UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

Securities registered or to be registered pursuant to Section 12(b) of the Act:

		Name of Each Exchange
Title of each Class		On Which Registered
American Depositary Shares, each representing 10 Class B shares of Petrobras Energía Participaciones S.A.		New York Stock Exchange
Class B shares of Petrobras Energía Participaciones S.A.		New York Stock Exchange*
American Depositary Shares, each representing 10 Class B shares of Petrobras Energía S.A.		—
Class B shares of Petrobras Energía S.A.		—

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

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

The number of outstanding shares of each of the issuer’s classes of capital or common stock as of December 31, 2008 was:

Petrobras Energía Participaciones S.A. Class B ordinary shares, nominal value P$1.00 per share			2,132,043,387
Petrobras Energía S.A. Class B ordinary shares, nominal value P$1.00 per share			1,009,618,410

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

Petrobras Energía Participaciones S.A.		Yes þ No o
Petrobras Energía S.A.		Yes o No þ†

If this report is an annual or transitional report, indicate by check mark if the registrant is not required to file reports pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934.

Petrobras Energía Participaciones S.A.		Yes o No þ
Petrobras Energía S.A.		Yes o No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days:

Petrobras Energía Participaciones S.A.		Yes þ No o
Petrobras Energía S.A.		Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.495 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Not applicable.

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

U.S. GAAP o       IFRS o       Other þ

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

Petrobras Energía Participaciones S.A.		Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o
Petrobras Energía S.A.		Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ†

Indicate by check mark which financial statement item the Registrant has elected to follow:

Item 17 o       Item 18 þ

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Petrobras Energía Participaciones S.A.		Yes o No þ
Petrobras Energía S.A.		Yes o No þ

 

 

TABLE OF CONTENTS

Item 1. Identity of Directors, Senior Management and Advisors			1
Item 2. Offer Statistics and Expected Timetable			1
Item 3. Key Information			1
Selected Financial Data			1
Exchange Rates			8
Risk Factors			10
Item 4. Information on the Company			21
Our History and Development			21
Business Overview			23
Oil and Gas Exploration and Production			27
Refining and Distribution			45
Petrochemicals			51
Gas and Energy			55
Insurance			65
Patents and Trademarks			66
Quality, Safety, Environment and Health			66
Regulation of our Business			70
Organization Structure			100
Property, Plant and Equipment			102
Item 4A. Unresolved Staff Comments			102
Item 5. Operating and Financial Review and Prospects			103
Proportional Consolidation and Presentation of Discussion			103
Overview			104
Factors Affecting our Consolidated Results of Operations			106
Discussion of Results			118
Analysis of Operating Results by Business Segment			124
Analysis of Equity in Earnings of Affiliates			131
Analysis of Operating Results By Business Segment			135
Analysis of Equity in Earnings of Affiliates			143
Critical Accounting Policies			145
Liquidity and Capital Resources			149
Description of Indebtedness			154
Future Capital Requirements			156
Off-Balance Sheet Transactions			157
Contractual Obligations			157
U.S. Gaap Reconciliation			160
Reconciliation Tables			161

Item 6. Directors, Senior Management and Employees			165
Directors and Senior Management			165
Compensation			172
Board Practices			173
Employees			177
Share Ownership			177
Item 7. Major Shareholders and Related Party Transactions			178
Major Shareholders of Petrobras Energía Participaciones			178
Major Shareholders of Petrobras Energía			178
Related Party Transactions			180
Item 8. Financial Information			183
Consolidated Financial Statements			183
Legal Proceedings			183
Dividends			183
Item 9. Offer and Listing			185
Markets			187
Item 10. Additional Information			188
Memorandum and Articles of Association			188
Material Contracts			196
Exchange Controls			197
Taxation			197
Documents On Display			201
Item 11. Quantitative and Qualitative Disclosures About Market Risk			202
Item 12. Description of Securities other than Equity Securities			204
Item 13. Defaults, Dividend Arrearages and Delinquencies			205
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds			205
Item 15. Controls and Procedures			205
Item 16A. Audit Committee Financial Expert			206
Item 16B. Code of Ethics			207
Item 16C. Principal Accountant Fees and Services			207
Item 16D. Exemption from the Listing Standard for Audit Committees			208
Item 16E. Purchases of Equity Securities by the Issuer and Affiliates Purchasers			208
Item 16G. Corporate Governance			208
Item 17. Financial Statements			215
Item 18. Financial Statements			215
Item 19. Exhibits			215
Exhibit 1.2
Exhibit 4.4
Exhibit 4.5
Exhibit 4.7
Exhibit 8.1
Exhibit 12.1
Exhibit 12.2
Exhibit 12.3
Exhibit 12.4
Exhibit 13.1
Exhibit 13.2
Exhibit 13.3
Exhibit 13.4

NOTE ON JOINT FILING

This annual report on Form 20-F has been jointly filed by Petrobras Energía Participaciones S.A. and Petrobras Energía S.A. On January 30, 2009, separate shareholders’ meetings of these two companies approved their merger, pursuant to which Petrobras Energía Participaciones would be merged and absorbed into Petrobras Energía, and Petrobras Energía would be the surviving company. The companies are currently in the process of completing the necessary formalities in Argentina to finalize this merger.

Once the requisite Argentine formalities have been completed, shareholders of Petrobras Energía Participaciones will receive shares of Petrobras Energía (in the United States, in the form of American Depositary Receipts), and the American Depositary Receipts of Petrobras Energía Participaciones will be removed from listing on the New York Stock Exchange (the “NYSE”) and from registration with the U.S. Securities and Exchange Commission (the “SEC”). Immediately subsequent to this exchange of shares, American Depositary Receipts, each representing 10 Class B shares of Petrobras Energía, will be listed and begin trading on the NYSE. Petrobras Energía S.A. will be a successor issuer to Petrobras Energía Participaciones S.A., as contemplated by Rule 12g-3 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Petrobras Energía Participaciones S.A. is a holding company that was created for the purpose of owning shares of Petrobras Energía S.A., and operates exclusively through Petrobras Energía S.A. and its subsidiaries. Petrobras Energía Participaciones S.A. has no independent operations other than the ownership of shares of Petrobras Energía S.A., and all disclosure in this annual report refers to the operations of Petrobras Energía S.A., unless otherwise indicated.

All references in this annual report to:

“Petrobras Energía,” “PESA” and “the Company” refer to Petrobras Energía S.A. and its subsidiaries, but excludes affiliates and companies under joint control. Prior to July 2003, Petrobras Energía’s corporate name was Pecom Energía S.A. On March 27, 2009, the shareholders of Petrobras Energía approved the official change of the company’s corporate name from Petrobras Energía S.A. to Petrobras Argentina, S.A. As of the date of this annual report, the Company is in the process of completing the necessary formalities to complete this name change. See “Item 4. Information on the Company—Our History and Development”.

“Petrobras Energía Participaciones,” and “PEPSA” refer to Petrobras Energía Participaciones S.A., the parent company of Petrobras Energía. Prior to July 2003, the corporate name of Petrobras Energía Participaciones was Perez Companc S.A.

Unless otherwise noted, “we,” “us,” “our,” and similar terms refer to Petrobras Energía Participaciones and its subsidiaries, including Petrobras Energía.

“Petrobras” refers to Petróleo Brasileiro S.A. — PETROBRAS.

“Argentine pesos”, “pesos” or “P$” refer to the currency of the Republic of Argentina.

“U.S. dollars,” “US$” or “U.S.$” refer to the currency of the United States of America.

FORWARD LOOKING STATEMENTS

Some of the information included in this annual report contains information that is forward looking, including statements regarding capital expenditures, competition and sales, oil and gas reserves and prospects and trends in the oil and gas, refining and distribution, petrochemicals and electricity industries.

Certain statements contained in this annual report are forward-looking statements and are not based on historical fact, such as statements containing the words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect” and similar words. These forward-looking statements are subject to risks, uncertainties and assumptions, including those discussed in “Item 3. Key Information—Risk Factors” and elsewhere in this annual report. Factors that could cause actual results to differ materially and adversely include, but are not limited to:

•

Changes in general economic, business, political or other conditions in Argentina or changes in general economic or business conditions in other Latin America countries;

•

The availability of financing at reasonable terms to Argentine companies, such as us;

	•		The failure of governmental authorities to approve proposed measures or transactions described in this annual report;
	•		Changes in the price of hydrocarbons and oil products;
	•		Changes to our capital expenditure plans;
	•		Changes in laws or regulations affecting our operations;
	•		Increased costs; and
	•		Other factors discussed under “Risk Factors” in Item 3 of this annual report.

Forward-looking statements speak only as of the date they were made. We undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict all of these factors. In light of these limitations, you should not place undue reliance on forward-looking statements contained in this annual report.

PART I

Item 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

Item 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

Item 3. KEY INFORMATION

SELECTED FINANCIAL DATA

The financial information set forth below may not contain all of the financial information that you should consider when making an investment decision. This information should be read in conjunction with, and is qualified in its entirety by reference to, the “Risk Factors” included in this annual report. See “—Risk Factors”. You should also carefully read our financial statements and “Item 5. Operating and Financial Review and Prospects” included in this annual report for additional financial information about us.

The consolidated financial statements for both Petrobras Energía Participaciones and Petrobras Energía are prepared in accordance with regulations of the Argentine National Securities Commission (Comisión Nacional de Valores) (“CNV”), and, except for the matters described in Note 3 to the consolidated financial statements of each of Petrobras Energía Participaciones and Petrobras Energía, with generally accepted accounting principles in Argentina (as approved by the Professional Council of Economic Sciences of the City of Buenos Aires, or its Spanish acronym “CPCECABA”), or Argentine GAAP. Argentine GAAP differs in certain significant respects from generally accepted accounting principles in the United States, or U.S. GAAP. Note 20 to each of Petrobras Energía Participaciones’s and Petrobras Energía’s financial statements provide a description of the principal differences between Argentine GAAP and U.S. GAAP, and Note 22 for each of Petrobras Energía Participaciones and Petrobras Energía, provides a reconciliation to U.S. GAAP of net income, shareholders’ equity and certain other selected financial data.

In compliance with Rule 3-09 of Regulation S-X, this annual report contains the audited financial statements of our equity investee, Petroritupano S.A., as of and for the years ended December 31, 2008 and 2007. The independent registered public auditors of Petroritupano S.A. have indicated in their report that Petroritupano has not complied with various formal tax duties, which, pursuant to current tax regulations, may give rise to the payment of sanctions and interest amounting to approximately US$24 million. The independent registered public auditors have noted that the accruals and other liabilities caption of the balance sheet as of December 31, 2008 and net income for the year then ended are understated and overstated by such amount, respectively. We do not believe that this fact has had or will have a material impact on the financial results of either Petrobras Energía Participaciones or Petrobras Energía.

Proportional consolidation of companies under which we exercise joint control

In accordance with the procedure set forth in Technical Resolution No. 21 of the Argentine Federation of Professional Councils in Economic Science (or its Spanish acronym “FACPCE”), we have consolidated both of our financial statements line by line on a proportional basis with the companies in which we exercise joint control (other than Compañía Inversora en Transmisión Eléctrica Citelec S.A., or “Citelec”). See “Item 5. Operating and Financial Review and Prospects — Proportional Consolidation and Presentation of Discussion”. In the consolidation of companies over which we exercise joint control, the amount of the investment in the companies under joint control and the interest in their income (loss) and cash flows are replaced by our proportional interest in the subsidiaries assets, liabilities and income (loss) and cash flows. In addition, related party receivables, payables and transactions within the consolidated group and companies under joint control are eliminated on a pro rata basis pursuant to our ownership share in that company.

Changes in professional accounting standards

On August 10, 2005, the Board of the CPCECABA approved Resolution CD No. 93/2005, which introduced a series of changes to professional accounting standards, effective for fiscal years beginning on or after January 1, 2006. Through General Resolution Nos. 485 and 487, dated December 29, 2005, and January 26, 2006, respectively, the CNV approved the aforementioned changes, which were effective for years beginning as from January 1, 2006.

Figures for the years 2005 and 2004 have been restated to give effect to the aforementioned changes in the professional accounting standards.

The effects of these changes on Petrobras Energía’s income statement and shareholders’ equity as of December 31, 2005 and 2004 are described below:

										Increase (decrease)
		Gain (loss)								Shareholders’ equity as of
		Income for								December 31,
		2005				2004				2005				2004
		(in millions of pesos)
Comparison with recoverable values (i)			(120	)			10				(190	)			(70	)
Deferred tax (ii)			272				118				(1,060	)			(1,332	)
Total effect on unappropriated retained earnings											(1,250	)			(1,402	)
Deferred loss (iii)			—				—				(14	)			(49	)
Total effect on Shareholders’ equity			152				128				(1,264	)			(1,451	)

For explanation of footnotes, please see the table below.

The effects of these changes on Petrobras Energía Participaciones’s income statement and shareholders’ equity as of December 31, 2005 and 2004 are described below:

										Increase (decrease)
		Gain (loss)								Shareholders’ equity as of
		Income for								December 31,
		2005				2004				2005				2004
		(in millions of pesos)
Comparison with recoverable values (i)			(120	)			10				(190	)			(70	)
Deferred tax (ii)			272				118				(1,060	)			(1,332	)
Minority interest			(36	)			(31	)			303				339
Total effect on unappropriated retained earnings											(947	)			(1,063	)
Deferred loss (iii)											(22	)			(49	)
Total effect on Shareholders’ equity			116				97				(969	)			(1,112	)

U.S. GAAP Information

Neither the effects of inflation accounting nor the proportional consolidation of Distrilec Inversora S.A. (“Distrilec”) (for all years presented) or Petrobras de Valores Internacional de España S.L. (“PVIE”) (for the years ended December 31, 2007 and 2008), jointly controlled companies under Argentine GAAP, have been reversed in the reconciliations to U.S. GAAP.

The proportional consolidation of Compañía de Inversiones de Energía S.A. (“CIESA”), another company under joint control in 2008, 2007, 2006, 2005 and 2004 under Argentine GAAP, has been reversed in the U.S. GAAP information. This reversal was a result of (1) CIESA having negative shareholders’ equity for each of those five years for purposes of U.S. GAAP, and (2) our not having assumed commitments to make capital contributions or to provide financial assistance to CIESA, which caused our interests in CIESA to be valued at zero.

The following tables set forth selected financial data for Petrobras Energía, including data for joint control companies consolidated under the proportional consolidation method, as of and for the years ended December 31, 2008, 2007, 2006, 2005 and 2004:

Petrobras Energía — Income Statement Data

		Year Ended December 31,
		2008				2007				2006				2005				2004
		(in millions of pesos, except for per share amounts and
		number of shares or as otherwise indicated)
Argentine GAAP:
Net sales			15,175				13,458				11,745				10,655				8,763
Cost of sales			(11,000	)			(10,111	)			(8,062	)			(6,848	)			(5,657	)
Gross profit			4,175				3,347				3,683				3,807				3,106
Administrative and selling expenses			(1,756	)			(1,463	)			(1,281	)			(1,136	)			(969	)
Exploration expenses			(238	)			(172	)			(117	)			(34	)			(133	)
Other operating expenses, net			(229	)			(176	)			(135	)			(329	)			(324	)
Operating income			1,952				1,536				2,150				2,308				1,680
Equity in earnings of affiliates			305				176				219				281				102
Financial expenses and holding losses, net			(786	)			(495	)			(504	)			(897	)			(1,264	)
Other income (expenses), net			(93	)			131				99				(456	)			(36	)
Income before income tax and minority interest in subsidiaries			1,378				1,348				1,964				1,236				482
Income tax			(529	)			(494	)			(465	)			(211	)			317
Minority interest in subsidiaries			(73	)			(92	)			(83	)			(54	)			26
Net income			776				762				1,416				971				825
Basic/diluted Earning per share			0.769				0.755				1.403				0.962				1.058
Number of shares outstanding (in millions):
Class B			1,010				1,010				1,010				1,010				779
U.S. GAAP:
Net sales			14,385				12,712				11,085				10,129				8,351
Operating income			1,295				681				1,942				619				1,350
Net income (loss)			434				(24	)			1,295				(91	)			781
Basic/diluted net income (loss) per share			0.430				(0.024	)			1.282				(0.090	)			1.003

Petrobras Energía — Balance Sheet Data

		Year Ended December 31,
		2008				2007				2006				2005				2004
		(in millions of pesos, except for per share amounts and
		number of shares or as otherwise indicated)
Argentine GAAP:
Consolidated Balance Sheet
Assets
Current assets
Cash			492				98				86				104				139
Investments			1,030				1,132				1,512				881				946
Trade receivables			1,635				1,605				1,438				1,626				1,181
Other receivables			1,593				2,658				1,226				663				759
Inventories			1,536				996				843				746				624
Other assets			5				—				1				—				1
Total current assets			6,291				6,489				5,106				4,020				3,650
Non-current assets
Trade receivables			154				228				124				78				47
Other receivables			522				657				691				672				943
Inventories			95				100				81				79				71
Investments			3,477				3,270				3,630				1,072				1,107
Property, plant and equipment			12,556				10,609				10,838				12,657				12,277
Other assets			35				41				41				47				65
Total non-current assets			16,839				14,905				15,405				14,605				14,510
Total assets			23,130				21,394				20,511				18,625				18,160
Liabilities
Current liabilities
Accounts payable			1,873				1,728				1,475				1,363				1,071
Short-term debt			2,445				1,922				2,646				1,805				1,709
Payroll and social security taxes			351				261				276				177				98
Taxes payable			454				274				360				255				233
Reserves			125				124				95				48				31
Other current liabilities			530				305				214				198				657
Total current liabilities			5,778				4,614				5,066				3,846				3,799
Non-current liabilities
Accounts payable			136				179				143				103				109
Long-term debt			5,152				5,430				4,716				5,708				6,248
Other liabilities			560				367				402				356				190
Taxes payable			1,508				1,428				1,492				1,404				1,692
Reserves			119				86				85				103				76
Total non-current liabilities			7,475				7,490				6,838				7,674				8,315
Total liabilities			13,253				12,104				11,904				11,520				12,114
Minority interest in subsidiaries			930				860				771				688				1,869
Total Shareholders’ Equity			8,947				8,430				7,836				6,417				4,177
Total liabilities and shareholders’ equity			23,130				21,394				20,511				18,625				18,160
Capital Stock			1,010				1,010				1,010				1,010				779
U.S. GAAP:
Total assets			20,540				19,343				18,049				16,181				16,763
Shareholders’ equity			8,886				8,689				7,786				6,502				6,549

The following tables set forth selected financial data for Petrobras Energía Participaciones, including data for joint control companies consolidated under the proportional consolidation method, as of and for the years ended December 31, 2008, 2007, 2006, 2005 and 2004:

Petrobras Energía Participaciones — Income Statement Data

		Year Ended December 31,
		2008				2007				2006				2005				2004
		(in millions of pesos, except for per share amounts and
		number of shares or as otherwise indicated)
Argentine GAAP:
Net sales			15,175				13,458				11,745				10,655				8,763
Cost of sales			(11.000	)			(10,111	)			(8,062	)			(6,848	)			(5,657	)
Gross profit			4,175				3,347				3,683				3,807				3,106
Administrative and selling expenses			(1,758	)			(1,465	)			(1,283	)			(1,139	)			(971	)
Exploration expenses			(238	)			(172	)			(117	)			(34	)			(133	)
Other operating expense, net			(231	)			(177	)			(135	)			(329	)			(324	)
Operating income			1,948				1,533				2,148				2,305				1,678
Equity in earnings of affiliates			305				176				219				281				102
Financial expenses and holding losses, net			(782	)			(495	)			(506	)			(899	)			(1,265	)
Other income (expenses), net			(96	)			130				93				(459	)			(40	)
Income before income tax and minority interest in subsidiaries			1,375				1,344				1,954				1,228				475
Income tax			(529	)			(494	)			(465	)			(211	)			317
Minority interest in subsidiaries			(261	)			(277	)			(425	)			(288	)			(17	)
Net income			585				573				1,064				729				775
Basic/diluted Earning per share			0.276				0.270				0.501				0.343				0.365
Number of shares outstanding (in millions):
Class B			2,132				2,132				2,132				2,132				2,132
U.S. GAAP:
Net sales			14,385				12,712				11,085				10,129				8,232
Operating income			1,288				677				1,934				613				1,348
Net income (loss)			326				(23	)			972				(77	)			760
Basic/diluted net income (loss) per share			0.154				(0.011	)			0.458				(0.036	)			0.356

Petrobras Energía Participaciones — Balance Sheet Data

		Year Ended December 31,
		2008				2007				2006				2005				2004
		(in millions of pesos, except for per share amounts and
		number of shares or as otherwise indicated)
Argentine GAAP:
Consolidated Balance Sheet
Assets
Current assets
Cash			492				98				86				104				139
Investments			989				1,094				1,479				857				934
Trade receivables			1,635				1,605				1,438				1,626				1,181
Other receivables			1,595				2,659				1,227				663				759
Inventories			1,536				996				843				746				624
Other assets			5				—				1				—				1
Total current assets			6,252				6,452				5,074				3,996				3,638
Non-current assets
Trade receivables			154				228				124				78				47
Other receivables			522				657				691				672				943
Inventories			95				100				81				79				71
Investments			3,477				3,270				3,630				1,072				1,107
Property, plant and equipment			12,556				10,609				10,838				12,657				12,277
Other assets			35				41				41				47				65
Total non-current assets			16,839				14,905				15,405				14,605				14,510
Total assets			23,091				21,357				20,479				18,601				18,148
Liabilities
Current liabilities
Accounts payable			1,873				1,728				1,475				1,363				1,072
Short-term debt			2,445				1,922				2,646				1,805				1,709
Payroll and social security taxes			351				261				276				177				98
Taxes payable			463				280				365				259				241
Reserves			125				124				95				48				31
Other current liabilities			530				305				214				198				657
Total current liabilities			5,787				4,620				5,071				3,850				3,808
Non-current liabilities
Accounts payable			136				179				143				103				109
Long-term debt			5,152				5,430				4,716				5,708				6,248
Other liabilities			560				367				402				356				190
Taxes payable			1,508				1,428				1,492				1,404				1,692
Reserves			119				86				85				103				76
Total non-current liabilities			7,475				7,490				6,838				7,674				8,315
Total liabilities			13,262				12,110				11,909				11,524				12,123
Minority interest in subsidiaries			2,777				2,583				2,350				1,922				1,626
Total Shareholders’ Equity			7,052				6,664				6,220				5,155				4,399
Total liabilities and shareholders’ equity			23,091				21,357				20,479				18,601				18,148
Capital Stock			2,132				2,132				2,132				2,132				2,132
U.S. GAAP:
Total assets			20,501				19,306				18,017				16,158				16,751
Shareholders’ equity			7,020				6,874				6,195				5,233				5,286

EXCHANGE RATES

From April 1, 1991 until the end of 2001, the Convertibility Law No. 23,928 and Regulatory Decree No. 529/91 (together, the “Convertibility Law”) established a fixed exchange rate under which the Central Bank of Argentina (the “Central Bank”) was obliged to sell U.S. dollars at a fixed rate of one peso per U.S. dollar. On January 6, 2002, the Argentine Congress enacted the Public Emergency and Foreign Exchange System Reform Law No. 25,562 (the “Public Emergency Law”), which suspended certain provisions of the Convertibility Law, including the fixed exchange rate of P$1 to U.S.$1, and granted the executive branch of the Argentine government the power to set the exchange rate between the peso and foreign currencies and to issue regulations related to the foreign exchange market. Following a brief period during which the Argentine government established a temporary dual exchange rate system, pursuant to the Public Emergency Law, the peso has been allowed to float freely against other currencies since February 2002.

The following table sets forth the annual high, low, average and period-end exchange rates for the periods indicated, expressed in Argentine pesos per U.S. dollar and not adjusted for inflation. There can be no assurance that the Argentine peso will not depreciate or appreciate again in the future. The Federal Reserve Bank of New York does not report a noon buying rate for pesos.

		Argentine peso per U.S. dollar
		High				Low				Average				Period-end
2009
June (1)			3.77				3.74				3.76				3.77
May			3.75				3.70				3.73				3.75
April			3.72				3.67				3.69				3.72
March			3.72				3.57				3.65				3.72
February			3.57				3.48				3.51				3.57
January			3.49				3.45				3.46				3.49
2008
December			3.37				3.47				3.42				3.45
For the year ended December 31,
2008			3.47				3.37				3.42				3.45
2007			3.16				3.08				3.12				3.15
2006			3.08				3.05				3.06				3.07
2005			3.03				2.86				2.92				3.03
2004			2.99				2.94				2.97				2.98

Exchange Controls

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

On December 3, 2001, the Argentine government imposed a number of monetary and currency exchange control measures, which included restrictions on the free disposition of funds deposited with banks and tight restrictions on transferring funds abroad without the Central Bank’s prior authorization subject to specific exceptions for transfers related to foreign trade. The Central Bank has gradually eased these restrictions with a view to gradually normalizing the domestic exchange market, and as a result, most restrictions relating to the repayment of foreign creditors and the payment of dividends to foreign shareholders have been lifted. In June 2003 the Argentine government set restrictions on capital flows into Argentina, which mainly consisted of a prohibition against the transfer abroad of any funds until 180 days after their entry into the country. Furthermore, in June 2005 the Argentine government established further restrictions on capital flows into Argentina, including increasing the period that certain incoming funds must remain in Argentina to 365 calendar days and requiring that 30% of such incoming funds be deposited with a bank in Argentina in a non-transferable, non-interest bearing account for 365 calendar days. Export and import financing operations, as well as primary public offerings of debt securities listed on self-regulated markets, among others, are exempt from the foregoing provision.

RISK FACTORS

Factors Relating to Argentina

Political and economic instability in Argentina has affected and may continue to adversely affect our financial condition and results of operations.

Both Petrobras Energía Participaciones and Petrobras Energía are Argentine corporations (sociedades anónimas). As of December 31, 2008, with respect to Petrobras Energía, approximately 70% of our total assets, 73% of our net sales, 68% of our combined crude oil and gas production and 62% of our proved oil and gas reserves were located in Argentina. Fluctuations in the Argentine economy and actions adopted by the Argentine government have had and may continue to have a significant impact on Argentine companies, including us. Specifically, we have been affected and may continue to be affected by inflation, interest rates, the value of the peso against foreign currencies, price controls, regulatory policies, business and tax regulations and in general by the political, social and economic scenario in Argentina and in other countries that may affect Argentina.

The Argentine economy has experienced significant volatility in recent decades, characterized by periods of low or negative growth, high and variable levels of inflation and currency devaluation.

During 2001 and 2002, Argentina went through a period of severe political, economic and social crisis. See “Business Overview—Our Principal Market”. The crisis had significant and adverse consequences on our company, including (i) losses derived from the effects of the peso devaluation on our affiliates and our affiliates’ net borrowing position, which primarily was denominated in U.S. dollars, (ii) the impairment of the book value of certain gas areas and tax assets due to material changes in the prospects of our operations, (iii) a decrease in U.S. dollar cash flows due to the imposition of export taxes, (iv) limits on the availability in the financial market to renew our short-term lines of credit and the current portion of our medium and long-term financings at maturity and (v) restrictions on our ability to pass through the effects of inflation to the prices of products sold by us in the domestic market. In 2002, we reported a significant net loss and our liquidity was adversely affected. Within this context and in order to secure compliance with our financial commitments, we reduced our investment plan and reached an agreement with our financial creditors and holders of notes to extend the maturity profile of a substantial portion of our debt, at face value. As a result, capital expenditures in 2002, net of divestments, totaled only P$139 million, a relatively low amount compared to our historical average investment.

Although the Argentine economy has largely recovered from the crisis of 2001 and 2002, the current global economic crisis has led to a sudden deceleration of the economy, accompanied by political and social unrest, inflationary and peso depreciation pressures and lack of consumer and investor confidence. Uncertainty remains as to whether and how quickly Argentina may overcome the economic slowdown and regain economic growth, which depends on a variety of factors, including international demand for Argentine exports, the stability and competitiveness of the peso against foreign currencies, confidence among consumers and foreign and domestic investors and a stable and relatively low rate of inflation.

We cannot provide you with any assurance that future economic, social and political developments in Argentina, over which we have no control, will not adversely affect our financial condition or results of operations, including our ability to pay our debts at maturity or dividends.

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

Financial and securities markets in Argentina are influenced, to varying degrees, by economic and market conditions in other markets worldwide. Although economic conditions vary from country to country, investors’ perceptions of events occurring in one country may substantially affect capital flows into and investments in securities from issuers in other countries, including Argentina. The Argentine economy was adversely impacted by the political and economic events that occurred during 2008, and continues to be affected by events in the economies of its major regional partners. Furthermore, the Argentine economy has been affected by events in developed economies which are trading partners or that impact the global economy. Consequently, there can be no assurance that the Argentine financial system and securities markets will not continue to be adversely affected by events in developed countries’ economies or events in other emerging markets.

A lack of financing for Argentine companies, whether due to government regulation or market forces, may negatively impact the execution of our strategic business plan.

The prospects for Argentine companies of accessing financial markets are limited in terms of the amount of financing available, and the conditions and cost of such financing. The default on the Argentine sovereign debt at the end of 2001, the recent global economic crisis, and the resulting international stock market crash and the insolvency of major financial institutions toward the end of 2008, have all significantly limited the ability of Argentine companies to access international financial markets as they had in the past.

Our ability to execute and carry out our strategic business plan depends upon our ability to obtain financing at a reasonable cost and on reasonable terms. In recent years, we have regularly obtained financing from the private pension fund system in Argentina, which has been a significant purchaser of our debt and shares. However, in November 2008 the Argentine National Congress passed a law eliminating the private pension system, mandating that funds administered by the private Retirement and Pension Funds Administrators (the “AFJP”), be transferred to a new administrator, the National Social Security Administrative Office (Administración Nacional de la Seguridad Social, or “ANSES”). Because the private pension funds had until recently been major institutional investors in the Argentine capital markets, the nationalization of these funds and the transfer of their assets to a state-run administrator has led to a decline in liquidity in the local capital markets, and may further limit the sources of financing for Argentine companies, including us. If we are unable to gain access to international or local financial markets to refinance our indebtedness at reasonable cost and on reasonable terms, we may have to reduce our projected capital expenditures, which, in turn, may negatively affect the implementation of our business plan.

Fluctuations in the value of the peso may adversely affect the Argentine economy, our financial condition and the results of operations.

The value of the peso has fluctuated significantly in the past and may do so in the future. Since the end of the U.S. dollar-peso parity in January 2002, the peso has fluctuated significantly in value. As a result, the Central Bank has taken several measures to stabilize the exchange rate and preserve its reserves. The marked devaluation of the peso in 2002 had a negative impact on the ability of the Argentine government and Argentine companies to honor their foreign currency-denominated debt, led to very high inflation initially and had a negative impact on businesses whose success depends on domestic market demand, including public utilities.

The significant peso devaluation during 2002 adversely affected our results of operations and financial condition. Substantially all of our financial debt and a significant portion of our affiliates’ debt were denominated in U.S. dollars. Before the enactment of the Public Emergency and Foreign Exchange System Reform Law No. 25,562 (the “Public Emergency Law”) in January 2002, our cash flow, generally denominated in U.S. dollars or dollar-adjusted, provided a natural hedge against exchange rate risks. The Argentine regulatory framework after the enactment of the Public Emergency Law (which included the pesification of utility rates, regulatory issues related to the renegotiation of pesified utility rates, new taxes on hydrocarbon exports, and the implementation of regulations to prevent an increase in prices to final users in the domestic market and restrictions on exports), however, limited our ability to hedge the impact of the peso devaluation.

If the peso devalues significantly, all of the negative effects on the Argentine economy related to such devaluation could recur, with adverse consequences to our business. On the other hand, a substantial increase in the value of the peso against the U.S. dollar also presents risks for the Argentine economy since it may lead to a deterioration of the country’s current account balance and the balance of payments.

We are unable to predict whether, and to what extent, the value of the peso may further depreciate or appreciate against the U.S. dollar and how any such fluctuations would affect the demand of our products and services. Moreover, we cannot assure you that the Argentine government will not make regulatory changes that prevent or limit us from offsetting the risk derived from our exposure to the U.S. dollar and, if so, what impact these changes will have on our financial condition and results of operations.

Inflation may escalate and undermine economic growth in Argentina and adversely affect our financial condition and results of operations.

In the past, inflation has undermined the Argentine economy and the government’s ability to stimulate economic growth. For example, during 2002, the Argentine consumer price index increased by 41%, and the wholesale price index increased by 118.2%. This inflation reflected both the effect of the peso devaluation on production costs and a significant change in relative prices, which was partially offset by the elimination of rate adjustments and a strong drop in demand as a result of the recession. According to official inflation data published by the National Statistics Institute, in 2003, inflation slowed, with a 3.7% increase in the consumer price index and a 2.0% increase in the wholesale price index.

Since 2004, encouraged by the pace of economic growth, the consumer price index increased by 6.1% in 2004, 12.3% in 2005, 9.8% in 2006 and 8.5% in 2007 while the wholesale price index went up 7.9% in 2004, 10.8% in 2005, 7.1% in 2006 and 14.4% in 2007. In 2008, the consumer and wholesale price indexes increased by 7.2% and 0.9%, respectively. In 2009, official price indexes show a slowing of inflation. In spite of these official indicators, alternative measurements have exhibited higher inflationary pressure and a general price level with a more marked dynamics.

Uncertainty surrounding future inflation may result in slowed economic activity and reduced growth. A return to a high inflation environment would also undermine Argentina’s foreign competitiveness by diluting the effects of the peso devaluation, with negative effects on the level of economic activity and employment. Sustained inflation in Argentina, without a corresponding increase in the price paid by consumers for our products in the local market would have a negative effect on our results of operations and financial condition. The variability of inflation in Argentina makes it impossible to estimate with a reasonable degree of certainty how our activities and results of operations will be affected in the future.

Exchange controls in Argentina may impair our ability to service our foreign currency-denominated debt obligations and pay dividends.

After December 2001, Argentine authorities implemented a number of monetary and currency exchange control measures that included restrictions on the withdrawal of funds deposited with banks, the obligation to deposit with the Argentine Central Bank foreign currency from exports, restrictions on the transfers of funds abroad as well as restrictions relating to the servicing of foreign debt. The Central Bank has since issued a number of regulations aimed at gradually normalizing the domestic exchange market and, as a result, most restrictions in connection with the repayment of foreign creditors and the payment of dividends to foreign shareholders have been lifted. Nevertheless, certain exchange controls, including those imposed on foreign loans to the Argentine private sector, remain in place, with related requirements concerning the term of such loans, their denomination and transferability. See “Item 3. Exchange Rates—Exchange controls,” and “Item 5. Description of Indebtedness.”

As a result of the global economic crisis and political and economic instability in Argentina, the Argentine Government may impose exchange controls and other related measures. If the Argentine Government imposes exchange controls and other restrictions on the transfer of funds, we may be unable to make principal or interest payments on our debt when they become due or to pay dividends.

Limits on exports of hydrocarbons and related oil products have affected and may continue to affect our results of operations.

In recent periods, Argentina has faced difficulties in satisfying its domestic energy needs. As a result, the government has enacted a series of measures limiting the export of hydrocarbons and related oil products, which has inhibited our ability to profit from higher prices for these commodities on the international market, hindered us from offsetting sustained increases in costs endemic to the energy industry, and materially affected our competitiveness and results of operations.

In April 2004, in order to facilitate the recovery of natural gas prices, the Secretary of Energy entered into an agreement with natural gas producers requiring them to sell a specified amount of gas in the local regulated market. During 2006, the Secretary of Energy required producers to redirect gas earmarked for export to instead supply local thermal power plants and gas distribution companies. In January 2007, the Secretary of Energy confirmed that the ability to export hydrocarbons would be subject to the satisfaction of domestic needs and that exports sales would have to be authorized on a case-by-case basis by the Secretary of Energy. These measures prevent us from benefiting from the higher margins offered by the export market. In 2007, upon the expiration of the aforementioned agreement, the Argentine government and producers signed a new agreement effective until 2011 aimed at securing the domestic supply of gas.

Under these agreements, temporary limits on certain natural gas exports have been imposed to avoid a crisis in the local supply of natural gas, depriving us of the higher margins offered by export prices. During 2005 and 2006, the Secretary of Energy requested producers to redirect gas for export to supply thermal plants and gas distribution companies. This decision limited our total gas export volumes by a daily average of approximately 110 thousand cubic meters and 339 thousand cubic meters, respectively. In 2007 and 2008, our total gas export volume was limited by a daily average of about 420 thousand cubic meters and 31 thousand cubic meters, respectively.

Similarly to restrictions imposed on the export of natural gas, pursuant to Resolution No. 1679/04, enacted in December 2004, producers must obtain the approval of the Argentine government prior to exporting crude oil or diesel oil. To obtain this approval, exporters must demonstrate that they have either satisfied local demand requirements or have granted the domestic market the opportunity to acquire oil or diesel oil under terms similar to current domestic market prices and, in the case of diesel oil, they must also demonstrate, if applicable, that commercial terms offered to the domestic market are at least equal to those offered to their own gas station network. Furthermore, in December 2006, pursuant to Resolution No. 1338/06, the Secretary of Energy extended these regulations to the export of gasoline, fuel oil and fuel oil mixtures, diesel oil, aero kerosene, jet fuel, lubricants, asphalts, coke and by-products for use in the petrochemical industry. In response to an increase in fuel prices in the domestic market, in January 2008 the Argentine government temporarily prohibited the exports of gasoline and diesel oil until the domestic market was fully supplied at the prices in force on October 31, 2007.

In the future, the extension of these restrictions could significantly and adversely affect the profitability of our operations, preventing us from capturing the upside of export prices, and negatively impacting the total volume of refined products sold in the domestic market, due to our need to manage crude oil volumes processed in accordance with our storage capacity.

We cannot assure you that the Argentine government will not increase export restrictions on hydrocarbons and related oil products. If it were to do so, our financial condition and results of operations could be adversely affected.

Export taxes on our products have negatively affected, and may continue to negatively affect, the profitability of our operations.

In order to discourage exports, secure domestic supply and fix a reference price for crude between producers and refineries, on March 1, 2002, the Argentine government imposed a withholding tax on exports of hydrocarbons, initially lasting five years.

This tax framework prevented us from benefiting from significant increases in international prices for oil, oil related products and natural gas, hindered us from offsetting sustained increases in costs endemic to the energy industry, and materially affected our competitiveness and results of operations.

Effective November 2007, the Ministry of Economy and Production adopted a more onerous method for calculating withholding taxes on exports of crude oil and certain oil by-products. In case of crude oil, under this method, when the international price for crude oil exceeds US$60.90 per barrel, the price the producer receives is capped at US$42 per barrel. At prices between US$45 and US$60.90 per barrel, the producer pays a withholding tax of 45%. This tax regime has had a negative impact on our Refining and Distribution business unit, particularly on exports of paraffins, other heavy products and gasoline. See “Item 5. Operating and financial review and prospects—Factors affecting our consolidated results of operations—Regulations of the Energy Industry in Argentina—Withholding Taxes on Exports”.

We cannot assure you that the Argentine government will reduce current export tax rates or will not increase them further. We do not know the government’s future intentions in regard to export taxes. As a consequence, we cannot predict the impact that any changes may have on our results of operations.

Price controls have affected, and may continue to affect, our results of operations and capital expenditures.

The Argentine government has imposed a series of regulations on the energy sector to limit the prices charged to end users in an effort to reduce the inflationary impact of high international commodity prices and to guarantee domestic supply. These regulations have had a material adverse impact on our results of operations. See “Regulation of our Businesses”.

a) Natural gas and electricity

Pursuant to the Public Emergency Law, Petrobras Energía was precluded from increasing the price of gas and electricity sold in the domestic market. This limitation, within the context of the peso devaluation and subsequent inflation, resulted in a substantial change in the economic and financial balance of our energy and gas-related businesses, significantly affecting our operating results and prospects.

In April 2004, Petrobras Energía and other gas producers, entered into an agreement with the Argentine government that provided for a schedule of gradual increases in gas prices in the domestic market that would culminate in a complete deregulation of the wellhead price of natural gas in 2007. Since September 1, 2005, wellhead prices have been deregulated for sales to electricity generation and gas distribution companies supplying industrial clients directly, with the Gas Electronic Market (Mercado Electrónico del Gas) starting operations for gas surplus spot transactions. In 2007, upon expiration of the aforementioned agreement, the Argentine government and producers signed a New Natural Gas Producers Agreement. This new agreement modified the prescribed extent of the total deregulation of wellhead prices of gas, adopting a schedule of defined prices, whereby the 2005 price remains unchanged for the residential sector and an annual average increase of approximately 6.5% is established for the Compressed Natural Gas (“CNG”), electricity generation, and industrial sectors, although the price for the latter remains freely negotiable. This new resolution has already come into effect by sector according to schedule; the residential supply commitment is the last one to expire in the year 2011. This agreement provides for minimum supply requirements that gas producers must supply to the domestic market and electricity generators.

With respect to electricity generation, with the enactment of the Public Emergency Law, the Argentine government implemented the pesification of dollar-denominated prices in the Wholesale Electricity Market (“WEM”), and set a price cap on gas supplied for electric power generation. This regulatory change imposed a deviation from the marginal cost system previously in force, and forced generators to set prices based on the price of natural gas, regardless of the fuel actually used in generation activities. In December 2004, the Secretary of Energy agreed to approve successive seasonal electricity price increases to rates that would at least cover total monomic costs by November 2006 (to include compensation for actual output at spot market rates, or energy, plus compensation for capacity placed at the disposal of the spot market, or power capacity). This commitment has not been carried out in practice. In November 2008 partial adjustments to seasonal prices were approved, applicable to the period between November 2008 and April 2009, but the adjusted prices still fail to cover costs actually incurred in the generation system, as a whole.

In addition, the Secretary of Energy committed to pay for energy at the marginal price obtained in the spot market and to pay for power capacity at the U.S. dollar values that were in effect prior to the enactment of the Public Emergency Law, once the new generation capacity is brought into the system under the Fund for the Investment Needed to Increase the Supply of Electricity in the Wholesale Market (Fondo para las Inversiones Necesarias que permitan incrementar la oferta de energía eléctrica en el Mercado Eléctrico Mayorista) (“FONINVEMEM”) plan. See “Item 5. Operating and Financial Review and Prospects—Analysis of Consolidated Results of Operations—Factors Affecting our Consolidated Results of Operations—Regulation of the Energy Industry in Argentina—Price Controls and Restrictions on Exports—Electricity Generation”.

Through these combined measures, the Argentine government is expected to gradually restore economic and financial balance to the natural gas and electricity sectors. Our results and capital expenditure plans, however, may be adversely affected if (i) the agreed schedule of increases in natural gas prices or the commitments with respect to electricity price increases fail to be fully implemented by the Argentine government or (ii) the government applies its regulatory emergency authority or adopts other regulations to control prices or supply.

b) Downstream margins

The downstream business in Argentina has been and may continue to be subject to extensive regulatory changes that affect prices and profitability, and these changes have had and may continue to have an adverse effect on the results of our operations. Downstream margins in Argentina have significantly declined since the enactment of the Public Emergency Law. Since 2002, the Argentine government has actively intervened in the domestic fuel market to ensure full supply and to limit increases in the price of gasoline and diesel oil at the retail level that would have resulted from: (i) higher costs due to increases in crude oil international prices (ii) the peso devaluation and (iii) domestic inflation. During 2007 and 2008, some flexibility was reintroduced to the domestic market that allowed for gradual increases in fuel prices, which facilitated a partial recovery in marketing margins.

The Argentine fuel market has steadily grown over the last several years. To secure domestic supply, in the face of growing demand and the inability of Argentine refineries to significantly increase production levels, in 2006 the Secretary of Domestic Trade promulgated Resolution No. 25/2006, which required refining companies to supply all diesel oil market demand with a baseline equal to the same month of the prior year’s demand, plus an estimated market variation.

In order to comply with this resolution, Petrobras Energía was required to import 202 thousand cubic meters of diesel oil in 2008, 208 thousand cubic meters in 2007 and 85 thousand cubic meters in 2006. Considering the differential between import and retail diesel oil prices, we recognized losses of P$151 million, P$106 million and P$38 million in 2008, 2007 and 2006, respectively. In 2008, under Resolution No. 121/2008 issued by the Ministry of Federal Planning, Public Investment and Services, we were able to import diesel oil at domestic market prices under the Total Energy Program (“PET”), due to a provision whereby the Treasury subsidized the cost of imports. This subsidization significantly mitigated the losses we would have otherwise had to bear under the supply requirements of Resolution No. 25/2006.

In the future, subject to the production capacity of our plants and the real market growth levels, we may be required to continue importing diesel oil pursuant to Resolution No. 25/2006, with a probable adverse effect upon our results of operations, as we do not have any assurance that the government will subsidize the cost of these programs in the future, as it did while Resolution No. 121/2008 was effective.

We cannot assure you that the Argentine government will not make further regulatory changes that will adversely affect our refining margins. See “Factors Affecting Our Consolidated Results of Operations—Regulation of the Energy Industry in Argentina—Price Controls and Restrictions on Exports—Downstream Margins”.

The Argentine government and our affiliated utility companies are in the process of renegotiating utility contracts, and the recoverability of our investments in these affiliates depends on the successful completion of these negotiations.

The macroeconomic state of the country after the enactment of the Public Emergency Law impacted the economic and financial condition of utility companies in Argentina. The combined effect of (i) the peso devaluation, (ii) the pesification of rates on a one-to-one basis and (iii) financial debts primarily denominated in foreign currency, adversely affected the utility companies’ financial condition, results of operations and ability to satisfy financial obligations and pay dividends. Although some of these utility companies have been successful in restructuring their indebtedness, their return to financial stability and profitability on a long-term basis depends on a successful negotiation of tariff increases with the Argentine government. The Utilities Contract Renegotiation and Analysis Committee (Unidad de Renegociación y Análisis de Contratos de Servicios Públicos) (“UNIREN”) (the agency created by the Argentine government to, among other things, provide assistance in the utility renegotiation process, execute comprehensive or partial agreements with utility companies and submit regulatory projects related to provisional rate adjustments) is currently in the process of renegotiating contracts with our affiliates Edesur S.A. (“Edesur”) and Transportadora de Gas del Sur S.A. (“TGS”). These discussions are in different stages. See “Business Overview—Gas and Energy—Gas Transportation—TGS—Regulated Energy Segment” and “Business Overview—Gas and Energy— Electricity—Electricity Distribution- Edesur” and “Regulation of Our Businesses—Argentine Regulatory Framework—Natural Gas and Electricity”.

We cannot assure you that these discussions will ultimately result in a level of tariff increases sufficient for our affiliated utility companies to return their regulated business to financial stability and profitability in the near future or on a long-term basis.

Factors Relating to Our Business

Substantial or extended declines in the prices of crude oil and related oil products may have an adverse effect on our results of operations and financial condition.

A significant amount of our revenue is derived from sales of crude oil and related oil products. We do not and will not have control over factors affecting international prices for crude oil and related oil products. These factors include: political developments in crude oil producing regions; the ability of the Organization of Petroleum Exporting Countries (“OPEC”) and other crude oil producing nations to set and maintain crude oil production levels and prices; global supply and demand for crude oil; competition from other energy sources; government regulations; weather conditions and global conflicts or acts of terrorism.

Changes in crude oil prices generally result in changes in prices for related oil products. International oil prices have fluctuated widely over the last ten years.

In 2008, oil average prices reached a high for the seventh year in a row, marked, however, by the sudden end of this upward trend. Oil prices were highly volatile. The benchmark West Texas Intermediate (“WTI”) crude reached a high of US$145 per barrel in July 2008, but by the end of the year and in line with the global economic crisis, such prices experienced a clear and steep decline to below US$40, with a resulting drop in the price for oil by-products. As of December 31, 2008, the WTI closed at US$44.6 per barrel, 54% lower than the price as of the same date in 2007. During 2008, the average WTI was US$99.6 per barrel, compared to US$72.3 and US$66.0 in 2007 and 2006, respectively.

Substantial or extended declines in international prices for crude oil and related oil products may have a material adverse effect on our business, results of operations and financial condition, and the value of our proved reserves. In addition, significant decreases in the prices for crude oil and related oil products may cause us to reduce or alter the timing of our capital expenditures, and this could adversely affect our production forecasts in the medium term and our reserve estimates in the future.

Our crude oil and natural gas reserve estimates involve some degree of uncertainty and may prove to be incorrect over time.

The proved crude oil and natural gas reserves set forth in this annual report account for our estimated quantities of crude oil, natural gas and natural gas liquids that geological and engineering data demonstrate with reasonable certainty to be recoverable from known reservoirs under existing economic and operating conditions (i.e. with prices and costs as of the estimate date). Our proved developed crude oil and natural gas reserves are those that can be expected to be recovered through existing wells with existing equipment and operating methods.

DeGolyer and MacNaughton, international technical consultants, audited 70% of our total reserves as of December 31, 2008. See “Business Overview—Oil and Gas Exploration and Production—Reserves”.

Crude oil and natural gas reserves are reviewed annually taking into consideration many factors, including:

	•		new production or drilling activities;
	•		field reviews;
	•		the addition of new reserves from discoveries or extensions of existing fields;
	•		changes in the international prices of oil and gas;
	•		the application of improved recovery techniques; and
	•		new economic conditions.

Proved reserve estimates could be materially different from the quantities of crude oil and natural gas that are ultimately recovered, and downward revisions of our estimates could impact our future results of operations and business plan, including our level of capital expenditures.

We may not be able to replace our oil and gas reserves and this may have an adverse impact on our future results of operations and financial condition.

In recent years, we have experienced a decline in reserves and production. The possibility of replacing our crude oil and gas reserves in the future is dependent on our ability to access new reserves, both through successful exploration and reserve acquisitions. We consider exploration, which carries inherent risks and uncertainties, our main vehicle for future growth and reserves replacement.

We have limited capital resources to implement an ambitious capital expenditure program. Moreover, we face strong competition in bidding for new production blocks, especially those blocks with the most attractive crude oil and natural gas reserves. Without successful exploration activities or reserve acquisitions, our proved reserves will decline as our oil and gas production will be forced to rely on our current portfolio of assets.

Further decline in reserves and production may limit the integration of our upstream and downstream operations, since maximizing the crude oil processing capacity of our refineries would require us to obtain a greater supply of our crude oil from third parties, including imports.

We cannot guarantee that our exploration, development and acquisition activities will result in significant additional reserves. If we are not able to successfully find, develop or acquire additional reserves, our reserves and therefore our production may continue to decline and, consequently, this may adversely affect our future results of operations and financial condition.

Our operations could be adversely affected by events beyond our control.

Our activities are subject to numerous risks, many of which are beyond our control. Our operations may be curtailed, delayed, interrupted or canceled as a result of weather conditions, mechanical difficulties, shortages or delays in the delivery of equipment, coercive actions and compliance with governmental requirements, or other events that could adversely impact our costs of production, results of operation and financial condition. For example, from March 9, 2007 to April 10, 2007, operations in Block 18, in Ecuador were curtailed as a result of coercive actions taken by local communities. During this period, cumulative oil production decreased by approximately 305,000 barrels of oil equivalent in our participation.

Our activities may be adversely affected by events in countries in which we do business.

Our operations are concentrated in Latin America, a region that has experienced significant economic, social, political and regulatory volatility. In recent periods, many governments in Latin America have taken steps to assert greater control or increase their share of revenues from the energy sector, spurred by soaring oil and gas prices and nationalist politics. See “Regulation of our Businesses—Regulatory Framework outside of Argentina—Petroleum and Gas”.

These risks are evidenced by changes in business conditions that we have experienced in Venezuela, Bolivia and Ecuador.

Venezuela

In 2006, the Venezuelan government took a majority stake in all hydrocarbon operations in that country that were the subject of operating agreements entered into between 1992 and 1997 by mandating that such operating agreements be converted into mixed-ownership companies. As a result of this conversion, four of Petrobras Energía’s pre-existing operating agreements were converted into mixed-ownership companies. The conditions imposed under the new operating agreements had an adverse impact on the recoverability of our assets in Venezuela. In light of this new contractual framework, as of December 31, 2005, we recognized impairment charges of P$424 million to adjust the book value of our assets in Venezuela to their estimated recoverable value.

The recoverability of these investments is highly sensitive to crude oil price volatility, to economic, social and regulatory changes in Venezuela and, particularly, to the decisions made by management of the mixed-ownership companies. As a result of the aforementioned variables, in the years ended December 31, 2008, 2007 and 2006, we recorded writedowns of P$154 million, P$33 million and P$186 million, respectively, related to our assets in Venezuela. For more detail on the conversion into mixed-ownership companies and regulations imposed by the Venezuelan government, see “Item 4. Oil and Gas Exploration and Production—Production—Production Outside of Argentina—Venezuela”

Bolivia

In May 2006, the Bolivian government enacted Supreme Decree No. 28,701, which provided, among other things, for the nationalization of hydrocarbon resources in Bolivia. This decree mandated that as of May 1, 2006, oil companies had to deliver all property related to hydrocarbon production for sale to the national operator, Yacimientos Petrolíferos Fiscales Bolivianos (“YPFB”). In addition, this decree provided that the Bolivian state would recover full participation in the entire oil and gas production chain and to that end provided for the nationalization of the shares of stock necessary for YPFB to have at least 50% plus one of the shares in a number of companies, including our affiliate Petrobras Bolivia Refinación S.A., in which we had a 49% interest, in partnership with Petrobras, which held a 51% interest.

Pursuant to the terms of the contract between Petrobras Energía and YPFB, we, through our branch in Bolivia, agreed to conduct, at our own expense and on our own account, exploration and production activities in the Colpa Caranda area on behalf of YPFB. In addition, in June 2007, we signed an agreement, through our subsidiary Petrobras Energía Internacional S.A., under which we sold our interest in Petrobras Bolivia Refinación S.A. to YPFB.

Ecuador

In April 2006, the Ecuadorian government approved the Law Amending the Hydrocarbon Law (“Law 42”), which assigned the Ecuadorian state a share of at least 50% of the revenues resulting from any increase in the average monthly sales price of Ecuadorian crude oil, based upon the average monthly sales price for such oil as of the execution date of the relevant agreements, stated in constant values as of the month of settlement. In October 2007, the Ecuadorian President issued an amendment to the regulations applying Law 42, further increasing the Ecuadorian government’s share of revenues from increases in the price of crude oil to 99%, reducing the oil companies’ share to 1%.

EcuadorTLC S.A. and Petroecuador, the national oil company of Ecuador, adopted significant opposing interpretations as to the applicability and scope of Law 42 in connection with revenues from the Palo Azul operating agreement in which the Ecuadorian state’s share in extraordinary revenues resulting from any increase in crude oil prices was already established.

The effect of these regulatory changes has been a material modification of the conditions set forth at the time of execution of our participation agreements, adversely affecting the valuation of our projects in Ecuador, and negatively impacting our assessment of recoverability. Accordingly, as of December 31, 2007, we recorded an impairment allowance of P$759 million to write down the book value of our Ecuadorian assets to their probable recoverable value.

During 2008, EcuadorTLC S.A. and the Ecuadorian state conducted negotiations aimed at designing a business framework that secures the sustained development of operations while focusing on long-term profitability and social responsibility. Within this framework, the parties agreed to resolve their previously conflicting interpretation of the applicability of Law 42. Under this agreement, EcuadorTLC S.A. made a payment in the amount of US$44 million, which was considered a settlement of any difference arising from the application of the Law 42 until the execution date of the Amendment Agreements mentioned below, whereupon the Tax Equity Law became effective.

In October 31, 2008 EcuadorTLC S.A. and Petroecuador signed Amendment Agreements which, among other things, provided terms and conditions for the exploitation of Block 18 for one year. During such period, negotiations will be conducted as to whether or not such agreements will be converted to a new contractual modality. Under the Amendment Agreements, the Ecuadorian state’s interest in the Pata and the Palo Azul fields has increased to 40% and 60%, respectively. In addition, upon execution of the Amendment Agreements the Tax Equity Law will be applicable whereby the Ecuadorian State receives 70% of revenues from sales at prices over a new base price of US$45.43 per barrel. Furthermore, on December 31, 2008, Petrobras Energía Ecuador and Petroecuador signed a Termination Agreement in connection with Block 31 Participation Agreement, under which Block 31 was returned to the Ecuadorian State.

These measures, and any other similar measures taken in the future by governments in countries where we conduct business, have had and may continue to have a material adverse effect on our business and results of operations.

We could be subject to organized labor action.

Many of our operations are highly labor-intensive and require a significant number of workers. The sectors in which we operate are largely unionized. We have experienced organized work disruptions and stoppages in the past, frequently due to strikes by employees of contractors we employ. We cannot assure you that we will not experience such disruptions or work stoppages in the future, and any such action could adversely affect our business and revenues.

During 2007 and 2008 unionized employees went on strike over salary increases, adversely affecting our operations. In 2008, in the Austral basin in Argentina, the pace of production slowed as a result of the labor strike held by our contractor’s employees throughout May 2008, with an adverse impact on production levels in subsequent months.

We cannot predict what actions unionized personnel might take in the future. Furthermore, we do not maintain insurance coverage for business interruptions, including business interruptions caused by labor action. Strikes, picketing or other types of conflict with the unionized personnel could curtail our operations and cause higher costs, having an adverse effect on our results in the long-term.

Our operations run the risk of causing environmental damage, and any changes in environmental laws may increase our operational costs.

Some of our operations are subject to environmental risks that may arise unexpectedly and result in material adverse effects on our results of operations and financial condition. We have not incurred any material pollution liabilities as a result of operations to date. We cannot assure you that we will not incur additional costs related to the environment in the future, which could negatively impact our results of operations.

In addition, we are subject to extensive environmental regulation both in Argentina and in the other countries in which we operate. Local, provincial and national authorities in Argentina and the other countries where we operate are moving towards more stringent enforcement of environmental laws, which may require us to incur higher compliance costs. We cannot predict what additional environmental legislation or regulations will be enacted in the future or the potential effects on our financial condition and results of operations.

Item 4. INFORMATION ON THE COMPANY

HISTORY AND DEVELOPMENT

History

Petrobras Energía

Petrobras Energía S.A. is a corporation (sociedad anónima) organized and existing under the laws of the Republic of Argentina and registered on November 17, 1947 with the Public Registry of Commerce, under No.759, page 569, Book 47, Volume A, with a term of duration expiring June 18, 2046. Our principal place of business is located at Maipú 1, (C1084ABA), Buenos Aires, Argentina. Telephone: 54-11-4344-6000, fax 54-11-4344-6315 and web site at www.petrobras.com.ar. Our process agent in the U.S. is CT Corporation System, located at 111 Eighth Avenue, New York, New York 10011.

We are an integrated energy company, engaged in oil and gas exploration and production, refining, petrochemicals, electricity generation, transmission and distribution and hydrocarbon marketing and transportation. As of December 31, 2008, we conduct operations in Argentina, Bolivia, Brazil, Ecuador, Mexico, Peru, Colombia and Venezuela. Our operations are currently divided into four business segments that are in turn supported by corporate functions. The four business units are: (1) Oil and Gas Exploration and Production, (2) Gas and Energy, (3) Refining and Distribution, and (4) Petrochemicals.

Petrobras Energía was founded in 1946 as a shipping company by the Perez Companc family. In the mid-1950’s, Petrobras Energía began its forestry operations when it acquired an important forestry area in northeastern Argentina. In the 1960s, it began servicing oil wells; over time, its maritime operations were gradually discontinued and replaced by oil-related activities.

The development of Petrobras Energía’s oil and gas business is marked by two significant events. The first occurred in 1991 when Petrobras Energía was awarded concessions to operate Puesto Hernandez, one of the most important oilfields in Argentina, in terms of reserves and production, and the Faro Vírgenes and Santa Cruz areas in the Austral basin. As a result of these concessions, Petrobras Energía has become one of the largest oil and gas producers in Argentina.

The second event that was a key factor in Petrobras Energía’s oil and gas operations growth abroad occurred in March 1994 when Petrobras Energía was awarded the Oritupano-Leona area in Venezuela. This was the first step towards a significant regional expansion of the businesses that consolidated later on.

Between 1990 and 1994 many state-owned activities were privatized in Argentina. As a result, Petrobras Energía acquired interests in companies operating in natural gas transportation and distribution, electricity generation, transmission and distribution, oil transportation, storage and shipment and refining. These activities have formed the core of Petrobras Energía’s businesses.

Petrobras Energía has in the past conducted operations in other industries, including construction, real estate, telecommunications, mining and agriculture.

Beginning in 1997, and through successive divestments, Petrobras Energía restructured its business strategy with a focus on the energy sector. As a result of these divestitures and the development of Petrobras Energía’s energy businesses, Petrobras Energía has become a vertically-integrated energy company.

On January 21, 2005, the shareholders’ meetings of Petrobras Energía, Eg3 S.A. (“Eg3”), Petrobras Argentina S.A. (“PAR”) and Petrolera Santa Fe S.R.L. (“PSF”), approved the merger of these companies, pursuant to which Petrobras Energía was the surviving company, having absorbed Eg3, PAR and PSF. The effective merger date was set at January 1, 2005, and as of that date all assets, liabilities, rights and obligations of the absorbed companies were assumed by Petrobras Energía.

On March 27, 2009, the General Regular and Special Shareholders’ Meeting of Petrobras Energía adopted the change of the Company’s corporate name to Petrobras Argentina S.A. As of the date of this annual report, the Company is in the process of completing the necessary formalities, including the registration of this name change before the relevant Argentine regulatory bodies, to bring this change into effect.

Petrobras Energía Participaciones

Petrobras Energía Participaciones S.A. is a corporation (sociedad anónima) organized and existing under the laws of the Republic of Argentina with a duration of 99 years from the date of its incorporation, September 25, 1998. PEPSA’s principal executive offices are located at Maipú 1, 22nd Floor, C1084ABA Buenos Aires, Argentina, Telephone: 54 11 4344-6000. The company’s process agent in the U.S. is CT Corporation System, located at 111 Eighth Avenue, New York, New York 10011.

Petrobras Energía Participaciones is a holding company that operates exclusively through its subsidiary, Petrobras Energía and its subsidiaries, as discussed above. Petrobras Energía Participaciones’s original name was PC Holdings S.A., and the company was formed in 1998 for the sole purpose of owning shares of Petrobras Energía. Members of the Perez Companc family controlled both Petrobras Energía Participaciones and Petrobras Energía at that time. As of December 31, 1999, Petrobras Energía Participaciones owned 28.92% of Petrobras Energía’s common stock.

On January 25, 2000, Petrobras Energía Participaciones acquired control of Petrobras Energía as a result of an exchange offer, increasing its ownership interest in Petrobras Energía to 98.21%. On October 17, 2002, Petrobras Participaciones, S.L. (“PPSL”), a wholly owned subsidiary of Petróleo Brasileiro S.A.—Petrobras (“Petrobras”), acquired from the Perez Companc family and Fundación Perez Companc their entire ownership interest, or 58.6%, in the capital stock of Petrobras Energía Participaciones. As result of the merger of Petrobras Energía with Eg3, PAR and PSF, Petrobras Energía Participaciones’s interest in Petrobras Energía declined from 98.21% to 75.82%, and considering its 58.62% shareholding in Petrobras Energía Participaciones, Petrobras increased its total shareholding in Petrobras Energía to 67.2%. Petrobras is a Brazilian company whose business concentrates on exploration, production, refining, sale and transportation of oil and by-products in Brazil and abroad. Petrobras is a mixed-capital company with a majority of its voting capital owned by the Brazilian federal government.

Corporate reorganization of Petrobras Energía and Petrobras Energía Participaciones

On January 31, 2009, the Special Shareholders’ Meetings of Petrobras Energía and Petrobras Energía Participaciones approved the merger of these two companies, pursuant to which Petrobras Energía Participaciones would be merged and absorbed into Petrobras Energía, and Petrobras Energía would be the surviving company. The effective merger date was set at January 1, 2009, and as of that date all assets, liabilities, rights and obligations of the absorbed companies are considered incorporated into Petrobras Energía. Immediately following the merger, Petrobras will continue to hold 67.2% of the outstanding shares of Petrobras Energía. As of the date of this annual report, the companies are in the process of completing the necessary formalities in Argentina to finalize this merger.

Once the requisite Argentine formalities have been completed and the merger is effective, shareholders of Petrobras Energía Participaciones will receive shares of Petrobras Energía (in the United States, in the form of American Depositary Receipts), and the American Depositary Receipts of Petrobras Energía Participaciones will be removed from listing on the NYSE and from registration with the SEC. Immediately subsequent to this exchange of shares, American Depositary Receipts, each representing 10 Class B shares of Petrobras Energía, will be listed and begin trading on the NYSE.

Capital Expenditures and Divestitures

For a description of our capital expenditures see “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources”. For a description of our most significant divestitures see “Item 5. Operating and Financial Review and Prospects—Factors Affecting Our Consolidated Results of Operations—Operations in Ecuador”, “—Sale of Petrobras Energía’s Interest in Petrobras de Valores Internacional de España S.L. (PVIE)” and “—Changes in Our Portfolio”.

BUSINESS OVERVIEW

Our Strategy

Our long-term strategy is to grow as an integrated energy company with a regional presence, while being a leader in profitability as well as social and environmental responsibility.

The main points of this strategy are:

•

Increasing oil and gas reserves and production, to secure sustainable growth.

•

Seeking profitability in the downstream business in Argentina, through a balanced crude production — refining — logistics — distribution chain.

•

Generating energy solutions through the development of businesses in the gas and energy areas that will allow for capitalizing on the synergies with the natural gas reserves of the Petrobras group.

•

Consolidating our leading position in the South American styrenics markets.

•

Maintaining our financial solvency, while pursuing operating and management efficiency and the development of human resources.

In order to adhere to this strategy, we consider the following to be essential:

•

A commitment to protecting the quality of our goods and services, the environment and the health and safety of our employees, contractors and neighboring communities.

•

Adoption of, and compliance with, corporate governance practices in line with recognized best practices.

•

Maintenance of a management style that favors communication and teamwork, fostered by the value of the people that work in our organization.

•

Developing new business opportunities in order to maximize potential synergies and capitalize on complementary business opportunities with Petrobras.

Petrobras Energía currently manages our activities, with the support of a corporate center, in four business segments: (1) Oil and Gas Exploration and Production, (2) Gas and Energy, (3) Refining and Distribution, and (4) Petrochemicals. The discussion that follows with respect to the operations of each of our four business segments relates to the operations of Petrobras Energía, unless otherwise indicated.

Our Principal Market

Both Petrobras Energía and Petrobras Energía Participaciones are Argentine corporations. As of December 31, 2008, with respect to Petrobras Energía, approximately 70% of total assets, 73% of net sales, 68% of combined crude oil and gas production and 62% of proved oil and gas reserves were located in Argentina. Fluctuations in the Argentine economy and actions adopted by the Argentine government have had and may continue to have a significant effect on Argentine private sector entities, including us. Specifically, we have been affected and may be affected by inflation, interest rates, the value of the peso against foreign currencies, price and export controls on oil and oil by-products, business regulations, tax regulations and in general by the political, social and economic environment affecting Argentina and other countries. See “Risk Factors—Factors Relating to Argentina”.

Historically, the Argentine economy was characterized by its macroeconomic instability and by periods of low or negative growth and high and variable levels of inflation and currency devaluation. In 1988, 1989 and 1990, the annual inflation rates were approximately 388%, 4,924% and 1,344%, respectively, based on the Argentine consumer price index and approximately 422%, 5,386% and 798%, respectively, based on the Argentine wholesale price index. As a result of inflationary pressures, the Argentine currency was devalued repeatedly during the 1960s, 1970s and 1980s. 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, the Argentine government implemented various plans and utilized a number of exchange rate systems and controls.

In the 1990s deep and drastic economic reforms were implemented in terms of State reform, privatization of public companies and utilities and opening of the economy. The pillar of the economic reform was the Convertibility Law enacted in 1991. The Convertibility Law fixed the exchange rate at one peso per U.S. dollar and required that the Central Bank maintain reserves in gold and foreign currency at least equivalent to the monetary base. In the 1991-1997 period, the economy experienced growth, with exchange stability and low inflation rates.

Partly due to the crisis of the convertibility model, in 1998 the Argentine economy entered into a recession, hitting its lowest point in December 2001 that resulted in a massive withdrawal of deposits and capital outflow. In this situation, and with a fall in GDP of approximately 10%, the Argentine government implemented a number of monetary and exchange control measures, which proved to be insufficient and caused a sharp rise in social discontent. This triggered a political, social and economic crisis.

On January 1, 2002 Argentina suspended the payment of a portion of its sovereign debt. Later that month, the Argentine Congress enacted the Public Emergency Law, whereby monetary, financial and exchange measures were implemented to overcome the economic crisis in the short term. These events resulted in dramatic changes in the economic model and put an end to the US dollar-peso parity, leading to a significant devaluation of the Argentine peso.

The Federal Executive Branch implemented a number of far-reaching initiatives, which included:

•

Pesification of certain assets and liabilities denominated in foreign currency and held in the country;

•

Amendment of the charter of the Central Bank authorizing it to issue money in excess of the foreign currency reserves, grant short-term loans to the federal government and provide financial assistance to financial institutions with liquidity or solvency problems;

•

Pesification and elimination of indexing clauses on utility rates, fixing those rates in pesos at the P$1=US$1 exchange rate; and

•

Implementation of taxes on hydrocarbon exports and certain related oil products, among others.

In 2002, with an active intervention by the government in the development of the economy, as a consequence of the significant political and economic changes that resulted from the severe crisis at the end of 2001, commercial and financial activities were virtually paralyzed, further aggravating the economic recession which included a 10.9% decline in the GDP. Within this context, the peso devalued 238% against the dollar and wholesale inflation grew 118.2%. Towards the end of 2002, the Argentine government implemented different measures aimed at stimulating the economy and abrogating certain restrictions to gradually normalize the foreign exchange market and the commercial and financial flow of foreign currency.

In subsequent years, the activity level exhibited an accelerated recovery, taking advantage on the existing idle capacity, a high real exchange rate and increased international prices for commodities. During this period, inflation remained stable and there was an excess supply of U.S. dollars, supported by a significant trade surplus. The Central Bank sought to prevent the nominal appreciation of the Argentine peso through the purchase of foreign currency, increasing its international reserves up to US$46 billion in 2007. During this stage, social indicators such as unemployment exhibited highly significant improvements.

The Argentine government has maintained a surplus in its public accounts, though increasingly reduced, to meet its financing needs. In 2005, the government was able to restructure the debt in default with 76% of creditors accepting the government’s exchange proposal, with reductions in principal amount, term extensions and reductions in interest rates. Early in 2006, Argentina prepaid the debt outstanding with the International Monetary Fund (“IMF”) (around US$10 billion) using freely available Central Bank reserves. Since the 2005 debt exchange and up through 2007, the Argentine country-risk remained below 500 basis points.

In 2008, the Argentine economy maintained high growth of 7%, according to official data. However, this growth rate was below prior years’ records, with a clear deceleration in the last months of the year. Although official inflation remained at approximately 7%, alternative, non-governmental measurements exhibited persistent inflationary pressure, which declined in the latter part of the year, consistent with the economic slowdown.

During 2008 exports reached record figures (above US$70 billion), driven by higher international prices but with a meager performance in volume, whereas imports were slightly below US$60 billion, with a balance of trade in excess of US$10 billion. Unlike previous years and despite the benefit of record commodity prices, the foreign currency supply did not show a surplus, reserves at the Central Bank stagnated and the nominal exchange rate showed a depreciation, which averaged US$1 = P$3.16 and closed the year at US$1 = P$3.45, triggered by capital outflows. Within this context, public accounts showed a primary surplus of about 3% of GDP, supported by record revenues from export withholdings. However, and with the combined effect of an international context affected by the financial crisis and a reduced domestic growth, raising of voluntary funds to repay the debt was insufficient and the government had to resort mostly to intra-public sector financing. Consequently, the country-risk exhibited a clear upward trend, which was exacerbated as from September 2008 and reached approximately 1,800 basis points. By the end of 2008, Congress approved a bill which eliminated the private pension system and provided for a return to the public pension regime. This allowed the government to have additional funds available in the short term.

During the first quarter of 2009, according to private estimates, the Argentine economy exhibited a moderate contraction. Industrial activity, in turn, showed a substantially more significant decline, with very strong drops in some sectors, especially the automobile sector. Exports were impacted by the strong drop in international prices for commodities and reduced export volumes in the largest lines of products. In line with these trends, import volumes also declined as a result of declining consumption and investment. Official price indices continue to show controlled inflation (6% year-over-year), but alternative measurements continue to evidence greater inflationary pressures, though less intense than in the two previous years, in line with the trend for the last quarter of 2008. In addition, salaries again showed increases over 20% year-over-year.

The rate of exchange recorded a 7.8% rise, closing at P$3.72 per dollar by the end of the quarter. The increase in the exchange rate against the U.S. dollar was mitigated by the Central Bank through the sale of reserves. The financial system exhibited stagnation in the absolute level of deposits, but with a growing shift toward deposits held in U.S. dollars.

The Argentine government maintained positive fiscal figures, but the nominal primary surplus was reduced to its half compared to the same period of previous year. Tax collection was affected by reduced revenues from export withholdings, but in turn benefited from the elimination of the private capitalization pension system and the return to the public pension regime.

OIL AND GAS EXPLORATION AND PRODUCTION

Overview

The core of our operations is the oil and gas exploration and production business segment, as it is a key link in our business chain. The business segment’s strategy is to:

	•		Use exploration activities as the main vehicle for replacement of reserves;
	•		Look for reserve purchase opportunities which contribute to balance our business portfolio;
	•		Keep an adequate temporal horizon for our business’s reserve to production ratio; and

•

Focus on improving efficiency and performance in our technical and management processes.

As of December 31, 2008, we participated in oil and gas exploration and production activities in Argentina, Venezuela, Peru, Ecuador, Bolivia and Colombia. In addition, we act as a contractor and provide technical and operating support in Mexico.

As of December 31, 2008, our combined crude oil and natural gas proved reserves, including our share of the reserves of our unconsolidated investees, were estimated at 433 million barrels of oil equivalent, approximately 59.2% of which were proved developed reserves and approximately 40.8% of which were proved undeveloped reserves. Crude oil accounted for approximately 51.1% of our combined proved reserves, while natural gas accounted for about 48.9%. As of December 31, 2008, 61.6% of our total combined proved reserves were located in Argentina and 38.4% were located abroad.

During 2008, combined crude oil and natural gas production, including our share in the production of our unconsolidated investees, averaged 128.7 thousand barrels of oil equivalent per day. Crude oil accounted for approximately 75.8 thousand barrels per day, while natural gas accounted for approximately 318.2 million cubic feet per day. Approximately 56.8% of our oil production and 83.7% of our gas production is derived from our operations in Argentina.

Integration with our Refining and Distribution business segment enables us to process a large part of our crude oil production in Argentina. The Genelba Thermal Power Plant (“Genelba”), allows us to use approximately 99 million cubic feet of natural gas per day of our own reserves. In addition, in Argentina our oil and gas exploration and production business segment supplies gas to our Petrochemical and Refining operations.

Our Oil and Gas Exploration and Production Interests

As is commonplace in the oil and gas exploration and production business, we generally participate in exploration and production activities in conjunction with joint venture partners. Contractual arrangements among participants in a joint venture are usually governed by an operating agreement, which provides that costs, entitlements to production and liabilities are to be shared according to each party’s percentage interest in the joint venture. One party to the joint venture is usually appointed as operator and is responsible for conducting the operations under the overall supervision and control of an operating committee that consists of representatives of each party to the joint venture. While operating agreements generally provide for liabilities to be borne by the participants according to their respective percentage interest, licenses issued by the relevant governmental authority generally provide that participants in joint ventures are jointly and severally liable for their obligations to that governmental authority pursuant to the applicable license. In addition to their interest in field production, contractual operators are generally paid their indirect administrative expenses on a monthly basis by their partners in proportion to their participation in the relevant field.

As of December 31, 2008, we had interests in fifty blocks: twenty-seven oil and gas production blocks (nineteen in Argentina and eight outside of Argentina) and twenty-three exploration blocks located within exploration areas or pending authorization for production (eighteen in Argentina and five outside of Argentina). We are directly or indirectly the contractual operator of twenty-eight of the fifty blocks in which we have an interest.

As of December 31, 2008, our total gross and net productive wells were as follows:

		Oil				Gas				Total
Gross productive wells (1)			6,070				368				6,438
Net productive wells (2)			3,253				258				3,511

As of December 31, 2008, our total producing and exploration acreage, both gross and net, was as follows:

		Average
		Producing (1)								Exploration (2)
		Gross				Net (3)				Gross				Net (3)
		(in thousands of acres)
Argentina			4,116				2,604				19,293	(4)			6,861	(5)
Peru			116				70				11,548				5,538
Venezuela			485				125				—				—
Ecuador			25				7				256				77
Bolivia			56				56				—				—
Colombia			81				24				—				—
Total			4,879				2,886				31,097				12,476

The following table sets forth the number of total wells we drilled in Argentina and outside of Argentina and the results for the relevant periods. A well is considered productive for purposes of the following table if it justifies the installation of permanent equipment for the production of oil or gas. A well is deemed to be a dry well if it is determined to be incapable of commercial production. “Gross wells drilled” in the table below refers to the number of wells completed during each fiscal year, regardless of the spud date, and “net wells drilled” relates to our fractional ownership working interest in wells drilled. This table includes wells drilled by our consolidated subsidiaries, companies under joint control and unconsolidated investees.

		Year ended December 31,
		2008								2007								2006
						Outside								Outside								Outside
						of								of								of
		Argentina				Argentina				Argentina				Argentina				Argentina				Argentina
Gross wells drilled:
Production:
Productive wells:
Oil			144				151				184				132				218				60
Gas			15				3				13				6				3				2
Dry wells			—				1				2				—				3				—
Total			159				155				199				138				224				62
Exploration:
Discovery wells:
Oil			6				—				5				—				5				—
Gas			7				1				1				1				6				—
Dry wells			—				—				3				—				4				1
Total			13				1				9				1				15				1
Net wells drilled:
Production:
Productive wells:
Oil			67				83				79.0				115.6				100.4				57.4
Gas			10				3				5.2				5.4				0.6				1.0
Dry wells			—				—				0.9				—				0.6				—
Total			77				86				85.1				121				101.6				58.4
Exploration:
Discovery wells:
Oil			3				—				1.1				—				1.7				—
Gas			6				0.3				0.5				0.4				3				—
Dry wells			—				—				1.3				—				2				0.5
Total			9				0.3				2.9				0.4				6.7				0.5