, 1991, according to Law No. 24,145 and Decree 546/1993. Our request is currently pending.
 
Dock Sud claim. We have been sued in the following environmental lawsuits that have been filed by residents living near Dock Sud, province of Buenos Aires: (i) “Mendoza, Beatriz against National State et al.”, a lawsuit before the Supreme Court of Argentina, in which the Argentine government, the province of Buenos Aires, the City of Buenos Aires, 14 municipalities and 44 companies (including us) were sued. The plaintiffs have requested unspecified compensation for collective environmental damage of Matanza and Riachuelo river basins and for physical and property damage, which they claim to have suffered. The Supreme Court of Argentina declared itself legally competent to settle only the conflict related to the collective environmental damages, including prevention of future pollution, remediation of environmental damages already caused and monetary compensation for irreparable environmental damages, and has requested that the defendants submit specific reports. In particular, it has requested that the Argentine
 
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government, the province of Buenos Aires, the City of Buenos Aires and Cofema submit a plan with environmental objectives. We answered the complaint and requested the impleading of the Argentine government, based on its obligation to indemnify us against any liability and hold us harmless for events and claims previous to January 1, 1991, according to Law No. 24,145 and Decree No. 546/1993. In July 2008, the Supreme Court of Argentina decided that the Basin Authority (Law 26,168) will be in charge of performing a remediation plan as well as of taking preventive measures in the area. The National State as well as the Province and City of Buenos Aires will be responsible for the performance of these measures. It also declared the exclusive competence of the First Instance Federal Court in Quilmes to hear any claims or disputes arising out of the remediation plan or the preventive measures and determined that any future action seeking the environmental remediation of the basin will be dismissed (litis pendentia). Additionally, the Supreme Court of Argentina declared that it will determine whether and how much liability is to be borne by the parties involved; (ii) “Cicero, María Cristina against Antivari S.A.C.I. et al. for damages” in which the plaintiffs, who are residents of Villa Inflamable, Dock Sud, also demand the environmental remediation of Dock Sud and Ps.33 million in compensation for physical and property damages against many companies that have operations there, including us. We answered the complaint by requesting its rejection and asked the citation of the Argentine government, due to its obligation to indemnify us against any liability and hold us harmless for events and claims previous to January 1, 1991, according to Law No. 24,145 and Decree No. 546/1993.
 
La Plata Refinery environmental claims. On June 6, 2007, we were served with a new complaint in which nine residents of the vicinity of the La Plata Refinery request (i) the cessation of contamination and other harms they claim are attributable to the refinery and (ii) the cleanup of the adjacent canals, Río Santiago and Río de la Plata (water, soils and aquifers, including within the refinery), or, if cleanup is impossible, compensation for environmental and personal damages. The plaintiffs have also requested physical and property damages of Ps.51.4 million, or an amount to be determined from evidence produced in discovery. We believe that most damages that are alleged by the plaintiff, if proven, may be attributable to events that occurred prior to YPF’ s privatization and would therefore be the responsibility of the Argentine government in accordance with the Privatization Law of YPF. Notwithstanding the aforesaid, there is the possibility a judgment could order us to meet the expenses of remedying these liabilities, in which case we could ask the Argentine government to reimburse the remediation expenses for liabilities existing prior to January 1, 1991 pursuant to Law 24,145. In addition, we believe that this claim partially overlaps with the request made by a group of neighbors of the La Plata Refinery on June 29, 1999, mentioned in preceding paragraphs. Accordingly, we consider that the cases will need to be partially consolidated to the extent that the claims overlap. We answered the complaint by requesting its rejection and asked for the citation of the Argentine government, due to its obligation to indemnify us against any liability and hold us harmless for events and claims previous to January 1, 1991, according to Law No. 24,145 and Decree No. 546/1993. The contamination that may exist could derive from countless sources, including from dumping of refuse over many years by other industrial facilities and by ships.
 
Additionally, we are aware of an action in which we have not yet been served, in which the plaintiff requests the cessation of contamination and the cleanup of the canals adjacent to the La Plata Refinery, in Río Santiago, and other sectors near the coast (removal of mud, drainage of wetlands, restoration of biodiversity, among other things), and, if such sanitation is not practicable, compensation of Ps.500 million or an amount to be determined from evidence produced in discovery. We believe that this claim partially overlaps with the requests made by a group of neighbors of the La Plata Refinery on June 29, 1999 and with the complaint served on June 6, 2007, mentioned in preceding paragraphs. Accordingly, we consider that if we are served in this proceeding or any other proceeding related to the same subject matters, the cases will need to be consolidated to the extent that the claims overlap. With respect to claims that would not be included in the previous proceedings, for the time being we are unable to estimate the prospects of such claims. Additionally, we believe that most damages that would be alleged by the plaintiff, if proven, may be attributable to events that occurred prior to YPF’s privatization and could therefore be the responsibility of the Argentine government in accordance with the Privatization Law concerning YPF.
 
Concessions on Hydrocarbon bearing zones – Provincial claims: We have been notified of Resolution 433/08 “MP’’ issued by the Ministry of Production, Hydrocarbon Department of the Rio Negro Province concerning compliance with certain obligations by exploitation concessionaires in the hydrocarbon bearing zones of Barranca de los Loros, Bajo del  Piche, El Medanito y Los Caldenes, all located in  Rio Negro Province. This resolution asserts that we, among others, in our capacity as a concessionaire, are liable for failing to meet certain concession and environmental obligations. If found liable, we could be at risk of termination of these concession contracts. In light of the above, and consistent with provisions of the Hydrocarbons Law, we were requested to submit a response.
 
The Hydrocarbons Law grants the concessionaire and /or licensee the right, prior to termination based upon contractual provisions, to cure a contractual breach within a certain period of time after receiving notice thereof. Accordingly, on May 29, 2008, we filed a request for nullification of Resolution 433/08 “MP”, since this resolution failed to grant us this right. Additionally, on June 13, 2008, we submitted a response denying the charges against us.
 
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Non-reserved, remote contingencies
 
Our management, in consultation with our external counsel, believes that the following contingencies, while individually significant, are remote:
 
Congressional request for investigation to CNDC. On November 7, 2003, certain former members of the Argentine Congress, Arturo Lafalla, Ricardo Falu and others, filed with the CNDC a complaint against us for abuse of a dominant position in the bulk LPG market during 2002 and part of 2003. The alleged conduct consisted of selling bulk LPG in the domestic market at prices higher than the export price, thereby restricting the availability of bulk LPG in the domestic market. On December 15, 2003, the CNDC decided to forward the complaint to us, and requested explanations under Art. 29 of the Antitrust Act. On January 21, 2004, we submitted explanations in accordance with Art. 29 of the Antitrust Act, contending that no antitrust violations had been committed. At this point, the CNDC may accept our explanations or begin a criminal investigation. We contend that we did not restrict LPG supply in the domestic market during the relevant period, that during this period all domestic demand for LPG could have been supplied by our competitors and that therefore our market share could not be deemed a dominant position. As of the date of this registration statement, CNDC has not taken any further action.
 
Pursuant to the provisions of Resolution No. 189/99, referred to above, certain third parties have claimed compensation for alleged damages suffered by them as a consequence of our sanctioned conduct. We have denied these claims and presented our defenses.
 
Neuquén royalty disputes. On February 20, 2006, the province of Neuquén published in the Official Gazette Decrees No. 225/06 and 226/06 (the “Decrees”). The Decrees provide that royalties for domestic sales of hydrocarbons produced within the province of Neuquén must be calculated using international market prices as a reference, thus increasing the amounts of the royalties to be paid by us. The calculation of hydrocarbon royalties, in accordance with Section 75 (12) of the Argentine Constitution, is ruled by federal legislation, and the Decrees, in our opinion, contradict the preemption principle of the Argentine Constitution. We filed a declaratory judgment action (Acción Declarativa de Certeza) with the Argentine Supreme Court with the aim of obtaining the nullification of the Decrees and the issuance of an interim measure banning the province of Neuquén from filing any royalty claim on the ground of the provisions contained within the Decrees. On October 31, 2006, the Argentine Supreme Court issued an injunction ordering the province of Neuquén to refrain from applying the Decrees to us. On November 29, 2007, the province of Neuquén issued Decree No. 2200/07, revoking the Decrees, and subsequently petitioned the Argentine Supreme Court to withdraw its injunction against the Decrees as moot. We have filed a written request for the continuation of the injunction as well as the official revocation of the Decrees. Neuquén has not expressly withdrawn its request and the matter is currently pending before the Argentine Supreme Court.
 
On August 31, 2004, the province of Neuquén filed with the Federal Court of the province of Neuquén (the “Federal Court”) a claim against Atalaya Energy and 19 oil and gas companies, including us, claiming compliance with Section 6 Law No. 25,561 for the calculation of royalties regarding hydrocarbons produced within the province of Neuquén. Section 6 Law No. 25,561 provides that in no event will export withholdings reduce the wellhead prices for the calculation and payment of hydrocarbon royalties. According to the province of Neuquén’s reading of Section 6 Law No. 25,561, the oil and gas companies producing hydrocarbons in the province of Neuquén should not make any deduction based on export withholdings for the calculation of royalties corresponding to hydrocarbons sold in the domestic market. The Federal Court issued an interim measure ordering the oil and gas companies to calculate and pay royalties on the basis of international prices. We filed an appeal against such interim measure. On October 5, 2005, the Federal Court granted our appeal. Additionally, the Federal Court clarified that Section 6 Law No. 25,561 shall be applied only to the calculation of royalties regarding exported hydrocarbons. The province of Neuquén appealed this decision to the National Court of Appeals, which declared that it lacked jurisdiction and referred the case to the Argentine Supreme Court. In 2006, the Argentine Supreme Court also declared that it lacked jurisdiction, and returned the case file to the Federal Court. We also requested the Argentine Supreme Court to order the Federal Court to restrain from continuing proceedings. The Argentine Supreme Court denied such request and we filed a writ requesting the reversal of such decision. On May 14, 2007, the judge issued an opinion declaring that the Federal Court lacked jurisdiction to hear our royalties dispute case and the case was transferred to the administrative courts of the province of Neuquén. On May 17, 2007, we presented our appeal on the basis that the judge failed to consider recent jurisprudential records of the Federal Court (the case of the Neuquén Decrees) that acknowledged that royalties disputes posed a valid federal question. On June 29, 2007, the judge rejected our motion in limine but subsequently accepted our motion of appeal. We have filed a request with the Federal Court requesting jurisdiction over the royalties litigation, in light of the above-mentioned recent jurisprudence.
 
Other export tax disputes. During 2006 and 2007, the Customs General Administrations in Neuquén, Comodoro Rivadavia and Puerto Deseado informed us that certain summary proceedings had been brought against us based on
 
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alleged formal misstatements on forward oil deliveries (future commitments of crude oil deliveries) in the loading permits submitted before these agencies. Although our management, based on the opinion of legal counsel, believes the claim has no legal basis, the potential fines imposed could be substantial.
 
Mendoza royalties dispute. Following demands by the province of Mendoza that the international market price be applied to internal market transactions based on an interpretation of Section 6 of Law No. 25,561 (similar to the above-mentioned claim made by Neuquén), we commenced an administrative proceeding. Our request is currently pending.
 
Neuquén concession investment dispute. On November 22, 2007, we received Note No. 172/07 of the Secretariat of Energy and Mining of the Province of Neuquén (SEEyM), alleging material shortfalls in our investments pursuant to the Extension Agreement for the Loma de la Lata – Sierra Barrosa Concession, executed on December 5, 2000 (the “Extension Agreement”). The Note provided that: (i) “YPF shall immediately explain the reasons for the detected underinvestment, subject to immediate forfeiture of the concession extension”; (ii) “this serious incident makes it necessary to delay any negotiations with this company for the purpose of any concession extensions”; (iii) the proceedings will be remitted to the Provincial Legislature so that the legislators may weigh this “incident” at the time of reviewing any extension to the contracts; and (iv) legal rights were reserved for the institution of legal actions “to comprehensively redress the damage caused.”
 
The Extension Agreement sets out three phases for investment by us: (i) a first phase from July 1, 2000 to December 31, 2005, during which the committed investment amounted to U.S.$3,500 million; (ii) a second period, from January 1, 2006 to December 31, 2011, contemplating a committed investment of U.S.$2,500 million; and (iii) a final period from January 1, 2012 to December 31, 2017, during which we agreed to invest the amount of U.S.$2,000 million. The aggregate amount of the committed investment is U.S.$8,000 million, and under the Extension Agreement any non-substantial difference in a phase can be performed and made up for in the next phase.
 
In addition to the SEEyM’s failure to observe Section 80 of the Hydrocarbons Law, which requires a controlling authority to warn permission holders and concession operators and to allow them to cure violations, we believe that:
 
(i) we have made the investments agreed to under the Extension Agreement for the first of the three periods (ended on December 31, 2005), which is the subject of Note No 172/07, whether calculated in U.S. dollars or in pesos (though we believe they should be calculated in pesos);
 
(ii) during almost two years since the end of the first period, we have made investments in the province of Neuquén of approximately U.S.$1,830 million (for a cumulative amount of U.S.$5,350 million since 2000), which greatly exceeds the difference alleged by the province in Note No. 172/07 and demonstrates the completion of our performance of the requisite investments for the first period (U.S.$2,500 million related to the years 2006-2011); and
 
(iii) the investment obligations are convertible into pesos at a one-to-one ratio by effect of the emergency regulations enacted in 2002 (including Section 1 of Decree 214/04) and in light of economic reality, as the size and scope of the investments that could be made at the time the Extension Agreement was entered into differs drastically from the amount possible after devaluation in 2002. Our arguments in this regard are considered without prejudice to asserting the “unforeseen conditions” doctrine under Argentine law due to the significant change in circumstances, as the right to assert the doctrine was not waived in the Extension Agreement.
 
We have challenged Note No. 172/07 through administrative and judicial proceedings  By means of Resolution No. 178/08 the Province of Neuquén’s Natural Resources State Secretariat rejected our filing against Note No. 172/07 only with respect to the jurisdiction of the Province of Neuquén to review the Extension Agreement. However, it recognized that the investments made for the years 2006 and 2007 compensated for any shortfalls during the first period (which were declared to be not material) and certified that YPF S.A. complied with its duties for the first period 2000-2005.
 
Additional information
 
On January 21, 2005, we were notified of a request made by Empresa Nacional de Electricidad S.A. (“ENDESA”) for arbitration to resolve a dispute relating to an alleged breach of a contractual clause in an export contract signed in June 2000. The clause relates to increased natural gas deliveries and ENDESA has requested payment of a contractual penalty resulting from our alleged failure to deliver the required amounts. The contract term is 15 years. ENDESA’s claim amounted to U.S.$353.8 million, while asserting that there had been willful misconduct on our part. Thereafter, the parties entered into (i) an agreement for the amendment of the gas supply agreement in order to adapt it to the export restrictions imposed by the Argentine government (the “Amendment”) and (ii) an agreement for the termination of the
 
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arbitration (the “Termination Agreement”), both subject to the Secretariat of Energy’s approval. On August 31, 2007, we were notified of the Secretariat of Energy’s approval. Thereafter, the parties informed the tribunal of the termination of the arbitration by mutual agreement. We have paid ENDESA U.S.$8 million pursuant to the Termination Agreement and ENDESA has foregone all claims based on past conduct. Finally, the Amendment adjusted the maximum semi-annual compensation that we would have to pay in connection with deficiencies in natural gas deliveries.
 
On August 11, 2006, we received Note SE No. 1009 (the “Note”) from the Secretariat of Energy, which reviewed the progress of reserves in the Ramos Area in the Noroeste basin, in relation to the export authorization granted by Resolution SE No. 169/97 (the “Export Authorization”). The Export Authorization concerns the long-term natural gas export contract between us and GasAtacama Generación, for a maximum daily volume of 530,000 m3/day. The Note stated that as a result of the decrease in natural gas reserves supporting the Export Authorization, the domestic market supply was at risk. The Note preventively provided that the maximum natural gas daily volumes authorized to be exported under the Export Authorization were to be reduced by 20%, affecting the export contract. We filed an answer to the Note on September 15, 2006 stating our allegations and defenses.
 
YPF Holdings
 
The following is a brief description of certain environmental and other liabilities related to YPF Holdings Inc., a Delaware corporation.
 
In connection with the sale of Maxus’ former chemical subsidiary, Chemicals, to Occidental in 1986, Maxus agreed to indemnify Chemicals and Occidental from and against certain liabilities relating to the business or activities of Chemicals prior to the Closing Date, including certain environmental liabilities relating to certain chemical plants and waste disposal sites used by Chemicals prior to the Closing Date.
 
As of June 30, 2008, YPF Holdings’ reserves for environmental and other contingencies totaled approximately U.S.$197.3 million. YPF Holdings management believes it has adequately reserved for all environmental and other contingencies that are probable and can be reasonably estimated based on information available as of such time; however, many such contingencies are subject to significant uncertainties, including the completion of ongoing studies, the discovery of new facts, or the issuance of orders by regulatory authorities, which could result in material additions to such reserves in the future. It is possible that additional claims will be made, and additional information about new or existing claims (such as results of ongoing investigations, the issuance of court decisions or the signing of settlement agreements) is likely to develop over time. YPF Holdings’ reserves for the environmental and other contingencies described below are based solely on currently available information and as a result, YPF Holdings, Maxus and Tierra may have to incur costs that may be material, in addition to the reserves already taken.
 
In the following discussion concerning plant sites and third party sites, references to YPF Holdings include, as appropriate and solely for ease of reference, references to Maxus and Tierra. As indicated above, Tierra is also a subsidiary of YPF Holdings and has assumed certain of Maxus’ obligations.
 
Newark, New Jersey. A consent decree, previously agreed upon by the U.S. Environmental Protection Agency (the “EPA”), the New Jersey Department of Environmental Protection (the “DEP”) and Occidental, as successor to Chemicals, was entered in 1990 by the United States District Court of New Jersey for Chemicals’ former Newark, New Jersey agricultural chemicals plant. The approved remedy has been completed and paid for by Tierra pursuant to the above described indemnification agreement with Occidental. Operations and maintenance of the constructed remedy are ongoing, and as of June 30, 2008, YPF Holdings has reserved approximately U.S.$15.4 million in connection with such activities.
 
Passaic River/Newark Bay, New Jersey. Maxus, acting on behalf of Occidental, negotiated an agreement with the EPA under which Tierra has conducted further testing and studies to characterize contaminated sediment and biota in a six-mile portion of the Passaic River near the Newark, New Jersey plant site described above. While some work remains, these studies were substantially completed in 2005. In addition, the EPA and other agencies are addressing the lower 17-mile portion of the Passaic River (including the six-mile portion already studied) in a joint federal, state, local and private sector cooperative effort designated as the Lower Passaic River Restoration Project (“PRRP”). Tierra, along with certain other entities, has agreed to participate in and fund a remedial investigation and feasibility study (“RIFS”) in connection with the PRRP. The parties are discussing the possibility of further work with the EPA. The entities that have agreed to fund the RIFS have negotiated allocations of RIFS costs among themselves based on a number of considerations.
 
Tierra, acting on behalf of Occidental, is also performing and funding a separate RIFS to characterize sediment contamination and evaluate remedial alternatives in Newark Bay and portions of the Hackensack River, the Arthur Kill,
 
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and the Kill van Kull pursuant to a 2004 administrative order on consent with EPA. The EPA has issued General Notice Letters to a series of additional parties concerning the contamination of Newark Bay. Tierra  has reached agreement with five of these parties to contribute anually toward Newark Bay study costs, and is continuing to negotiate with other parties.
 
In December 2005, the DEP issued a directive to Tierra, Maxus and Occidental directing said parties to pay the State of New Jersey’s costs of developing a Source Control Dredge Plan focused on allegedly dioxin-contaminated sediment in the lower six-mile portion of the Passaic River described above. The development of this Plan is estimated by the DEP to cost approximately U.S.$2.3 million. The DEP has advised the recipients that they are not required to respond to the directive until otherwise notified. Also in December 2005, the DEP and the New Jersey Spill Compensation Fund sued YPF Holdings, Tierra, Maxus and other affiliates, as well as Occidental, in connection with dioxin contamination allegedly emanating from Chemicals’ former Newark plant and contaminating the lower 17-mile portion of the Passaic River, Newark Bay, other nearby waterways and surrounding areas. The defendants have made responsive pleadings and/or filings.  In March 2008, the court denied motions to dismiss for failure to state a claim by Occidental Chemical Corporation, and by Tierra and Maxus. NJDEP filed its Second Amended Complaint in April, 2008; YPF’s motion to dismiss for lack of personal jurisdiction was denied in September, 2008. Notwithstanding, the Court denied the plaintiffs’ motion to bar third party practice and allowed defendants to file third-party complaints. See “Legal Proceedings—Argentina—New Jersey Claims.”
 
In June 2007, EPA released a draft Focused Feasibility Study (“FFS”) that outlines several alternatives for remedial action in the lower eight miles of the Passaic River. These range from no action (which would result in comparatively little cost) to extensive dredging and capping (which according to the draft FFS, EPA estimated could cost from U.S.$0.9 billion to U.S.$2.3 billion), and are all described by EPA as involving proven technologies that could be carried out in the near term, without extensive research. Tierra, in conjunction with the other parties of the PRRP group, submitted comments on the draft FFS to EPA, as did a number of other interested parties. EPA has recently informed us that a revised remedy  proposal will not be forthcoming any earlier than mid-2009. Tierra plans to respond to any further EPA proposal as may be appropriate at that time.
 
In August 2007, the National Oceanic Atmospheric Administration (“NOAA”), as one of the Federal Natural Resources Trustees, sent a letter to the parties of the PRRP group, including Tierra and Occidental, requesting that the group enter into an agreement to conduct a cooperative assessment of natural resources damages in the Passaic River and Newark Bay. The PRRP group has responded through its common counsel to request that discussions relating to such an agreement be postponed until 2008, due in part to the pending FFS proposal by EPA. Tierra plans to continue to participate in the PRRP group with regard to this matter. In January 2008, the NOAA sent a letter to us, YPF Holdings, CLH Holdings Inc. and other entities designating each as a potentially responsible party (“PRP”).
 
In June 2008, the EPA, Occidental, and Tierra entered into an Administrative Order on Consent (“AOC”), pursuant to which Tierra (on behalf of Occidental) will undertake the removal of sediment from a portion of the Passaic River in the vicinity of Chemicals’ former Newark, New Jersey facility described above. This action will result in the removal of approximately 200,000 cubic yards of sediment, which will be carried out in two phases. The first phase, which will encompass the removal of 40,000 cubic yards, is scheduled for completion within approximately 30 months from the effective date of the AOC (June 2008). The second phase, which will encompass the removal of approximately 160,000 cubic yards of sediment, will be completed on a different schedule. Pursuant to the AOC, the EPA has required the provision of financial assurance in the amount of U.S.$80 million for the performance of the removal work through a trust fund, to which U.S.$2 million must be contributed within 90 days of the effective date of the AOC and an additional U.S.$10 million must be contributed every six months thereafter until a total of U.S.$80 million has been deposited into the fund. The total amount of required financial assurance may be decreased or increased over time if the anticipated cost of completing the removal work contemplated by the AOC changes. During the removal work, certain contaminants not produced by the former Chemicals plant, such as PCBs and mercury, will be removed along with dioxin. YPF Holdings may seek cost recovery from the parties responsible for such contamination; however, at this time it is not possible to make any predictions regarding the likelihood of success or the funds potentially recoverable in a cost-recovery action. The removal work required pursuant to the AOC will be conducted concurrently with and in addition to the other investigations and remedial actions described above, including those undertaken in connection with the FFS concerning the lower eight miles of the Passaic River, the RIFS addressing the lower 17-mile portion of the Passaic River, and the RIFS relating to contamination in Newark Bay, portions of the Hackensack River, the Arthur Kill and the Kill van Kull.
 
As of June 30, 2008, YPF Holdings has reserved approximately U.S.$91.9 million in connection with the foregoing matters related to the Passaic River, the Newark Bay and the surrounding area comprising the estimated costs for studies, estimated costs in connection with the AOC, and certain other matters related to the Passaic River and Newark Bay. However, it is possible that other works, including interim remedial measures, may be ordered. How these matters
 
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are resolved, including the development of new information, the imposition of natural resource damages or the selection of remedial actions differing from the scenarios we have proposed could result in Maxus and Tierra incurring material costs in addition to the amount currently reserved.
 
Hudson and Essex Counties, New Jersey. Until the 1970s, Chemicals operated a chromite ore processing plant at Kearny, New Jersey (the “Kearny Plant”). Tierra, on behalf of Occidental, is providing financial assurance in the amount of U.S.$20 million for performance of the work associated with the issues described below.
 
In May 2005, the DEP took two actions in connection with the chrome sites in Hudson and Essex Counties. First, the DEP issued a directive to Maxus, Occidental and two other chromium manufacturers (the “Respondents”) directing them to arrange for the cleanup of chromite ore residue at three sites in Jersey City and for the conduct of a study by paying the DEP a total of U.S.$19.5 million. Second, the DEP filed a lawsuit against Occidental and two other entities in state court in Hudson County seeking, among other things, cleanup of various sites where chromite ore residue is allegedly located, recovery of past costs incurred by the state at such sites (including in excess of U.S.$2.3 million dollars allegedly spent for investigations and studies) and, with respect to certain costs at 18 sites, treble damages. The DEP claims that the defendants are jointly and severally liable, without regard to fault, for much of the damages alleged. The parties have  come to an agreement regarding this matter, pursuant to which Tierra will pay U.S.$ 5 million, and will remediate three sites at an estimated cost of U.S.$ 2.1 million.
 
Pursuant to a request of the DEP, in the second half of 2006, Tierra and certain other parties tested the sediments in a portion of the Hackensack River near the former Kearny Plant. A report of those test results has been submitted to the DEP for its comments. What, if any, additional work will be required is expected to be determined once the results of this testing have been analyzed by the DEP.
 
In November 2005, several environmental groups sent a notice of intent to sue the owner of the property adjacent to the former Kearny Plant and five other parties, including Tierra, under the Resource Conservation and Recovery Act. The parties have entered into an agreement that addresses the concerns of the environmental groups, and these groups have agreed, at least for now, not to file suit.
 
As of June 30, 2008, YPF Holdings has reserved a total of approximately U.S.$32.9 million in connection with the foregoing chrome-related matters. Soil action levels for chromium in New Jersey have not been finalized, and the DEP continues to review the proposed action levels. The cost of addressing these chrome-related matters could increase significantly depending upon the final soil action levels, the DEP’s response to Tierra’s reports and other developments.
 
Painesville, Ohio. From about 1912 through 1976, Chemicals operated manufacturing facilities in Painesville, Ohio (the “Painesville Works”). The operations there over the years involved several discrete but contiguous plant sites over an area of about 1,300 acres. The primary area of concern historically has been Chemicals’ former chromite ore processing plant (the “Chrome Plant”). The Ohio Environmental Protection Agency (“OEPA”) has approved certain work, including the remediation of specific sites within the former Painesville Works area and work associated with the development plans (the “Remediation Work”). The Remediation Work has begun. As the OEPA approves additional projects for the site of the former Painesville Works, additional amounts may need to be reserved. YPF Holdings has reserved a total of approximately U.S.$8.0 million as of June 30, 2008 for its estimated share of the cost to perform the remedial investigation and feasibility study, the Remediation Work and other operation and maintenance activities at this site.
 
Third Party Sites. Pursuant to settlement agreements with the Port of Houston Authority (the “Port”) and other parties, Tierra and Maxus are participating (on behalf of Occidental) in the remediation of property adjoining Chemicals’ former Greens Bayou facility where dichloro-diphenyl-trichloroethane (“DDT”) and certain other chemicals were manufactured. Additionally, the parties have recently entered into a settlement with federal and state natural resources trustees in connection with claims for natural resources damages. As of June 30, 2008, YPF Holdings has reserved approximately U.S.$17.2 million for its estimated share of the remediation and the natural resources damages settlement associated with the Greens Bayou facility.
 
In June 2005, the EPA designated Maxus as a PRP at the Milwaukee Solvay Coke & Gas Site in Milwaukee, Wisconsin. The basis for this designation is Maxus’ alleged status as the successor to Pickands Mather & Co. and Milwaukee Solvay Coke Co., companies that the EPA has asserted are former owners or operators of such site. Preliminary work in connection with the RIFS in respect of this site commenced in the second half of 2006. YPF Holdings has reserved approximately U.S.$0.21 million as of June 30, 2008 for its estimated share of the costs of the RIFS. Maxus lacks sufficient information to determine additional exposure or costs, if any, it might have in respect of this site.
 
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Maxus is responsible for certain liabilities attributable to Occidental, as successor to Chemicals, in respect of the Malone Service Company Superfund Site in Galveston County, Texas. This site is a former waste disposal site where Chemicals is alleged to have sent waste products prior to September 1986.
 
Chemicals has also been designated as a PRP by the EPA under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (“CERCLA”) with respect to a number of third party sites where hazardous substances from Chemicals’ plant operations allegedly were disposed or have come to be located. Numerous PRPs have been named at substantially all of these sites. At several of these, Chemicals has no known exposure. At June 30, 2008, YPF Holdings had reserved approximately U.S.$2.3 million in connection with its estimated share of costs related to the Milwaukee Solvay Coke & Gas Site, the Malone Service Company Superfund Site, and the other sites mentioned in this paragraph.
 
“Agent Orange” and VCM Litigation. In 2002, Occidental sued Maxus and Tierra in state court in Dallas, Texas seeking a declaration that Maxus and Tierra have the obligation under the agreement pursuant to which Maxus sold Chemicals to Occidental to defend and indemnify Occidental from and against certain historical obligations of Chemicals, including claims related to “Agent Orange” and vinyl chloride monomer (VCM), notwithstanding the fact that said agreement contains a 12-year cut-off for defense and indemnity obligations with respect to most litigation. Tierra was dismissed as a party, and the matter was tried in May 2006. The trial court decided that the 12-year cut-off period did not apply and entered judgment against Maxus. This decision was affirmed by the Court of Appeals in February 2008. Maxus’ petition to the Texas Supreme Court for review was denied. This decision will require Maxus to accept responsibility for various matters for which it has refused to indemnify Occidental since 1998, which could result in the incurrence of material costs in addition to YPF Holdings’ current reserves for this matter. This decision will also require Maxus to reimburse Occidental for past costs on these matters. Maxus believes that its current reserves are adequate for these past costs and is currently evaluating the decision of the Supreme Court. As of June 30, 2008, YPF Holdings had reserved approximately U.S.$14.9 million in respect of this matter.
 
Turtle Bayou Litigation. In March 2005, Maxus agreed to defend Occidental, as successor to Chemicals, in respect of an action seeking the contribution of costs for the remediation of the Turtle Bayou waste disposal site in Liberty County, Texas. Judgment was recently entered in this action, and Maxus filed a motion for reconsideration which was partially successful. As a result, the court’s decision requires Maxus to pay, on behalf of Occidental, approximately 16% of those costs incurred by one of the plaintiffs. Maxus has appealed. As of June 30, 2008, YPF Holdings has reserved U.S.$3.8 million in respect of this matter.
 
YPF Holdings, including its subsidiaries, is a party to various other lawsuits, the outcomes of which are not expected to have a material adverse affect on the Company’s financial condition. YPF Holdings has established reserves for legal contingencies in situations where a loss is probable and can be reasonably estimated.
 
YPF Holdings has entered into various operating agreements and capital commitments associated with the exploration and development of its oil and gas properties. Such contractual, financial and/or performance commitments are not material, except perhaps those commitments related to the development of the Neptune Project located in the vicinity of the Atwater Valley Area, Blocks 573, 574, 575, 617 and 618. Total commitments for the Neptune Project are capital expenditures of U.S.$19.3 million for the remainder of 2008, and a minimum pipeline transportation payment obligation of approximately U.S.$3.1 million for the remainder of 2008; U.S.$5 million for 2009; U.S.$4 million for 2010; U.S.$3.1 million for 2011; U.S.$2.4 million for 2012 and U.S.$8.4 million thereafter.
 
ITEM 4.        OTHER RECENT DEVELOPMENTS

Disposition No. 1

The Hydrocarbons Law establishes the basic legal framework for the regulation of oil and gas exploration and production in Argentina. The Hydrocarbons Law empowers the executive branch of the Argentine government to establish a national policy for development of Argentina’s hydrocarbon reserves, with the principal purpose of satisfying domestic demand. Pursuant to the Hydrocarbons Law, exploration and production of oil and gas is carried out through exploration permits, production concessions, exploitation contracts or partnership agreements.
 
According to the Hydrocarbons Law, holders of production concessions, including us, also are required to pay royalties to the province where production occurs. A 12% royalty is payable on the value at the wellhead (equal to the price upon delivery of the product, less transportation, treatment costs and other deductions) of crude oil production and the natural gas volumes commercialized. The value is calculated based upon the volume and the sale price of the crude oil and gas produced, less the costs of transportation and storage. In addition, if a concession holder allots crude oil production for further industrialization processes at its plants, the concession holder is required to agree with the
 
36

 
 
provincial authorities or the Secretariat of Energy, as applicable, on the reference price to be used for purposes of calculating royalties.
 
However, in January 2008, considering, among other things, that as a result of Resolution 394/2007 of the Ministry of Economy and Production companies began to negotiate the price for crude oil in the domestic market, which would then be used as the basis for calculation of royalties, the Secretariat of Energy passed Disposition No. 1, which sets a minimum reference price for the calculation of royalties. As of the date of this report we have negotiated with certain third parties sale prices of crude oil that we have used as the basis for calculating and paying royalties according to the methodology set forth in the Hydrocarbons Law. According to certain interpretations, some of the prices negotiated by us may differ from the ones set forth in Disposition No. 1. If the final interpretation of Disposition No. 1 differs with the one considered by us, we could be subject to higher royalty obligations in the future, although our management believes the effect of such higher royalties would not be material.
 
In addition to the above, the Public Emergency Law, which created the export withholdings, established that export withholdings were not to be deducted from the export price for purposes of calculating the 12% royalties. The royalty expense is accounted for as a production cost. Any oil and gas produced by the holder of an exploration permit prior to the grant of a production concession is subject to the payment of a 15% royalty. See “Update of Legal Proceedings—Argentina—Neuquén royalty disputes” in this report.
 
Tender Offer for our Capital Stock by Petersen Energía S.A.
 
Since 1999, we have been controlled by Repsol YPF, an integrated oil and gas company headquartered in Spain with global operations. Repsol YPF owned approximately 99% of our capital stock from 2000 until February 21, 2008, when Petersen Energía, S.A. (“Petersen Energía”) purchased 58,603,606 of our ADSs, representing 14.9% of our capital stock, from Repsol YPF for U.S.$2,235 million (the “Petersen Transaction”). In addition, Repsol YPF also granted options to Enrique Eskenazi, Sebastián Eskenazi, Ezequiel Eskenazi Storey and Matías Eskenazi Storey, shareholders of Petersen Energía, or to companies that are, directly or indirectly, wholly-controlled by any of them to purchase up to an additional 10.1% of our outstanding capital stock within four years. On May 20, 2008, Petersen Energía Inversora S.A. (“PEISA”) exercised an option to purchase shares representing 0.1% of our capital stock, which will close upon the fulfillment of certain requirements. Additionally, PEISA launched a tender offer to purchase all of the shares of YPF that it were not already of their own at a price of U.S.$49.45 per share or ADS. Repsol, pursuant to its first option agreement with Petersen Energía, had stated that it would not tender YPF shares to PEISA. The offer period commenced on September 11, 2008 and expired on October 20, 2008.A total of 461,868 shares, representing approximately 0.117% of our total shares oustanding, have been tendered. The settlement will close upon the fulfillment of certain requirements. We believe that the Petersen entities’ participation in our capital stock and management will strengthen our Argentine ties and expertise.
 
Extension of Exploitation Concessions in the province of Neuquén
 
During the month of September, pursuant to the notice provided to firms holding exploitation concessions by the Province of Neuquén, through provincial decree No. 822/08, YPF entered into a Memorandum of Agreement provided under such Regulation and an Addendum to such agreement (hereinafter, the “Memorandum of Agreement”) to extend the term of the exploitation concessions identified below, which was to become effective upon its approval by the Legislature of the Province of Neuquén.
 
On October 2008, the legislation of the Province of Neuquén approved the Memorandum of Agreement through provincial Act No. 2615, which was enacted by provincial executive decree No. 1830/08, and was published in Official Gazette No. 3109 of the Province of Neuquén.
 
The Memorandum of Agreement between YPF and the Province of Neuquén establishes the following provisions, among others:
 
·  
Concessions involved: Cerro Bandera, Señal Cerro Bayo, Chihuido de la Sierra Negra, El Portón, Filo Morado, Octógono, Señal Picada – Punta Barda and Puesto Hernández.

·  
Extension of concession terms within the province of Neuquén: exploitation concession terms, which were originally set to expire on November 14, 2017, are extended for a 10-year term, which means that they will expire on November 14, 2027.

·  
Under Provincial Decree No. 822/08, YPF undertook the following commitments upon the execution of the Memorandum of Agreement: i) to make, on the date specified in the Memorandum of Agreement,

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initial payments of U.S.$ 109 million, U.S.$ 26 million, and U.S.$ 40 million, to be applied to different accounts of different provincial agencies; ii)  to pay the Province “An Extraordinary Production Royalty” of 3% of the production of the areas involved in the Memorandum of Agreement. In addition, the parties agreed to make additional adjustments of up to an additional 3% in the event of extraordinary income due to lower export duties or if YPF actually received a higher price for the sale of crude oil and/or natural gas according to a mechanism and reference values established in the Memorandum of Agreement; iii) to carry out exploration activities in the remaining exploration areas and make certain investments and expenditures in a total amount of U.S.$ 3,200 million trough 2027, as stipulated in the Memorandum of Agreement, on the exploitation concessions that constitute the subject-matter of the mentioned Memorandum of Agreement; and iv) to make “Corporate Social Responsibility” contributions to the province of Neuquén in a total amount of U.S.$ 20 million, which will be made in installments in the years 2008, 2009 and 2010. The purpose of such contributions will be to contribute to the development of the Province of Neuquén in terms of education, environment, health, culture, science and research and community development.
 
 
Changes to our Board of Directors, Committees and Management
 
Since the filing of our Annual Report on Form 20-F with the Securities and Exchange Commission on April 15, 2008, the following changes to our Board of Directors, committees and management have taken place:
 
·  
Mr. Eduardo Elsztain is no longer a member of our Board of Directors or an alternate member of our Audit Committee. Our Board of Directors is currently composed of 16 Directors and 14 Alternate Directors.
 
·  
Mr. Ignacio Cruz Moran has replaced Mr. Walter Forwood as our Chief Financial Officer.  Both Mr. Moran and Mr. Forwood continue to serve as Alternate Directors.
 
·  
Our Disclosure Committee is currently composed of the following members:
 
Name
 
Position
Sebastián Eskenazi
 
Chief Executive Officer
Antonio Gomis Sáez
 
Chief Operating Officer
Carlos Alfonsi
 
Director Refining and Logistics
Fernando Dasso
 
Director of Human Resources
Juan Carlos Miranda
 
Media Director
Sergio Resumil
 
Director of Communication
Ignacio Cruz Moran
 
Chief Financial Officer
Tomás García Blanco
 
Director of Exploration and Production
Carlos Jimenez
 
Director of Management Control
Àngel Ramos Sánchez
 
Director of Administration and Tax
Rafael López Revuelta
 
Director of Chemicals
Alfredo Pochintesta
 
Director of Marketing
Gonzalo López Fanjul
 
Director of Industrial Subsidiaries
Alejandro Quiroga López
 
General Counsel
Aquiles Rattia
 
Director of Reserves Control
Rubén Marasca
 
Director of Internal Audit
 
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ITEM 5.    UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2008

 
YPF SOCIEDAD ANONIMA AND CONTROLLED AND JOINTLY CONTROLLED COMPANIES
 
 
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
INDEX





 
Page
   
Condensed consolidated statements of income for the six-month periods ended June 30, 2008, and 2007
F-2
   
Condensed consolidated balance sheets as of June 30, 2008 and December 31, 2007
F-3
   
Condensed consolidated statements of cash flows for the six-month periods ended June 30, 2008 and 2007
F-4
   
Condensed consolidated statements of changes in shareholders' equity for the six-month periods ended June 30, 2008 and 2007
F-5
   
Notes to condensed consolidated financial statements for the six-month period ended June 30, 2008 and comparative information
F-6
   
 
The accompanying notes are an integral part of these financial statements.
 
F-1

 
 
YPF SOCIEDAD ANONIMA AND CONTROLLED AND JOINTLY CONTROLLED COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2008 AND 2007
(Amounts expressed in millions of Argentine pesos, except for per share amounts in Argentine pesos – Note 1)
(The condensed consolidated statements of income for the six-month periods ended June 30, 2008 and June 30, 2007, are unaudited)
 
   
2008
   
2007
 
             
Net sales (Note 3.h)
    16,443       13,099  
Cost of sales  (Note 9.b)
    (10,901 )     (8,299 )
Gross profit
    5,542       4,800  
                 
Administrative expenses (Note 9.c)
    (429 )     (361 )
Selling expenses (Note 9.c)
    (1,102 )     (992 )
Exploration expenses (Note 9.c)
    (218 )     (247 )
Operating income
    3,793       3,200  
                 
Income on long-term investments
    67       29  
Other expenses, net (Note 3.i)
    (241 )     (18 )
Financial income (expense), net and holding gains:
               
Gains (losses) on assets
               
Interests
    75       160  
Exchange differences
    (18 )     59  
Holding gains on inventories
    123       119  
Losses on liabilities
               
Interests
    (189 )     (145 )
Exchange differences
    279       (19 )
Reversal of impairment of other current assets (Note 2.j)
    -       69  
Net income before income tax
    3,889       3,454  
Income tax
    (1,635 )     (1,310 )
Net income
    2,254       2,144  
Earnings per share (Note 1)
    5.73       5.45  
 
The accompanying notes are an integral part of these financial statements.
 
F-2

 
 
YPF SOCIEDAD ANONIMA AND CONTROLLED AND JOINTLY CONTROLLED COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2008 AND DECEMBER 31, 2007
(Amounts expressed in millions of Argentine pesos – Note 1)
(The condensed consolidated balance sheet as of June 30, 2008, is unaudited)
 
   
2008
   
2007
 
Current Assets
           
Cash
    105       196  
Investments (Note 3.a)
    519       655  
Trade receivables (Note 3.b)
    3,179       3,235  
Other receivables (Note 3.c)
    2,053       4,361  
Inventories (Note 3.d)
    2,854       2,573  
Total current assets
    8,710       11,020  
                 
Non current Assets
               
Trade receivables (Note 3.b)
    27       32  
Other receivables (Note 3.c)
    854       809  
Investments (Note 3.a)
    824       799  
Fixed assets (Note 3.e)
    26,342       25,434  
Intangible assets
    7       8  
Total non current assets
    28,054       27,082  
Total assets
    36,764       38,102  
                 
Current Liabilities
               
Accounts payable (Note 3.f)
    4,784       4,339  
Loans (Note 3.g)
    2,602       471  
Salaries and social security
    199       213  
Taxes payable
    1,561       1,441  
Net advances from crude oil purchasers
    -       9  
Reserves
    508       466  
Total current liabilities
    9,654       6,939  
                 
Non current Liabilities
               
Accounts payable (Note 3.f)
    2,845       2,542  
Loans (Note 3.g)
    650       523  
Salaries and social security
    134