2007 LEGAL DOCUMENTS - Cepsa

2007 LEGAL DOCUMENTS

Cepsa•IA07•Portada y Contra DL ingl 6.0 13/6/08 13:31 Página 1

CEPSA

LEGAL DOCUMENTS

REPORT FROM INDEPENDENT AUDITORS / 2

BALANCE SHEETS / 4

INCOME STATEMENTS / 6

NOTES TO FINANCIAL STATEMENTS / 8

MANAGEMENT DISCUSSION & ANALYSIS / 88

TABLE OF CONTENTS

Cepsa•IA07•Doc Legal_ing 13/6/08 13:28 Página 1

CEPSA LEGAL DOCUMENTS2

REPORT FROM INDEPENDENT AUDITORS

COMPAÑÍA ESPAÑOLA DE PETRÓLEOS, S.A. (CEPSA)


REPORT FROM INDEPENDENT AUDITORS

3



BALANCE SHEETS

at 31 December 2007 and 2006 (Notes 1, 2, 3 and 4)Compañía Española de Petróleos, S.A. (CEPSA)

Thousands of Euros

ASSETS 2007 2006

Non-current assets

Start-up costs (Note 6) - -

Current assets (Note 7) 589,991 636,061

Property, plant and equipment (Note 8)

Land and buildings 38,139 36,899

Plant and machinery 2,441,423 2,357,915

Other fixtures, tools and furniture 15,928 14,354

Advances and non-current assets in the course of construction 354,030 146,298

Other items of property, plant and equipment 64,653 64,580

Allowances and accumulated depreciation (1,610,422) (1,505,902)

Total property, plant and equipment 1,303,751 1,114,144

Long- term Investments (Note 9)

Investments in group companies 503,597 485,993

Loans to Group companies 502,629 656,290

Investments in associates 188,030 187,923

Loans to associates 95,869 17,430

Long-term investment securities 1,201 4,467

Other loans 47,053 38,920

Long-term deposits and guarantees given 10,245 11,757

Allowances (81,340) (70,018)

Total long-term investments 1,267,284 1,332,762

Total non-current assets 3,161,026 3,082,967

Deferred charges (Note 10) 2,174 3,313

Current assets

Inventories (Note 11) 611,812 694,011

Accounts receivable (Note 2-c) 2,363,506 1,795,943

Short-term investments (Note 9) 625,561 438,986

Cash 6,261 27,305

Accrual accounts 8,149 16,031

Total current assets 3,615,289 2,972,276

TOTAL ASSETS 6,778,489 6,058,556

(The accompanying Notes 1 to 27 are an integral part of these balance sheets)


BALANCE SHEETS

5

Thousands of Euros

SHAREHOLDERS' EQUITY AND LIABILITIES 2007 2006

Shareholders' equity (Note 12)

Share capital 267,575 267,575

Share premium 338,728 338,728

Revaluation reserve 90,936 90,936

Reserves

Legal reserves 53,605 53,605

Other reserves 2,292,163 1,930,441

Prior years' profits - -

Profit for the year 612,242 686,818

Interim dividend paid during the year (147,166) (147,166)

Total shareholders' equity 3,508,083 3,220,937

Deferred income (Note 13) 16,704 42,560

Provisions for contingencies and charges (Note 14) 81,152 94,654

Non-current liabilities (Note 15)

Bank borrowings 52,167 159,147

Payable to Group companies and associates (Note 19) 30,099 149,966

Other payables 76,775 46,573

Uncalled capital payments payable 3 39

Total non-current liabilities 159,044 355,725

Current liabilities (Note 15)

Bank borrowings 48,067 122,559

Payable to Group companies and associates (Note 19) 2,140,835 1,568,821

Trade payables 495,733 366,454

Other non-trade payables (Note 2.c) 327,895 264,340

Accrual accounts 913 1,610

Total current liabilities 3,013,443 2,323,784

Provisions for contingencies and current charges (Note 22) 63 20,896

TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES 6,778,489 6,058,556



INCOME STATEMENTS

for the years ended 31 December 2007 and 2006 (Notes 1, 2, 3 and 4).Compañía Española de Petróleos, S.A. (CEPSA).

DEBIT 2007 2006

Decrease in finished goods and work in process inventories 5,007 -

Procurements (Note 19) 14,335,256 13,990,445

Staff costs (Note 2.c) 205,115 205,107

Depreciation and amortisation charge 225,696 208,779

Change in operating provisions (5,653) 4,798

Other expenses (including oil and gas excise tax) (Note 2.c) 3,356,681 3,191,952

Total operating expenses 18,122,102 17,601,081

Profit from operations 669,857 730,139

Finance costs on debts to Group companies (Note 19) 41,631 42,248

Finance costs on debts to associates (Note 19) 4,010 2,698

Financial costs on debts to third parties and similar costs 11,431 14,821

Change in investment valuation allowances 9,060 (1,442)

Exchange gains 10,658 11,468

Total finance costs 76,790 69,793

Financial profit 255,568 215,553

Profit from ordinary activities 925,425 945,692

Change in intangible asset, property, plant and equipment and control portfolio allowances (Note 19) 3,002 (25,157)

Losses on intangible assets, property, plant and equipment and control portfolio (Note 19) 38,111 52,456

Extraordinary expenses (Note 19) 60,973 10,614

Total extraordinary losses 102,086 37,913

Extraordinary profit (Note 19) - 42,498

Profit before tax 879,378 988,190

Income tax (Note 16) 74,328 143,877

Other taxes (Note 16) 192,808 157,495

Profit for the year 612,242 686,818

(The accompanying Notes 1 to 27 are an integral part of these statements of income)

Thousands of Euros


INCOME STATEMENTS

7

CREDIT 2007 2006

Sales and services on ordinary activities 16,390,687 16,038,831

Oil and gas excise tax charged on sales 2,342,454 2,233,069

Revenue (Note 19) 18,733,141 18,271,900

Increase in finished goods and work in progress inventories - 13,845

Work on non-current assets 24,572 25,944

Other operating income 34,246 19,531

Total operating income 18,791,959 18,331,220

Loss from operations - -

Income from equity investments (Note 19) 218,903 196,495

Income from other marketable securities and loans to Group companies and associates (Note 19) 50,437 35,359

Income from other marketable securities and non-current loans 12,088 9,464

Other interest and similar income 13,227 9,677

Exchange gains 37,703 34,351

Total finance income 332,358 285,346

Financial loss - -

Loss on ordinary activities - -

Gains on non-current asset disposals (Note 19) 31,439 640

Grants related to assets transferred to profit or loss (Note 19) 21,101 75,644

Extraordinary expenses (Note 19) 3,499 4,127

Total extraordinary income 56,039 80,411

Extraordinary loss (note 19) 46,047 -

Losses before tax - -

Thousands of Euros



NOTES TO FINANCIAL STATEMENTS

for the years ended 31 December 2007 and 2006.Compañía Española de Petróleos, S.A. (CEPSA)

1. COMPANY ACTIVITIES

Compañía Española de Petróleos, S.A. (“CEPSA”), whose registered office is at Avenida del Partenón

12 (Campo de las Naciones), Madrid, was incorporated for an unlimited period of time on 26

September 1929, and is registered in the Madrid Mercantile Register in Volume 206 of the

Companies book, sheet 100, page 6045. Its employer identification number is A-28003119.

CEPSA’s company object is basically to carry on in Spain and abroad all manner of activities relating

to solid, liquid and gaseous hydrocarbons.

2. BASIS OF PRESENTATION OF THE FINANCIAL STATEMENTS

a) Fair presentation

The financial statements, which were prepared from CEPSA’s accounting records, are presented in

accordance with the Spanish National Chart of Accounts approved by Royal Decree 1643/1990, of

20 December and subsequent legislation, and accordingly, present fairly the Company’s net worth,

financial position and results of operations.

The 2007 financial statements, which were prepared by the Board of Directors at its meeting on 27

March 2008, will be submitted for approval by the shareholders at the next Annual General Meeting.

The shareholders at the General Meeting held in Madrid on 22 June 2007, approved the 2006

financial statements without any changes.

b) Comparative information

In accordance with the Spanish National Chart of Accounts, approved by Royal Decree 1643/1990,

of 20 December, the financial statements present, together with the figures for 2007, the

corresponding amounts for 2006.

c) Grouping of items

The balances "Accounts Receivable" and "Other Non-trade Payables" in the accompanying balance

sheets at 31 December 2007 and 2006 consist of the items detailed below:



9

The detail of the balances of "Staff Costs" and "Other Expenses" in the accompanying 2007 and

2006 income statements is as follows:

CURRENT ASSETS (ACCOUNTS RECEIVABLE) 2007 2006

Trade receivables for sales and services 1,077,847 760,135

Receivables from Group companies (Note 19) 1,233,110 984,652

Receivables from associates (Note 19) 50,843 53,525

Sundry accounts receivable 10,987 11,977

Tax receivables 11,231 12,934

Allowances (20,512) (27,280)

Total 2,363,506 1,795,943

CURRENT LIABILITIES (OTHER NON-TRADE PAYABLES) 2007 2006

Taxes payable 152,786 177,841

Other payables 170,875 80,372

Guarantees and deposits received 4,234 6,127

Total 327,895 264,340

STAFF COSTS 2007 2006

Wages, salaries and similar expenses 159,303 145,964

Pension contributions and provisions to pension allowances 3,408 18,599

Other employee benefit costs 42,404 40,544

Total 205,115 205,107

Thousands of Euros

Thousands of Euros

Thousands of Euros



OTHER EXPENSES 2007 2006

Taxes other than income taxes 20,822 24,079

Excise tax on oil and gas borne 2,342,428 2,233,101

Transport and freight 192,814 178,959

Outside work, supplies and services 790,970 726,058

Other current operating expenses 4,854 4,018

Greenhouse gas emissions (Note 22) 63 21,809

Environmental expenses (Note 21) 4,730 3,928

Total 3,356,681 3,191,952

In compliance with the Spanish Accounting and Audit Institute (ICAC) Resolution of 25 March 2002,

approving the regulations for the recognition, valuation and reporting of environmental matters in

the financial statements, a breakdown is given of the environmental expenses for 2007 and 2006

included under “Other Operating Expenses” (see Notes 4-l and 21).

Thousands of Euros



11

3. DISTRIBUTION OF INCOME

The proposed distribution of 2007 profit that the Board of Directors will submit for approval by the

shareholders at the Annual General Meeting is as follows:

The dividend distributed out of 2007 profit is equal to EUR 1.25 per share. Of the total dividend

indicated above, an interim dividend of EUR 147,166 thousand, equal to EUR 0.55 per share, was paid

on 25 October 2007 and this amount is recognised under "Shareholders' Equity - Interim Dividend

Paid during the Year" in the accompanying balance sheet at 31 December 2007.

This dividend was approved by the Board of Directors on 27 September 2007, on the basis of the

accounting statement at 31 August 2007 (shown below), prepared in accordance with Article 216 of

the Consolidated Companies Law, evidencing the existence of sufficient liquidity for the distribution

of the aforementioned interim dividend.

Distributable profit

Distributable profit 612,242

Total distributable 612,242

Distribution to:

Dividends 334,469

Voluntary reserves 277,773

Total distributed 612,242

Thousands of Euros


CEPSA LEGAL DOCUMENTS

The profit for the period after income tax shown in the foregoing accounting statement is the

Company’s distributable net profit at 31 August 2007. At that date the mandatory legal reserve was

at the required level, working capital, i.e. the difference between current assets and current liabilities,

amounted to EUR 1,329,768 thousand, and the Company had unused credit facilities amounting to EUR

596,582 thousand. The undrawn balances did not bear interest.

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Individual Accounting Statement of CEPSAsupporting the interim dividend declared on 27 September 2007 31.08.07

ASSETS

Non-current assets

Intangible assets 607,152

Property, plant and equipment 1,216,382

Long-term investments 674,291

Total 2,497,825

Deferred charges 2,520

Current assets

Inventories 533,935

Accounts receivable 2,045,971

Short-term investments 1,489,972

Cash 20,539

Accrual accounts 11,771

Total 4,102,188

TOTAL ASSETS 6,602,533

SHAREHOLDERS' EQUITY AND LIABILITIES

Share capital and reserves 3,033,635

Profit for the period 509,933

Deferred income 22,155

Provisions for contingencies and charges 100,088

Non-current liabilities 164,302

Current liabilities 2,772,420

TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES 6,602,533

Thousands of Euros



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4. ACCOUNTING POLICIES

The main accounting policies applied were as follows:

a) Intangible assets

Intangible assets, which are valued at acquisition cost or at the cost incurred in producing or developing

them, including staff, finance and other costs relating to projects carried out, are presented in the

accompanying balance sheets net of the related accumulated amortisation (see Note 7).

Research and development expenditure is amortised in full when the related project is completed,

regardless of its outcome, unless the technology developed is patented, in which case it is amortised over

13 years.

Oil exploration investments are recognised by the “successful efforts method”, and exploration costs are

expensed as incurred. Drilling costs are capitalised until it is determined whether they give rise to the

detection of exploitable reserves, at which time they start to be amortised, together with the field

development costs, on the basis of the reserves extracted with respect to the reserves proven to be

recoverable; if the reserves detected are not exploitable, the drilling costs are charged to income as soon

as this becomes known.

Production license rights are amortised at the same rates as those used to depreciate the production

units to which they relate. The other intangible assets are amortised on a straight-line basis over a

maximum of three years.

The rights under finance lease agreements, when there is no reasonable doubt that the purchase option

will be exercised, are recognised at the cost of the related assets and the total debt for lease payments

plus the amount of the purchase option are recognised as a liability. The difference between the two

amounts, which represents the finance costs on the transaction, is recognised as a deferred expense.

These rights are amortised at the same rate as the leased asset. When the purchase option is exercised,

the value of the rights recognised and the related accumulated amortisation are derecognised from

intangible assets and are recognised as part of the value of the acquired asset.

The accounting policies applied to greenhouse gas emission allowances are detailed in Note 4-m.



b) Property, plant and equipment

Property, plant and equipment acquired until 31 December 1996 is measured at cost, revalued where

appropriate, in accordance with the applicable asset revaluation laws. Subsequent additions are

recognised at cost. In both cases, the accumulated depreciation and specific-purpose allowances

recognised to cover losses were deducted.

If necessary, in accordance with Spanish accounting regulations, the values of property, plant and

equipment are definitively adjusted based on the amounts that are not recoverable through the

foreseeable generation of future income (see Note 8).

The costs of expansion, modernisation or improvements leading to increased productivity, capacity

or efficiency or to a lengthening of the useful lives of the assets are capitalised. The accounting

policies relating to environmental investments are detailed in Note 4-l. Repair, upkeep and

maintenance expenses are expensed currently.

Property, plant and equipment is depreciated basically using the straight-line method on the basis

of the estimated years of useful life of the various assets. The detail, by item, is as follows:

14

Years ofDEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT useful life

Buildings and other structures 33 to 50

Plant and machinery

Machinery, installations and fixtures 10 to 15

Furniture 10

Specialised complex installations

Units 12 to 15

Lines and networks 15

Tanks and spheres 20

Other items of property, plant and equipment 4 to 10



c) Marketable securities and other similar investments

Investments in marketable short- and long-term fixed-income and equity securities are recognised

at the lower of cost, revalued where appropriate, pursuant to the applicable asset revaluation laws,

and market. The market value of investments in unlisted companies was taken to be the underlying

carrying amount of the investments per the balance sheets of the investees, adjusted, where

appropriate, by the amount of the unrealised gains disclosed at the time of acquisition and still

existing at the present date. Unrealised losses (cost higher than market value) are recognised

under "Long-Term Investments - Allowances" in the accompanying balance sheets (see Note 9).

CEPSA’s financial statements do not reflect the effects of applying consolidation principles to its

equity investments. Under current company law CEPSA has been required to prepare consolidated

financial statements in accordance with International Financial Reporting Standards (IFRSs) since

2005.

The main aggregates of these consolidated financial statements are as follows:

15

ASSETS 2007 2006

Non-current assets 4,561,927 4,465,290

Current assets 4,878,599 4,258,430

TOTAL ASSETS 9,440,526 8,723,720

LIABILITIES 2007 2006

Shareholder equity 5,281,829 4,837,846

Non-current liabilities 1,183,275 1,356,388

Current liabilities 2,975,422 2,529,486

TOTAL LIABILITIES 9,440,526 8,723,720

Thousands of Euros

Thousands of Euros



d) Inventories

Crude oil and oil derivatives are measured at the lower of dollar-value LIFO cost and market. Crude

and oil derivatives in transit are measured at the cost at source plus direct costs incurred until

year-end. Replacement parts and supplies and other inventories are measured at the lower of

average acquisition or production cost and market (see Note 11).

Individual costs are allocated to refined products in proportion to the selling price thereof

(isomargin method).

Production cost is calculated as the sum of the acquisition cost of raw materials and other

consumables required, determined in accordance with the accounting policies of the Spanish Chart

of Accounts, the costs directly allocable to the product and the related costs and depreciation

charge corresponding to production facilities which are indirectly allocable to the product in

question, insofar as these costs relate to the production, manufacturing or construction period.

e) Deferred income

Grants related to assets are recognised at the amount granted. Non-refundable grants related to

assets are recognised under “Deferred Income” in the balance sheet and are allocated to income

on the basis of the years of useful life of the subsidised investments. Refundable grants related to

assets are recognised as non-current liabilities transformable into grants, and grants relating to

income are credited to income when earned.

The accounting policies applied to grants for greenhouse gas emission allowances are detailed in

Note 4-m.

f) Provisions for contingencies and charges

Provisions for pensions and similar obligations

The value of the obligations to employees and beneficiaries who are covered by in-house provisions

is calculated by the Company using actuarial individual capitalisation techniques in line with the

technical hypotheses in force in the market at year-end. The obligations provisioned basically relate

to employee benefit costs (see Note 14).

The accrued annual cost for obligations to employees and the financial effect of discounting the

related provisions are recognised under “Staff Costs” and “Finance Costs”.

16



Additionally, CEPSA externalised, through pension plans and/or life insurance, all the obligations for

death of spouse, death of parent, disability and retirement to its employees and their beneficiaries

in accordance with current legislation on the instrumentation of pension obligations.

Other provisions for contingencies and charges

CEPSA has recognised provisions for major repairs, of a multi-annual nature, of production units on

the basis of the projected cost of the next overhaul and of the period between two overhauls. It

has also recognised provisions for environmental risks, for taxes, for tax assessments issued by the

tax inspection authorities which have been signed on a contested basis by the Company and against

which appeals have been filed, and for third-party liability to cover possible obligations, all of which

are based on the best financial estimates.

Under current labour legislation, companies are required to pay termination benefits to employees

terminated without just cause. CEPSA does not have any collective redundancy procedure plans.

g) Classification of debt

Debts maturing at over 12 months from year-end were classified as non-current liabilities and the

remainder as current liabilities.

h) Income tax

The expense for income tax for each year is calculated on the basis of accounting profit before tax,

increased or decreased, as appropriate, by the permanent differences from taxable profit. Tax relief

and tax credits are treated as a reduction of the amount of income tax for the year in which they

are taken.

In the case of income attributed to the permanent establishment in Algeria, the tax expense is

recorded under “Other Taxes” in the income statement, in compliance with the Resolution of the

Spanish Accounting and Audit Institute (ICAC) of 9 October 1997, ruling no. 7.

Pursuant to the provisions of Personal Income Tax Law 35/2006, of 28 November, partially amending

Spanish Corporation Tax, Non-Resident Income Tax and Wealth Tax, the standard income tax rate

was established at 32.5% for 2007 and at 30% for 2008 and subsequent years. As a result of this

change deferred tax assets and liabilities and tax credits recognised in the balance sheet at 31

December 2006 and 2007 must be adjusted, with a balancing entry in profit/loss for each year, for

the estimated effect of the reduced tax rates in terms of the period in which the related tax

receivables and payables are realised.

17



CEPSA files tax returns on a consolidated basis with its subsidiaries, which meet the relevant legal

requirements, observing the Spanish Accounting and Audit Institute Resolution dated 9 October

1997, partially modified by the Spanish Accounting and Audit Institute Resolution dated 15 March

2002 (see Note 16).

i) Foreign currency transactions and balances

Transactions in foreign currencies are translated to euros at the exchange rates ruling at the

transaction date and the exchange differences arising at the date of settlement of the

transactions are charged or credited, as appropriate, to income.

Foreign currency balances at each year-end are translated to euros at the year-end exchange

rates or, where appropriate, at the hedged exchange rates. Exchange losses are recognised as an

expense under “Exchange Differences” in the income statement; in accordance with the accounting

principle of prudence, only realised exchange gains are allocated to income whereas exchange gains

relating to long-term financing are recognised under “Deferred Income”.

Exchange differences arising on foreign currency loans financing investments in the same

functional currency for which there are currency hedges (cash flow hedges) are recognised with a

balancing entry under “Deferred Income” or “Deferred Charges”, and are taken to income using the

same criteria as that used for the gains and losses on the hedged non-current assets (see Notes

13 and 23).

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j) Recognition of income and expenses

Income and expenses are recognised on an accrual basis, i.e. when the actual flow of the related

goods and services occurs, regardless of when the resulting monetary or financial flow arises.

However, the Company only recognises realised income at year-end, whereas foreseeable

contingencies and losses, including possible losses, are recognised as soon as they become known.

In accordance with the legislation applicable to companies operating in the oil and gas industry, the

excise tax on oil and gas sales is recognised as part of the selling price and as an addition to cost

under “Revenue” and “Other Expenses”, respectively, in the income statement (see Note 2-c).

“Revenue” also includes the value of the hedging transactions for strategic stocks arranged with

other operators.

k) Hedging transactions

CEPSA uses certain hedging instruments and derivatives, including most notably futures contracts

with crude oil and product brokers, to hedge price risks relating to the monthly purchases and sales

of oil-based products. The transaction limits and the hedging instruments have been approved by

Company management and the monitoring process respects the separation of the performance

and control functions. Any differences between the market price at year-end and the deal price for

open transactions at year-end are generally charged to income (see Note 23).

For currency and interest rate risks, the transaction limits and hedging instruments (basically

forward currency transactions and interest rate swaps) have also been approved by Company

management and the monitoring process respects the separation of the performance and control

functions (see Notes 15, 18 and 23).

The gains or losses on hedging transactions are credited or charged to income symmetrically to the

revenues or costs arising on the hedged item.

19



l) Information on the environment

Per the Resolution dated 25 March 2002 of the Spanish Accounting and Audit Institute (ICAC),

environmental investments are defined as investments included in the Company's assets for use

in its business on a lasting basis which are mainly for the purpose of minimising the impact on the

environment and protecting and improving the environment, including the reduction or elimination

of pollution in the future caused by the operations performed by CEPSA.

Also, environmental expenses are deemed to be those incurred to prevent, reduce or repair

damage to the environment, i.e. the natural surroundings, as well as those relating to

environmental commitments.

With respect to provisions for environmental risks and obligations, CEPSA recorded provisions for

environmental actions to remedy the risk of gradual soil pollution, with a charge to extraordinary

expenses in the income statements. These provisions are quantified on the basis of in-house

estimates and technical studies. Also, CEPSA has taken out insurance policies to cover the third

party liability that might arise from sudden accidental pollution and gradual subsequent pollution

after 1 April 2002 (see Note 21).

m) Greenhouse gas emission allowances

In compliance with the commitments to reduce greenhouse gas emissions - the Kyoto Protocol -

assumed by the European Union in May 2002, various EU and national regulations were issued, which

led to the approval, by Royal Decree 60/2005, of 21 January, of the National Emission Allowance

Allocation Plan, which affects eleven industries including the oil refining industry and is in force for

the three-year period 2005-2007. Pursuant to this legislation, on 3 February 2005, the Ministry of

the Environment communicated the allocation for no consideration of emission allowances equal to

3,287 thousand tonnes of CO2 for the 2005-2007 period (see Note 22).

Pursuant to this legislation, CEPSA must deliver in the first few months of the following year CO2

emission allowances equal to the volume of emissions made during the year.

20



The emission allowances are recognised, in compliance with Spanish Accounting and Audit Institute

Resolution dated 8 February 2007, as non-amortisable intangible assets, measured at acquisition or

production cost, and are derecognised when delivered, transferred to third parties or when the

conditions stipulated for their expiration are met (see Note 22).

Allowances received for no consideration under the National Emission Allowance Allocation Plan are

measured at the market price prevailing at the beginning at the year to which they relate,

recognising deferred income as a balancing entry, which is taken to income as an extraordinary item

as the expenses arising from the actual emissions are incurred (see Notes 19 and 22).

If the market value of the emission allowances is lower than the carrying amount of the allowances

recognised under assets, the value of the allowances held is adjusted to market. Depending on

whether the allowances are acquired or received from the government, an appropriate allowance

for non-current asset decline in value would be recognised (reversible losses) or the value of the

intangible asset item would be adjusted (irreversible losses), respectively. In the second case

(allowances received from the government), the value of the deferred income would be adjusted and

a balancing item would be recognised under “Extraordinary Income” (see Notes 7, 13, 19 and 22).

The obligation to deliver emission allowances for the CO2 emissions made during the year is

recognised as the greenhouse gas emissions are made. These costs are charged to “Other

Operating Expenses” in the income statement and credited to a short-term provision until the

related emission allowances are delivered. The unit value to be assigned to the emissions is

determined by taking into account the following amounts:

• Firstly, the carrying amount of the emission allowances received for no consideration.

• Secondly, the cost of other emission allowances capitalised in the balance sheet.

• Lastly, where necessary, the most up-to-date estimate of the cost of acquisition of the remaining

allowances.

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5. MERGER BY ABSORPTION OF ETBE HUELVA, S.A.

At the respective Annual General Meetings of CEPSA and ETBE Huelva, S.A., held on 22 June 2007,

the shareholders unanimously adopted the resolution, among others, to formalise the merger by

absorption of the two companies and to establish 1 January 2007 as the date from which the

merger would take effect for accounting and business purposes.

At the date of approval of this proposal, CEPSA owned all the share capital of ETBE Huelva, S.A.,

represented by 45,204 fully paid registered ordinary shares of EUR 50 par value each. Since CEPSA

was the sole shareholder of ETBE Huelva, S.A., the merger of the two companies was carried out in

accordance with the provisions of Article 250 of the Consolidated Spanish Companies Law, as

approved by Royal Decree-Law 1564/1989, of 22 December.

The merger deed was executed on 5 September 2007 and registered in the Madrid Mercantile

Register in volume 22,313, book 0, sheet 68, section 8, page M-12689, entry no. 1283. By virtue of

this deed, ETBE Huelva, S.A. was dissolved without liquidation and all its rights and obligations were

transferred en bloc to the absorbing company CEPSA, by universal succession.

As a result of the foregoing, CEPSA’s 2007 financial statements include, from 1 January 2007, the

assets, liabilities, net worth and operations of the absorbed company. Also, with effect from that

date, the investment in the absorbed company’s securities, which had been recognised in CEPSA’s

books for a net value of EUR 2,782 thousand, was derecognised. (See Note 9)



Pursuant to the provisions of Article 93 of the Consolidated Spanish Corporation Tax Law as

approved by Royal Decree-Law 4/2004, of 5 March, the formal obligations addressed therein are

described below:

a) Year in which the transferor acquired the depreciable/amortisable assets

transferred.

The assets transferred were acquired by ETBE Huelva, S.A. over various years. CEPSA takes into

account the dates on which they were originally purchased or transferred to operations, for the

purpose of calculating the corresponding depreciation/amortisation.

b) Latest balance sheet of the transferor.

The balance sheet at 31 December 2006, approved by the shareholders at the Annual General

Meeting held on 22 June 2007, is shown below:

23


BALANCE SHEET OF ETBE HUELVA, S.A. 31-12-06

ASSETS

Non-current Assets

Start-up costs (Note 6) 85

Intangible assets (Note 7) 1

Property plant and equipment (Note 8) 12,647

Total 12,733

Accounts receivable 261

Short term investments 299

Cash 41

Accrual accounts 30

Total 631

TOTAL ASSETS 13,364

SHAREHOLDERS' EQUITY AND LIABILITIES

Shareholders' equity (Note 12)

Share capital 2,260

Reserves

Legal reserves 452

Other reserves 7,127

Profit for the year 2,316

Total shareholders' equity 12,155

Deferred income (Note 13) 828

Payable to group companies and associates (143)

Trade payables 524

TOTAL LIABILITIES 13,364


Thousands of Euros


Balance at ETBE Additions or Charge Disposals Balance at

2007 01.01.07 Merger Effect for the Year Transfers or Reductions 31.12.07

Start-up costs - 85 - - (85) -


c) Assets recognised by the transferee company at a value other than that at

which they appeared in the transferor’s books.

All the assets, rights and obligations of ETBE Huelva, S.A. were included in CEPSA’s books at the

same value at which they appeared in the transferor’s books.

d) Subrogation to the transferor’s tax rights and obligations.

CEPSA availed itself of the tax regime established in Chapter VIII of Title VII of the Consolidated

Spanish Corporation Tax Law as approved by Royal Decree-Law 4/2004, of 5 March. The most

significant aspects of this tax regime are: the transfer of the transferor’s assets and liabilities to

the acquiring company is tax-exempt; any net worth increases or decreases that might arise in the

merger are excluded from the shareholders’ tax base; VAT is not applicable since the business

assets and liabilities are transferred en bloc; and no tax is incurred on the increase in urban land

value.

At the merger date, the transferor, ETBE Huelva, S.A., had no outstanding tax obligations or

benefits.

6. START-UP COSTS

The changes in this heading in 2007 were as follows:

25

Thousands of Euros


7. INTANGIBLE ASSETS

The changes in intangible asset accounts in 2006 and 2007 were as follows:

Balance at Additions or Disposals Balance at

2006 01.01.06 Charge for the Year Transfers or Reductions 31.12.06

ASSETS

Research and development expenditure 18 4,480 (4,498) - -

Oil well drilling costs 996,993 78,737 - (3,563) 1,072,167

Concessions, patents and licenses 57,210 1,423 4,480 - 63,113

Goodwill 250 - - - 250

Computer software 75,444 4,584 (40) - 79,988

Rights on leased assets 57,171 - - - 57,171

Other project rights 571 - - - 571

Greenhouse gas emission allowances 27,449 74,172 - (79,360) 22,261

Total 1,215,106 163,396 (58) (82,923) 1,295,521

Accumulated depreciation and allowances

Oil well drilling costs (435,715) (104,306) - 3,470 (536,551)

Concessions, patents and licenses (38,178) (4,754) - - (42,932)

Goodwill (135) (25) - - (160)

Computer software (59,004) (5,237) - - (64,241)

Rights on leased assets (12,646) (2,835) - - (15,481)

Surface rights (76) (19) - - (95)

Total (545,754) (117,176) - 3,470 (659,460)

Net intangible assets 669,352 46,220 (58) (79,453) 636,061

Thousands of Euros





Assets

Research and development expenditure - - 4,847 (4,847) - -

Oil well drilling costs 1,072,167 - 83,168 - (6,240) 1,149,095

Concessions, patents and licenses 63,113 - 8,287 4,847 - 76,247

Goodwill 250 - - - - 250

Computer software 79,988 1 5,507 (218) 85,278

Rights on leased assets 57,171 - 249 - - 57,420

Other project rights 571 - - - - 571

Advances on Intangible Assets - - 91 - - 91

Greenhouse gas emission allowances 22,261 - 18,568 - (40,759) 70

Certified reductions of GHG emissions - - 535 - - 535

Total 1,295,521 1 121,252 (218) (46,999) 1,369,557

Accumulated depreciation and allowances

Oil well drilling costs (536,551) - (107,058) - 1,588 (642,021)

Concessions, patents and licenses (42,932) - (6,641) - - (49,573)

Goodwill (160) - (25) - - (185)

Computer software (64,241) - (5,117) - - (69,358)

Rights on leased assets (15,481) - (2,834) - - (18,315)

Surface rights (95) - (19) - - (114)

Total (659,460) - (121,694) - 1,588 (779,566)

Net intangible assets 636,061 1 (442) (218) (45,411) 589,991

Thousands of Euros


27


In 2006 and 2007 EUR 15,839 thousand and EUR 14,944 thousand, respectively, of staff, finance and

other costs relating basically to oil well drilling projects and computer software in progress in those

years were capitalised to intangible asset with a credit to “Work on Non-Current Assets” in the

accompanying income statements.

The direct and indirect costs incurred in research and development projects in progress were

recognised as additions to “Research and Development Expenditure”.

The detail of “Oil Well Drilling Costs” at 2007 and 2006 year-end, which includes exploration and

development investments at production fields, is as follows:

The investment recognised by CEPSA under “Computer Software” relates basically to acquisitions

made in order to upgrade computer software to the most recent market versions.

“Rights on Leased Assets” includes basically the investments for the acquisition under lease

contracts of four tanks of 50,000 m3 each for petrol storage and four tanks of 150,000 m3 each for

crude oil storage.

2007 2006 2007 2006

Production assets 66,401 63,986 100,014 94,205

Exploration costs 16,767 14,751 7,044 10,101

Total 83,168 78,737 107,058 104,306

Investments Depreciation

Thousands of Euros



The main amounts concerning CEPSA’s lease contracts for the years ended 31 December 2007 and

2006 are as follows:

The CO2 emission allowances recognised in 2006 and 2007 for an amount of EUR 74,172 thousand

and EUR 18,568 thousand, respectively, relate to the allowances assigned for no consideration under

the National Emission Allowance Allocation Plans, and are equal to 3,287 thousand and 3,287

thousand tonnes, respectively (see Note 22).

CEPSA has a 1.373% share in the Spanish Carbon Fund for the purpose of financing various projects

that target greenhouse gas reduction and the sustainable development of developing countries. If

these projects are successful they will generate emission allowances. In 2007, EUR 535 thousand

were paid to the World Bank for CEPSA’s share and recognised as an addition under “Certified

Reductions of Greenhouse Gas (GHG) Emissions”.

At 31 December 2006 and 2007, the fully amortised intangible assets amounted to EUR 188,287

thousand and EUR 215,063 thousand, respectively.

2007 2006

Original cost (without purchase option) 55,138 54,908

Purchase option 1,795 1,776

Principal repaid 34,926 29,545

Accrual of deferred finance costs 50 42

Unamortised finance costs 2,086 3,153

Lease payments paid 43,351 39,342

Lease payments outstanding 24,138 30,334

Contract term (months) 123/124 123/124

Contract currency EUR EUR

Thousands of Euros


29


Thousands of Euros

Balance at Additions or Disposals Balance at

2006 01.01.06 Charge for the Year Transfers or Reductions 31.12.06

Assets

Land and buildings 35,649 - 1,297 (47) 36,899

Plant and machinery 2,161,266 - 232,240 (35,591) 2,357,915

Other fixtures, tools and furniture 14,062 - 292 - 14,354

Advances and non-current assetsin the course of construction 183,548 233,346 (270,596) - 146,298

Other items of property, plant and equipment 28,339 - 36,825 (584) 64,580

Total 2,422,864 233,346 58 (36,222) 2,620,046

Accumulated depreciation

Land and building (2,132) (36) - - (2,168)

Plant and machinery (1,415,198) (89,387) - 35,578 (1,469,007)

Other fixtures, tools and furniture (9,255) (1,106) - - (10,361)

Other items of property, plant and equipment (16,080) (1,074) - 467 (16,687)

Total (1,442,665) (91,603) - 36,045 (1,498,223)

Allowances (8,195) (100) - 616 (7,679)

Net items of property, plant and equipment 972,004 141,643 58 439 1,114,144


8. PROPERTY, PLANT AND EQUIPMENT

The changes in this heading in 2006 and 2007 were as follows:

30




Assets

Land and buildings 36,899 - - 1,271 (31) 38,139

Plant and machinery 2,357,915 15,278 - 69,308 (1,078) 2,441,423

Other fixtures, tools and furniture 14,354 - - 1,574 - 15,928

Advances and non-current assets in the course of construction 146,298 - 279,860 (72,128) - 354,030

Other items of property, plant and equipment 64,580 - - 193 (120) 64,653

Total 2,620,046 15,278 279,860 218 (1,229) 2,914,173

Accumulated depreciation

Land and building (2,168) - 2 - 26 (2,140)

Plant and machinery (1,469,007) (2,631) (102,213) - 1,015 (1,572,836)

Other fixtures, tools and furniture (10,361) - (894) - - (11,255)

Other items of property, plant and equipment (16,687) - (812) - 111 (17,388)

Total (1,498,223) (2,631) (103,917) - 1,152 (1,603,619)

Allowances (7,679) - (70) - 946 (6,803)

Net items of property, plant and equipment 1,114,144 12,647 175,873 218 869 1,303,751

Thousands of Euros


31



The Company’s work on non-current assets is recognised at production cost and includes, where

appropriate, staff and other costs incurred during the related construction period. EUR 10,105

thousand and EUR 9,628 thousand of costs were capitalised to property, plant and equipment in

this connection in 2006 and 2007, respectively, and these amounts were credited to “Work on

Non-Current Assets” in the accompanying income statements.

The additions to property, plant and equipment in 2006 and 2007, which amounted to EUR 233,346

thousand and EUR 279,860 thousand, respectively, relate basically to investments made at the

three refineries. Noteworthy in 2007 was the construction of new units at the Gibraltar-San

Roque refinery.

At 31 December 2006 and 2007, fully-depreciated property, plant and equipment amounted to

EUR 923,261 thousand and EUR 1,041,755 thousand, respectively. All the property, plant and

equipment are assigned to operating facilities, which contain equipment and materials that are

not depreciated for accounting purposes.

32



At 31 December 1996, CEPSA revalued its property, plant and equipment, including those of the

absorbed company Ertoil, S.A., by EUR 71,154 thousand, pursuant to the applicable asset

revaluation law (Royal Decree 2607/1996, of 20 December regulating the rules for asset

revaluations enacted by Royal Decree-Law 7/1996 of 7 June). This increase in value is being

depreciated (the depreciation charge is a tax-deductible expense) with a charge to income in

1997 and subsequent years based on the years of residual useful life of the revalued assets. The

revaluation made increased the property, plant and equipment depreciation charges for 2006 and

2007 by EUR 1,952 thousand and EUR 1,515 thousand, respectively. At the end of these years, the

increases in value yet to be depreciated amounted to EUR 11,064 thousand and EUR 9,549

thousand, respectively.

CEPSA has been granted administrative concessions by the Spanish State to use mooring

facilities, access and adjacent areas at the ports of Algeciras-La Línea, Santa Cruz de Tenerife

and Palos de la Frontera, which will revert to the State in 2022, 2009 to 2028 and 2008 to 2030.

CEPSA management expects all the concessions to be renewed on expiration of the concession

term and considers that it is not necessary to record a reversion reserve since the facilities are

adequately maintained and the related cost will have been depreciated in full for accounting

purposes during the concession term.

33



9. LONG- AND SHORT-TERM INVESTMENTS

The changes in 2006 and 2007 in “Long-Term Investments” were as follows:

34

Balance at Additions or Charge Disposals Balance at

2006 01.01.06 for the Year Transfers or Reductions 31.12.06

Assets

Investments in Group companies 442,093 43,674 226 - 485,993

Investments in associates 185,818 2,105 - - 187,923

Long-term investment securities 5,314 65 (226) (686) 4,467

Investments 633,225 45,844 - (686) 678,383

Loans to Group companies (Note 19) 335,764 656,290 - (335,764) 656,290

Loans to associates (Note 19) 12,852 9,340 - (4,762) 17,430

Other loans 64,583 4,353 - (30,016) 38,920

Loans 413,199 669,983 - (370,542) 712,640

Long-term deposits and guarantees given 4,378 16,241 - (8,862) 11,757

Total 1,050,802 732,068 - (380,090) 1,402,780

Allowances

Investments in Group companies (36,198) (2,468) - 7,763 (30,903)

Investments in associates (59,900) (2,457) - 23,251 (39,106)

Other (596) (7) - 594 (9)

Total (96,694) (4,932) - 31,608 (70,018)

Net long-term investments 954,108 727,136 - (348,482) 1,332,762

Thousands of Euros



35



Assets

Investments in Group companies 485,993 (2,782) 23,392 - (3,006) 503,597

Investments in associates 187,923 - 2,000 - (1,893) 188,030

Long-term investment securities 4,467 - 45 - (3,311) 1,201

Investments 678,383 (2,782) 25,437 - (8,210) 692,828

Loans to Group companies (Note 19) 656,290 - 557,954 - (711,615) 502,629

Loans to associates (Note 19) 17,430 - 82,119 - (3,680) 95,869

Other loans 38,920 - 28,339 - (20,206) 47,053

Loans 712,640 - 668,412 - (735,501) 645,551

Long-term deposits and guarantees given 11,757 - 9,203 - (10,715) 10,245

Total 1,402,780 (2,782) 703,052 - (754,426) 1,348,624

Allowances

Investments in Group companies (30,903) - (7,532) - 2,177 (36,258)

Investments in associates (39,106) - (819) - 3,229 (36,696)

Other (9) - (8,377) - - (8,386)

Total (70,018) - (16,728) - 5,406 (81,340)

Net long-term investments 1,332,762 (2,782) 686,324 - (749,020) 1,267,284

Thousands of Euros



In relation to ownership interests in Group companies and associates, the most relevant addition is

that due to the subscription of the capital increase at CEPSA Egypt SA, B.V.

In 2007 and 2006 the Company recorded and used provisions to equate the cost recognised in its

financial statements to the underlying carrying amount of certain holdings for which the

circumstances provided for by accounting regulations are met (see Note 4-c).

In “Other Loans” CEPSA has recognised at 31 December 2007 and 2006, basically the deferred tax

assets arising from timing differences due to expenses incurred which, in principle, were not

deductible for tax purposes but will be deductible at medium- and long- term, up to a limit of ten

years. The detail of the balance of this heading is as follows:

The deferred tax assets were adjusted at 2006 and 2007 year-end on the basis of the best

estimate of the time of their reversal and the applicable income tax rate, in accordance with the

tax rate changes established by Law 35/2006 of 28 November (see Note 4-h).

The information on Group companies and associates is shown at the end of these notes to financial

statements (see Table I).

36

2007 2006

Long-term deferred tax assets 31,336 30,686

Receivable for non-current asset disposals 235 458

Other items 15,482 7,776

Total 47,053 38,920

Thousands of Euros



The changes in 2006 and 2007 in “Short-Term Investments” were as follows:

37

Balance at Additions or Charge Disposals or Balance at

2006 01.01.06 for the Year Reductions 31.12.06

Assets

Other short-term investment securities 72,027 - (62,026) 10,001

Equity investments 72,027 - (62,026) 10,001

Loans to Group companies (Note 19) 639,115 313,327 (652,920) 299,522

Loans to associates (Note 19) 47,177 54,926 (60,286) 41,817

Other loans 160,640 9,116,497 (9,189,700) 87,437

Loans 846,932 9,484,750 (9,902,906) 428,776

Short-term deposits and guarantees given 630 44 (465) 209

Total 919,589 9,484,794 (9,965,397) 438,986

Allowances

Short-term bad debts (60) - 60 -

Total (60) - 60 -

Net short-term investments 919,529 9,484,794 (9,965,337) 438,986

Thousands of Euros



Balance at Additions or Charge Disposals or Balance at

2007 01.01.07 for the Year Reductions 31.12.07

Assets

Other short-term investment securities 10,001 - (10,001) -

Equity investments 10,001 - (10,001) -

Loans to Group companies (Note 19) 299,522 702,530 (416,462) 585,590

Loans to associates (Note 19) 41,817 73,202 (105,950) 9,069

Other loans 87,437 8,195,927 (8,252,625) 30,739

Loans 428,776 8,971,659 (8,775,037) 625,398

Short-term deposits and guarantees given 209 28 (74) 163

Total 438,986 8,971,687 (8,785,112) 625,561

Allowances

Short-term bad debts - - - -

Total - - - -

Net short-term investments 438,986 8,971,687 (8,785,112) 625,561

Thousands of Euros



The detail, by maturity, of the short- and long-term loans granted at 31 December 2006 and 2007

is as follows:

The average annual interest rate applied by CEPSA on loans to subsidiaries in 2006 and 2007 was

similar to the average cost of its borrowed funds for transactions of the same type (see Note 15).

39

2006 2007 2008 2009 2010 2011 Others Total

Loans to Group companies 299,522 656,290 - - - - 955,812

Loans to associates 41,817 3,680 5,250 1,500 7,000 - 59,247

Other loans 87,437 13,565 10,451 3,162 2,380 9,362 126,357

Total 428,776 673,535 15,701 4,662 9,380 9,362 1,141,416

Maturity

2007 2008 2009 2010 2011 2012 Others Total

Loans to Group companies 585,590 392,709 109,920 - - - 1,088,219

Loans to associates 9,069 48,874 39,995 7,000 - - 104,938

Other loans 30,739 17,074 6,877 6,236 6,261 10,605 77,792

Total 625,398 458,657 156,792 13,236 6,261 10,605 1,270,949

Maturity

Thousands of Euros

Thousands of Euros



10. DEFERRED CHARGES

The changes in "Deferred Charges" in 2006 and 2007 were as follows:

The deferred interest expenses relate to the lease contracts entered into by CEPSA (see Note 7).

40

Balance at Incurred Amortisation Balance at

2006 01.01.06 Expenses Charged to Profit 31.12.06

Deferred interest expenses 4,524 (418) (953) 3,153

Other deferred charges 1,097 (899) (38) 160

Total 5,621 (1,317) (991) 3,313

Balance at Incurred Amortisation Balance at

2007 01.01.07 Expenses Charged to Profit 31.12.07

Deferred interest expenses 3,153 (44) (1,023) 2,086

Other deferred charges 160 7 (79) 88

Total 3,313 (37) (1,102) 2,174

Thousands of Euros

Thousands of Euros



11. INVENTORIES

The detail of "Inventories" at 31 December 2007 and 2006 is as follows:

Pursuant to Directorate-General of Energy Policy and Mining resolution dated 26 October 2007,

CEPSA, as an operator authorised to distribute oil products, is required to maintain minimum safety

stocks to 53 days of sales of the preceding 12 months in the domestic market, excluding sales to

other wholesalers, and Corporación de Reservas Estratégicas (CORES) inspects and controls the

fulfilment of this obligation. Company management considers that it has been meeting this

obligation.

As indicated in Note 4-d, CEPSA uses the dollar-value LIFO valuation method to value its raw

material and commercial goods inventories.

Pursuant to the ICAC Resolution of 9 May 2000, establishing the methods for determining

production cost, it is hereby stated that the value using the weighted average price or weighted

average cost method at 2007 and 2006 year-end was EUR 635,092 thousand and EUR 481,019

thousand respectively, higher than the value obtained using the dollar-value LIFO valuation method.

41

Amount Amount

MT Thousands of � MT Thousands of �

Crude in oil tanks 1,003,292 122,227 1,240,356 204,682

Crude in transit 438,508 196,588 645,174 197,629

Other raw materials 427 846 455 882

By-products and recovered materials 13,991 2,104 21,344 2,974

Refined finished products 1,472,824 213,367 1,464,567 217,504

Materials and other inventories 74,075 68,403

Advances to suppliers 2,745 1,963

Allowances (140) (26)

Total 611,812 694,011

2007 2006

Thousands of Euros



12. SHAREHOLDERS’ EQUITY

The changes in 2006 and 2007 were as follows:

42

Share Share Revaluation Legal Other Profit for Interim

2006 Capital Premium Reserve Reserve Reserves the Year Dividend Total

Balance at 31.12.05 267,575 338,728 90,936 53,605 1,564,483 700,427 (147,166) 2,868,588

Distribution of profit

Gross dividend - - - - - (334,469) 147,166 (187,303)

Reserves - - - - 365,958 (365,958) - -

Profit for the year - - - - - 686,818 - 686,818

Interim dividend - - - - - - (147,166) (147,166)

Balance at 31.12.06 267,575 338,728 90,936 53,605 1,930,441 686,818 (147,166) 3,220,937

Share Share Revaluation Legal Other Profit for Interim

2007 Capital Premium Reserve Reserve Reserves the Year Dividend Total

Balance at 31.12.06 267,575 338,728 90,936 53,605 1,930,441 686,818 (147,166) 3,220,937

Distribution of profit

Gross dividend - - - - - (334,469) 147,166 (187,303)

Reserves - - - - 352,349 (352,349) - -

Other changes

ETBE merger effect - - - - 9,373 - - 9,373

Profit for the year - - - - - 612,242 - 612,242

Interim dividend - - - - - - (147,166) (147,166)

Balance at 31.12.07 267,575 338,728 90,936 53,605 2,292,163 612,242 (147,166) 3,508,083

Thousands of Euros

Thousands of Euros



Share capital

Fully subscribed and paid share capital amounted to EUR 267,574,941, and consisted of 267,574,941

book-entry shares of EUR 1 par value each.

Per the information provided by the members of the Board of Directors who are shareholders, at 31

December 2007, Total, S.A., Banco Santander, International Petroleum Investment Company (IPIC) and

Unión Fenosa, S.A. directly and indirectly owned 48.8%, 31.6%, 9.5% and 5.0%, respectively, of the share

capital of CEPSA.

CEPSA’s shares are traded on the continuous market on the four Spanish stock exchanges.

Legal reserve

Under the Consolidated Spanish Companies Law, 10% of net profit for each year must be

transferred to the legal reserve until the balance of this reserve reaches at least 20% of the share

capital. The legal reserve can be used to increase capital provided that the remaining reserve

balance does not fall below 10% of the increased share capital amount. Otherwise, until the legal

reserve exceeds 20% of share capital, it can only be used to offset losses, provided that sufficient

other reserves are not available for this purpose.

At 31 December 2007, CEPSA had recognised a legal reserve of EUR 53,605 thousand, i.e. 20% of

share capital. This legal reserve was recognised before the share capital was redenominated in

euros.

Share premium account

The Consolidated Spanish Companies Law expressly permits the use of the share premium balance

to increase capital and establishes no specific restrictions as to its use. There were no changes in

2007 or 2006 in the balance of this account, which amounted to EUR 338,728 thousand.

Revaluation reserve

This reserve, amounting to EUR 90,936 thousand, relates to the revaluations made pursuant to 1979

State Budget Law 1/1979, 1981 State Budget Law 74/1980 and Royal Decree-Law 7/1996 on asset

revaluations.

The full balances of the aforementioned revaluations relating to State Budget Law 1/1979 and State

Budget Law 74/1980, amounting to EUR 15,896 thousand and EUR 16,602 thousand, respectively, can

be transferred to unrestricted voluntary reserves.

43



The balance of the “Revaluation Reserve, Royal Decree-Law 7/1996” account, which amounts to EUR

58,438 thousand, is still subject to the restrictions contained in the legislation under which it was

recognised and can be used, free of tax, to eliminate recognised losses and to increase capital.

From 1 January 2007 (i.e. ten years after the date of the balance sheet reflecting the revaluation

transactions) the balance of this reserve can be taken to unrestricted reserves, provided that the

monetary surplus has been realised. The surplus will be deemed to have been realised in respect of

the portion on which depreciation has been taken for accounting purposes or when the revalued

assets have been transferred or derecognised.

At 31 December 2007, the unrestricted balance of this reserve amounted to EUR 38,203 thousand.

If this balance were used in a manner other than that provided for in Royal Decree-Law 7/1996, it

would be subject to tax.

44



13. DEFERRED INCOME

The changes in “Deferred Income” in 2006 and 2007 were as follows:

45

Balance at Additions/ Amortisation Balance at

2006 01.01.06 Reductions Depreciation Charged to Profit 31.12.06

Income from grants related to assets 3,913 245 - (1,400) 2,758

Income from grants for greenhouse gas emission allowances 1,437 74,172 (52,435) (21,809) 1,365

Deferred interest income 665 - - (220) 445

Exchange gains 41,645 17,138 - (27,807) 30,976

Other deferred income 7,288 - - (272) 7,016

Total 54,948 91,555 (52,435) (51,508) 42,560

Balance at ETBE Merger Additions/ Amortisation Balance at

2007 01.01.07 Effect Reductions Depreciation Charged to Profit 31.12.07

Income from grants related to assets 2,758 828 785 - (1,175) 3,196

Income from grants for greenhouse gas emission allowances 365 - 18,568 (19,863) (63) 7

Deferred interest income 445 - - - (167) 278

Exchange gains 30,976 - 6,424 - (30,922) 6,478

Other deferred income 7,016 - - - (271) 6,745

Total 42,560 828 25,777 (19,863) (32,598) 16,704

Thousands of Euros

Thousands of Euros



The additions to “Income from Grants for Greenhouse Gas Emission Allowances” include the market

value of the emission allowances assigned for no consideration for 2006 and 2007 at the time they

were assigned, and the “Amortisation Charged to Income” column relating to “Income from Grants

for Greenhouse Gas Emission Allowances” includes the value of the allowances assigned for CO2

emissions made in the year (see Note 22).

“Exchange Gains” includes:

•“Additions/Reductions”, which includes the differences relating to value adjustments arising

from the foreign currency financing of CEPSA’s investments in the Ourhoud field in Algeria which

give rise to currency risk hedging associated with this financing (cash flow hedge) (see Notes 4-

i and 23).

•“Amortisation Charged to Profit”, which includes the allocation to profit of these exchange gains

as described in the accounting policies (see Notes 4-i and 23).

“Other Deferred Income” includes a contract for the assignment of surface rights entered into

between CEPSA and Nueva Generadora del Sur, S.A., a 50%-owned investee, for the erection of a

combined cycle power plant.

46



14. PROVISIONS FOR CONTINGENCIES AND CHARGES

Provision for pensions and similar obligations

CEPSA’s pension obligations to employees and beneficiaries at 31 December 2007 and 2006, have

been externalised in full and instrumented in pension plans or insurance policies. Additionally, the

Company has recognised in-house provisions, using actuarial individual capitalisation techniques, to

cover other obligations to its employees (see Note 4-f).

The balances of this account in 2007 and 2006 and the changes therein were as follows:

“Other Amounts used and Payments” in 2007 and 2006 include payments of obligations which were

covered with in-house provisions and results on the initially recognised provision (see Note 4-f).

The balance at 31 December 2007, relates to the actuarial estimate of the obligations whose

externalization was not compulsory pursuant to Royal Decree 1.588/1999 of 15 October.

47

2007 2006

Beginning balance 10,335 11,127

Provisions

Finance costs 319 379

Staff costsOrdinary charges to in-house pension provisions and similar obligations 2,175 1,332

Amounts used

Other amounts used and payments (2,935) (2,503)

Ending balance 9,894 10,335

Thousands of Euros



Other provisions for contingencies and charges

The changes in 2006 and 2007 in “Other Provisions for Contingencies and Charges” were as follows:

The "Provision for Taxes Other than Income Tax” includes the provisions recognised by the Company

to cover possible tax contingencies arising from assessments which have been signed on a

contested basis.

The “Provision for Third-Party Liability” covers, in accordance with the accounting principle of

prudence, the foreseeable contingencies arising from CEPSA’s ordinary operations, which might

result from its relationships with third parties and with its employees. At 31 December 2007, the

main items related to contingencies arising from lawsuits in progress and to future tax

contingencies arising from the years open for review. The provision recognised in this connection

amounted to EUR 23,902 thousand.

48

Balance at Balance at

2006 01.01.06 Additions Amounts Used 31.12.06

Provision for taxes other than income tax 29,054 610 (5,666) 23,998

Provision for third-party liability 61,793 4,733 (20,189) 46,337

Provision for major repairs 25,380 7,236 (26,242) 6,374

Provision for environmental risks (Note 21) 7,010 1,830 (1,230) 7,610

Total 123,237 14,409 (53,327) 84,319

Balance at Balance at

2007 01.01.07 Additions Amounts Used 31.12.07

Provision for taxes other than income tax 23,998 636 (2,803) 21,831

Provision for third-party liability 46,337 53,821 (72,762) 27,396

Provision for major repairs 6,374 8,047 - 14,421

Provision for environmental risks (Note 21) 7,610 1,236 (1,236) 7,610

Total 84,319 63,740 (76,801) 71,258

Thousands of Euros

Thousands of Euros



The most significant additions and disposals included in 2007 concern those arising from the

European Commission’s Ruling in the disciplinary proceedings for the alleged involvement of a CEPSA

subsidiary in anti-competitive practices in the asphalt business, against which CEPSA and its

subsidiary have appealed at the EU courts.

The "Provision for Major Repairs" covers the expenses of periodic general overhauls at the

Company’s refineries.

15. ACCOUNTS PAYABLE (NON-TRADE PAYABLES)

The detail, by item and maturity, of the Company’s non-trade payables in the accompanying balance

sheets at 31 December 2006 and 2007 is as follows:

49

2006 2007 2008 2009 2010 2011 Others Total

Interest-bearing payables to Group companies and associates 783,223 149,966 - - - - 933,189

Non-interest-bearing payables to Group companies and associates 12,356 - - - - - 12,356

Bank borrowings 122,559 31,710 51,562 22,396 14,026 39,453 281,706

Other nontrade payables 264,340 1,413 3,286 3,562 4,163 34,149 310,913

Uncalled capital payments outstanding - - - - - 39 39

Total 1,182,478 183,089 54,848 25,958 18,189 73,641 1,538,203

Maturity

Thousands of Euros



CEPSA pays interest on the "Interest-Bearing Payables to Group Companies and Associates” at

market rates.

The “Non-Interest-Bearing Payables to Group Companies and Associates” relate basically to debts

with companies in the consolidated tax group for the projected income tax settlements to them for

each year.

“Bank Borrowings” at 31 December 2007 and 2006, included debts denominated basically in euros

and US dollars, the detail, by currency and maturity, being as follows:

50

2007 2008 2009 2010 2011 2012 Others Total

Interest-bearing payablesto Group companies and associates 1,159,509 - 30,099 - - - 1,189,608

Non-interest-bearing payables to Group companies and associates 3,070 - - - - - 3,070

Bank borrowings 48,067 33,017 12,877 4,530 1,743 - 100,234

Other nontrade payables 327,895 7,786 7,372 7,115 6,375 48,127 404,670

Uncalled capital payments outstanding - - - - - 3 3

Total 1,538,541 40,803 50,348 11,645 8,118 48,130 1,697,585

Maturity

Maturing at Maturing at

Short Term Long Term Total Short Term Long Term Total

In euros 46,235 28,872 75,107 44,046 120,603 164,649

In foreign currencies 1,504 23,295 24,799 77,150 38,544 115,694

Unmatured interest payable 328 - 328 1,363 - 1,363

Total bank borrowings 48,067 52,167 100,234 122,559 159,147 281,706

2007 2006

Thousands of Euros

Thousands of Euros



The average annual nominal interest rate on the loans received in euros was 3.71% in 2007 and 2.76%

in 2006. The interest rate on loans in foreign currencies was 5.43% in 2007 and 5.27% in 2006, not

taking into account the exchange rate effect. The overall average annual interest rate on the loans

received was 4.38% in 2007 and 3.93% in 2006, without the aforementioned effect.

In accordance with its foreign currency risk management policy (see Note 23), CEPSA has arranged

loans in US dollars to finance certain investments in non-current assets that generate cash flows

in US dollars and are accounted for as cash flow hedges.

At 31 December 2007 and 2006, CEPSA had unused credit facilities amounting to EUR 560.803

thousand and EUR 497,897 thousand, respectively, with several banks. The unused balance bears no

interest (see Note 23).

The debts maturing at long term recognised under “Other Non-trade Payables” comprise mainly

deferred tax liabilities amounting to EUR 13,221 thousand and EUR 12,658 thousand 2007 and 2006,

respectively. The short-term portion relates mainly to payables to public authorities in connection

with commercial and corporate taxes payable and debts for non-current asset purchases.

The deferred tax liabilities were adjusted at 2007 and 2006 year-end on the basis of the best

estimates at the time of settlement and the income tax rate then in force, pursuant to the tax rate

changes established by Law 35/2006, of 28 November (see Note 4-h).

51



16. TAX MATTERS

CEPSA files consolidated tax returns. The reconciliation of CEPSA’s profit before taxes to the

taxable income for Spanish corporation tax purposes for 2006 and 2007 is as follows:

52

2006 Increases Decreases Amount

Accounting profit for the year before tax 988,190

Income tax

Individual permanent differences 38,771 403,614 (364,843)

Individual temporary differences

Arising in the year 3,428 7,795 (4,367)

Arising in prior years 5,210 54,135 (48,925)

Individual taxable profit 570,055

Permanent differences in consolidation 2,138 141,089 (138,951)

Temporary differences in consolidation

Arising in prior years 1 8 (7)

Taxable profit 431,097

Thousands of Euros



The permanent differences arose mainly as a result of non-deductible expenses and income not

computable for tax purposes or of expenses and income that are computable for tax purposes in a

period exceeding ten years. The permanent differences recognised in 2006 and 2007 related basically

to profit attributed to the permanent establishment in Algeria, covered by the exemption regime,

provisions, fines, dividends distributed by Group companies, gains arising from asset transfers and

consolidation adjustments. In 2007 there was a gain of EUR 30,860 thousand under the Special Regime

for sales established in Royal Decree Law 6/2000. This gain was not included in the tax base, since the

conditions of Additional Provision no. 4 of the Consolidated Spanish Companies Law were met.

The temporary differences were due mainly to accrued expenses and income earned that will be

deductible for tax purposes in a period of less than ten years. The temporary differences recognised

in 2006 and 2007 arose from expenses resulting from the provisioning and discounting to present

value of supplementary pension obligations, which gave rise to increases of EUR 514 thousand in 2007

and EUR 530 thousand in 2006 relating to non-deductible period contributions and to decreases of

EUR 26,112 thousand in 2007 and EUR 26,991 thousand in 2006 relating to the payments made in those

years in connection with those commitments and to one-tenth of the reversal of the deferred tax

asset for the externalisation of past-service costs.

53

2007 Increases Decreases Amount

Accounting profit for the year before tax 879,378

Income tax

Individual permanent differences 130,259 475,431 (345,172)

Individual temporary differences

Arising in the year 2,231 7,253 (5,022)

Arising in prior years 4,920 41,249 (36,329)

Individual taxable profit 492,855

Permanent differences in consolidation 188 139,425 (139,237)

Temporary differences in consolidation

Arising in prior years 1 - 1

Taxable profit 353,619

Thousands of Euros



The balances recognised under “Deferred Tax Assets” and “Deferred Tax Liabilities” in 2007 and 2006

were as follows:

The balances of “Deferred Tax Assets” and “Deferred Tax Liabilities” at 31 December 2007 and 2006,

were adjusted pursuant to Personal Income Tax Law 35/2006, of 28 November, partially amending

Corporation Tax, Non-Resident Income Tax and Wealth Tax, reducing the standard 35% tax rate

gradually over two years to 32.5% in 2007 and 30% in 2008 and following years.

Deferred tax assets and liabilities decreased by EUR (452) thousand and EUR 368 thousand,

respectively in 2007 and EUR 4,463 thousand and EUR 2,184 thousand in 2006, as a result of the

adjustment arising from the estimated effect of the tax rate reduction, based on the period of

realisation of the tax receivables and payables.

54

2007 2006

Deferred tax assets 31,336 30,686

Deferred tax liabilities 15,659 14,777

Thousands of Euros



The detail of the calculation of the income tax expense for 2007 and 2006 is as follows:

In calculating the income tax expense for each year, CEPSA took into account the applicable tax

credits for dividend double taxation and investments and other tax incentives.

At 31 December 2007 and 2006, CEPSA did not have any material unused tax credits.

In 2007 and 2006 the income qualifying for the reinvestment tax credit amounted to EUR 578 and

EUR 477 thousand, respectively. This income was reinvested in 2007 and 2006.

55

2007 2006

Taxable profit 353,619 431,097

Gross tax payable 114,926 150,884

Tax relief 2,404 2,404

Tax credits taken 32,498 23,359

Net tax payable 80,024 125,121

Net generation of deferred tax assets 12,681 18,193

Net generation of deferred tax liabilities 758 461

Income tax expense 93,463 143,775

Adjustment of prior years' income tax expense and other items (18,315) (2,177)

Adjustment of deferred tax assets and deferred tax liabilities due to decrease in current tax rate (820) 2,279

Total income tax expense 74,328 143,877

Thousands of Euros



In 2007 and 2006 CEPSA took the following tax credits for environmental investments pursuant to

Article 35 of the Spanish Corporation Tax Law:

Also, pursuant to Article 94.1.a ("Tax Credit for Investment in the Canary Islands”) of Canary Islands

Tax Law 20/1991, the following tax credit for environmental investments in the Canary Islands was

taken:

CEPSA is taxed in Algeria on the income obtained from the prospection for and production of crude

oil from the “Berkine” Block 406 A oilfield, in the central eastern region of the Algerian Sahara, which

is attributed to its permanent establishment.

The tax on remuneration for production activities in force in Algeria is deemed to be of the same

nature as the Spanish corporation tax. The current tax rate is 38% on the gross annual

remuneration in barrels of Saharan Blend crude oil, withheld and settled through the Algerian state-

owned company Sonatrach, in the name and on behalf of CEPSA. New legislation, applicable since

August, was enacted in Algeria in 2006, introducing a new windfall profits tax. On this basis, CEPSA

estimated the expense to be borne in this connection, which is also included, together with the tax

on remuneration for production activities, under “Other Taxes” in the income statement. The

accrued taxes in this connection amounted to EUR 157,495 thousand and EUR 192,808 thousand in

2006 and 2007, respectively.

56

GENERAL TAX REGIME 2007 2006

Environmental investments 6,225 7,139

Tax Credit 498 714

CANARY ISLAND TAX REGIME 2007 2006

Environmental investments - 1,009

Tax Credit - 303

Thousands of Euros

Thousands of Euros



The tax inspection authorities reviewed the returns filed by CEPSA for various taxes, including the

excise tax on oil and gas, and issued tax assessments which were signed on a contested basis.

CEPSA filed the related appeals against these assessments with the appropriate courts. The

Company recognised a provision for the full amount of these assessments and for the related late-

payment interest accrued until 2007 year-end (see Note 14).

The years open for review are as follows:

In 2007 the High-Income Taxpayers Central Office of the State Tax Agency carried out the review

of the years from 2000 to 2004. At the date of these financial statements, no discrepancies in the

returns subject to review had been reported.

CEPSA management does not expect any additional material liabilities for which provisions have not

been recognised to arise as a result of the appeals filed or of inspection of the open years.

57

YEARS OPEN FOR REVIEW

Income Tax 2000 to 2007

Value Added Tax (VAT) and withholdings July 2002 to 2007

Special taxes and VAT on transactions treated as imports 2005 to 2007

Local and Autonomous Community Government taxes 2003 to 2007



17. DIRECTORS’ REMUNERATION AND OTHER BENEFITS

The remuneration (salaries, per diems and other remuneration) earned by CEPSA's directors

amounted to EUR 7,625 thousand in 2007 and EUR 13,961 thousand in 2006. Also, the Company has

not granted any advances or loans to its Board members.

Pursuant to Article 127 ter.4 of the Spanish Companies Law, introduced by Law 26/2003 of 17 July

which amends Securities Market Law 24/1988 of 28 July and the Consolidated Spanish Companies

Law, in order to reinforce the transparency of listed corporations, the directors have made the

disclosures to which the aforementioned Article refers.

Following is a detail of the companies engaging in an activity that is identical, similar or

complementary to the activity that constitutes the company object of Compañía Española de

Petróleos S.A. in which the members of the Board of Directors own equity interests, and of the

functions that they discharge thereat.

58

DIRECTOR Investee Line of Business % of Ownership Function

Mr. Pedro López Jiménez Unión Fenosa S.A. Energy 0.098% Chairman

Mr. Michel Bénézit TOTAL, S.A. Energy Not significant Member of the Executive Comitee

Mr. Fernando de Asúa TOTAL, S.A. Energy Not significant -

ENI Energy Not significant -

ERG Energy Not significant -

GALP Energía Energy Not significant -

REPSOL-YPF Energy Not significant

Mr. Juan Rodriguez Inciarte REPSOL-YPF Energy Not significant -

Mr. Humbert de Wendel TOTAL, S.A. Energy Not significant Director of Finance Division Corporate Development

Mr. Patrick Pouyanné TOTAL, S.A. Energy Not significant Director of Exploration andProduction Strategy and Research and Development



Also, pursuant to the aforementioned law, we set forth below the activities carried on by members

of the Board of Directors that are identical, similar or complementary to the activity that

constitutes the company object of Compañía Española de Petróleos S.A., except for those carried

on at other consolidated CEPSA Group companies.

59

System under Company through Position or

which the Activity which the Activity Function at the Company

DIRECTOR Line of Business is Performed is Performed Concerned

Mr. Murtadha Al Hashemi Integrated oil company As an employee IPIC OMV Aktiengesellschaft

Board Member

Mr. Michel Bénézit Integrated oil company As an employee TOTAL S.A. TOTAL, S.A. Managing Director of Refining and Marketing andExecutive Committee member

Mr. Jean Privey Integrated oil company As an employee TOTAL S.A. TOTAL, S.A. Director ofExploration and Productionfor Africa

Mr. Jacques Porez Integrated oil company As an employee TOTAL S.A. TOTAL S.A. Director of Southand West Europe Division,Refining and Marketing

Ms. Bernadette Spinoy Integrated oil company As an employee TOTAL S.A. TOTAL S.A.Styrene Director

Mr. Eric de Menten Integrated oil company As an employee TOTAL S.A. TOTAL, S.A. Director ofMarketing for Europe

Mr. Saeed Al Mehairbi Oil transport As an employee IPIC SUMED (Suez-MediterraneanPipeline) Deputy Chairman ofthe Board and Board Member

Mr. Saeed Al Mehairbi Oil transport As an employee IPIC COSMO OIL COMPANYBoard Member

Mr. Patrick Pouyanné Integrated oil company As an employee TOTAL S.A. TOTAL S.A.Exploration and ProductionStrategy and Research &Development Director

Mr. Humbert de Wendel Integrated oil company As an employee TOTAL S.A. TOTAL S.A.Director of Finance Division Corporate Development



The following Board members discharge director or executive offices at other Group companies

and associates.

60

Position or Function

DIRECTOR Corporate Name of the Subsidiary at the Company

Mr. Carlos Pérez de Bricio Olariaga Intercontinental Química, S.A. Chairman

Petroquímica Española, S.A. Chairman

Ertisa, S.A. Chairman

Petresa Canada, Inc Chairman

Interquisa Canada, L.P. Chairman

Deten Química, S.A. Chairman

Compañía Lógistica de Hidrocarburos CLH, S.A. Director

H.R.H. Carlos de Borbón-Dos Sicilias Petroquímica Española, S.A. Director

Mr. Dominique de Riberolles Petroquímica Española, S.A. Director

Ertisa, S.A. Director

Cepsa Estaciones de Servicio, S.A. Chairman

Intercontinental Química, S.A. Director

Petresa Canada, Inc Director

Interquisa Canada, L.P. Director

Cepsa International, B.V. Joint Director

Cepsa Gas Comercializadora S.A. Director

Cepsa Portuguesa Petróleos, S.A. Chairman

Compañía Logística de Hidrocarburos CLH, S.A. Director



The classification of Board members by type and gender is as follows:

61

TYPE OF DIRECTOR Women Men Women Men

Executive - 2 - 2

Non-executive shareholder representative 1 14 1 14

Non-executive independent - 2 - 2

Total 1 18 1 18

2007 2006



Thousands of Euros

18. GUARANTEE COMMITMENTS TO THIRD PARTIES AND OTHER CONTINGENT

LIABILITIES

At 31 December 2007 and 2006, CEPSA had provided guarantees to various entities, mainly to

secure financing transactions for Group companies and supply contracts. The detail of these

guarantees is as follows::

With respect to 2007:

(1) (1) Includes guarantees amounting to EUR 62,381 thousand for subsidised loans arranged with

state agencies, which are recognised on the liability side of CEPSA’s balance sheet.

(2) Includes guarantees amounting to EUR 57,333 thousand for subsidised loans granted to

subsidiaries by state agencies, which are recognised on the liability side of the consolidated

balance sheet.

(3) These transactions have been recognised on the liability side of the consolidated Group’s

balance sheet.

(4) Includes bank guarantees for financial transactions relating to CEPSA (loans from EIB)

amounting to EUR 15,025 thousand, which are recognised on the liability side of CEPSA’s

balance sheet.

CEPSA management considers that the unforeseen liabilities, if any, which might arise from the

guarantees provided at 31 December 2007, would not be material.

At 31 December 2007, CEPSA had arranged forward exchange transactions hedging the sales

position in pounds sterling for GBP 5,520 thousand, and the purchase position in Japanese yen for

JPY 2,478,600 thousand.

2007 2006

Bank guarantees to public authorities as a result of CEPSA's business activities (1) 139,957 122,505

Guarantees provided by CEPSA to financial institutions:

As a result of guarantees issued by such institutions to public authorities for the operations of subsidiaries (2) 120,927 119,609

As a result of financial transactions of Group subsidiaries (3) 676,154 521,205

Other guarantees (4) 87,638 80,679

Total 1,024,676 843,998



19. INCOME AND EXPENSES

Revenue

The detail, by market, of CEPSA’s net ordinary sales in 2007 and 2006 is as follows:

Procurements

The detail of "Procurements" is as follows:

63

Product Services Product Services

Sales Provided Total Sales Provided Total

Spain 15,368,190 168,351 15,536,541 14,942,108 139,557 15,081,665

Other EU countries 674,166 2,628 676,794 687,016 1,361 688,377

All other countries 2,238,038 281,768 2,519,806 2,254,729 247,129 2,501,858

Total 18,280,394 452,747 18,733,141 17,883,853 388,047 18,271,900

2007 2006

2007 2006

Goods consumed

Purchases 1,167,093 1,178,677

Raw materials and other materials consumed

Purchases 13,080,252 12,901,464

Changes in inventories 77,860 (97,429)

Other external expenses 10,051 7,733

Total 14,335,256 13,990,445

Thousands of Euros

Thousands of Euros



Fees paid to auditors

The balance of “Independent Professional Services” under “External Services” in the accompanying

income statement for 2007, includes the fees for the audit of the Company’s and Consolidated

financial statements, amounting to EUR 443 thousand. This heading also includes fees for other

services billed by the auditors or by other entities related to the auditors, amounting to EUR 578

thousand.

Transactions with Group companies and associates

The detail of CEPSA’s transactions with Group companies and associates in 2006 and 2007 is as

follows:

64

Services Interest Services Interest Dividends

2006 Purchases Received Paid Sales Provided Collected Received

CEPSA EE.SS. 16 12,600 4,239 3,703,399 - 42 26,000

CEPSA INTERNATIONAL 9,559,398 4,356 28,832 2,399,704 - 15,351 -

CEPSA LUBRICANTES 1,887 1,136 138 18,763 - 11 3,800

ERTISA 31,918 212 - 327,530 - 2,719 10,000

INTERQUISA 8,804 1,921 - 70,465 - 2,565 18,200

INTERQUISA CANADA LP - - - - - 7,368 -

LUBRISUR 2,185 920 1 139,188 - 253 -

PETRESA 83,544 1,487 438 233,328 (2,060) 54 20,000

PROAS - 29 910 269,083 - - 9,700

Other companies 148,972 137,747 7,690 2,074,178 388 9,469 68,932

Total Group companies 9,836,724 160,408 42,248 9,235,638 (1,672) 37,832 156,632

CLH 9,428 99,930 - 5,098 - (5) 21,435

Other companies 50,545 28,505 387 443,275 - 1,786 18,261

Total associates 59,973 128,435 387 448,373 - 1,781 39,696

Other associated entities - 8 2,311 122 - 17 -

Total 9,896,697 288,851 44,946 9,684,133 (1,672) 39,630 196,328

Expenses Income

Thousands of Euros



65

Services Interest Services Interest Dividends

2007 Purchases Received Paid Sales Provided Collected Received

CEPSA EE.SS. 161 12,989 7,562 3,852,937 - - 54,999

CEPSA INTERNATIONAL 9,497,695 6,890 20,995 2,334,573 - 19,024 -

CEPSA LUBRICANTES 2,108 1,369 13 2,586 - 311 -

ERTISA 41,719 1,218 - 483,080 - 8,461 -

INTERQUISA 1,226 4,808 - 72,409 - 5,213 9,000

INTERQUISA CANADA LP - 29 - 1 - 7,255 -

LUBRISUR 3,312 1,157 324 131,035 - 45 24,692

PETRESA 23,274 1,530 1,324 183,464 (925) - 5,600

PROAS - 75 1,541 330,070 - - 2,654

Other companies 168,987 134,137 9,872 2,246,349 168 11,105 58,293

Total Group companies 9,738,482 164,202 41,631 9,636,504 (757) 51,414 155,238

CLH 6,832 102,328 - 8,731 - 5 59,648

Other companies 9,627 36,935 1,664 285,342 - 3,643 4,000

Total associates 16,459 139,263 1,664 294,073 - 3,648 63,648

Other associated entities - 10 2,346 59 - 25 -

Total 9,754,941 303,475 45,641 9,930,636 (757) 55,087 218,886

Expenses Income

Thousands of Euros



The detail of CEPSA’s balances with Group companies and associates at December 31, 2006 and

2007 is a follows:

66

Trade Accounts Non-Current Current

2006 Receivable Other Liabilities Liabilities

CEPSA EE.SS. 330,185 9,340 - 166,218

CEPSA GAS LICUADO 12,519 162,242 - 96

CEPSA INTERNATIONAL 162,845 281,981 149,966 770,167

CEPSA LUBRICANTES 549 1 - 8,460

CEPSA PORTUGUESA 470 99,761 - 690

CEPSA E.P. 559 - - 30,565

ERTISA 53,849 142,123 - 4,553

LUBRISUR 20,549 8,431 - 819

INTERQUISA 19,934 117,572 - 9,137

INTERQUISA CANADA LP 1,108 121,471 - -

PETRESA 33,688 15 - 34,334

PROAS 72,987 1,611 - 31,754

Other companies 275,410 11,269 - 285,747

Total Group companies 984,652 955,817 149,966 1,342,540

CLH 357 10 - 184,543*

Other companies 53,138 59,247 - 41,738

Total associates 53,495 59,257 - 226,281

Other associated entities 30 2 26,411 2,001

Total 1,038,177 1,015,076 176,377 1,570,822

* Including EUR 183,334 thousand relating to the excise tax on oil and gas which became payable in December 2006 and was paid over by CEPSA to the SpanishTreasury through Compañía Logística de Hidrocarburos CLH, S.A.

Asset Balances Liability Balances

Thousands of Euros



67

Trade Accounts Non-Current Current

2007 Receivable Other Liabilities Liabilities

CEPSA EE.SS. 387,929 6,465 - 218,473

CEPSA GAS LICUADO 19,493 143,511 - 86

CEPSA INTERNATIONAL 170,002 428,953 30,099 1,216,547

CEPSA LUBRICANTES 399 1,217 - 4,258

CEPSA PORTUGUESA 631 55,899 - 675

CEPSA E.P. 435 - - 34,164

ERTISA 87,598 189,113 - 10,208

LUBRISUR 27,486 4,579 - 2,271

INTERQUISA 20,939 114,505 - 4,151

INTERQUISA CANADA LP 0 111,095 - -

PETRESA 33,496 15 - 52,094

PROAS 103,974 1 - 42,726

Other companies 380,728 32,872 - 327,680

Total Group companies 1,233,110 1,088,225 30,099 1,913,333

CLH 945 7 - 182,491*

Other companies 49,894 104,938 - 45,010

Total associates 50,839 104,945 - 227,501

Other associated entities 4 6 16,076 1,779

Total 1,283,953 1,193,176 46,175 2,142,613

* Including EUR 183,334 thousand relating to the excise tax on oil and gas which became payable in December 2006 and was paid over by CEPSA to the SpanishTreasury through Compañía Logística de Hidrocarburos CLH, S.A.

Asset Balances Liability Balances

Thousands of Euros



Foreign currency transactions

In 2006 and 2007 CEPSA carried out the following foreign currency transactions in the course of

its ordinary commercial and financial operations (amounts expressed in equivalent euro value):

68

Other

2006 USD GBP Currencies Total

Sales 5,482,556 32,184 - 5,514,740

Purchases 2,085,079 490 - 2,085,569

Services provided 3,068 - - 3,068

Services received 197,456 658 14 198,128

Finance Income 52,181 157 - 52,338

Finance Costs 45,541 16 20 45,577

Other

2007 USD GBP Currencies Total

Sales 5,592,432 41,910 - 5,634,342

Purchases 2,450,972 759 1 2,451,732

Services provided 1,876 - - 1,876

Services received 187,337 773 36 188,146

Finance Income 50,618 3,366 79 54,063

Finance Costs 35,224 264 (120) 35,368

Equivalent Value in Thousands of Euros

Equivalent Value in Thousands of Euros



Extraordinary profit and loss

In 2006 and 2007 CEPSA carried out the following foreign currency transactions in the course of

its ordinary commercial and financial operations (amounts expressed in equivalent euro value):

69

Extraordinary Extraordinary Extraordinary Extraordinary

Expenses Income Expenses Income

Income from non-current assets

For greenhouse emissions allowances (Notes 4.m and 22) 37,733 - 52,435 -

Gains on disposal of other non-current assets 378 31,439 21 640

Provisions recorded 55,011 - 6,480 -

Expenses and indemnities arising from claims 4,062 1,101 1,757 3,275

Grants related to assets transferred to income for the year (Note 4.e)

For amortisation of greenhouse gas emissions (Notes 4.m, 13 and 22) - 19,863 - 52,435

For greenhouse gas emission allowances(Note 4.m, 13 and 22) - 63 - 21,809

Other grants related to assets - 1,175 - 1,400

Change in intangible asset, property, plant and equipment and control portfolio allowances 3,002 - (25,157) -

Other items 1,900 2,398 2,377 852

Total 102,086 56,039 37,913 80,411

2007 2006

Thousands of Euros



The extraordinary income relating to the gain on the disposal of the remaining non-current assets

arose mainly from adjustments to the contract sale prices of the shares of Compañía Logística de

Hidrocarburos, S.A. (CLH) sold in prior years.

In accordance with the accounting principle of prudence, CEPSA has recognised under "Provisions

Recorded" the amounts that might be required to cover expenses for unusual commitments and

liability arising in its dealings with third parties and with its staff and those arising from the

European Commission’s Ruling in the disciplinary proceedings for the alleged involvement of a CEPSA

subsidiary in anti-competitive practices in the asphalt business, against which CEPSA and its

subsidiary have appealed at the EU courts (see Note 14).

The “Change in Intangible Asset, Property, Plant and Equipment and Control Portfolio Allowances”

includes the net adjustments at the end of each year to the value of the assets under these

headings. (See Note 9).

70



20. EMPLOYEES

The average number of employees in 2007 and 2006, by professional category, was as follows:

At 31 December 2007 and 2006, the number of employees, by professional category and gender, was

as follows

71

PROFESSIONAL CATEGORY 2007 2006

Management 59 58

Department Heads 263 272

Other line personnel 1,227 1,185

Specialists/Assistants 1,357 1,334

Total 2,906 2,849

PROFESSIONAL CATEGORY Women Men Women Men

Management 1 56 1 55

Department Heads 32 226 28 237

Other line personnel 228 1,023 225 995

Specialists/Assistants 265 1,138 258 1,070

Total 526 2,443 512 2,357

2007 2006

Average Number of Employees

Number of Employees



21. INFORMATION ON THE ENVIRONMENT

The environmental information for 2006 and 2007 is as follows:

Environmental investments

In accordance with the definition contained in the Spanish Accounting and Audit Institute (ICAC)

Resolution of 25 March 2002, approving the rules for the recognition, measurement and disclosure

of environmental matters in financial statements, environmental investments were identified in

2002, for the purpose of this classification.

CEPSA considers that the main objective of certain investments, such as those made in the

hydrodesulphurisation units, is to adapt the gasoline and diesel specifications to market demand.

Therefore, although the aim of these units is also to reduce sulphur in these products in order to

comply with European environmental legislation, these units have not been specifically classified as

environmental facilities.

72

Balance at Additions/ Period Disposals/ Other Balance at

2006 01.01.06 Provisions Amounts Used Changes 31.12.06

Environmental assets 127,060 9,071 (55) 234 136,310

Accumulated depreciation of environmental non-current assets (71,926) (6,121) 55 3 (77,989)

Total 55,134 2,950 - 237 58,321

Balance at Additions/ Period Disposals/ Other Balance at

2007 01.01.07 Provisions Amounts Used Changes 31.12.07

Environmental assets 136,310 30,693 (36) 7,441 174,408

Accumulated depreciation of environmental non-current assets (77,989) (6,065) 36 (42) (84,060)

Total 58,321 24,628 - 7,399 90,348

Thousands of Euros

Thousands of Euros



Environmental provisions

“Provisions for Contingencies and Expenses” includes the provision to cater for the possible risk of

gradual land pollution, which is the only contingency not covered by the insurance policies taken out

by CEPSA. The amounts used in 2007 basically offset the extraordinary expenses arising from land

treatment.

73

Balance at Additions/ Period Disposals/ Balance at

2006 01.01.06 Provisions Amounts Used 31.12.06

Provisions for environmental contingencies and liabilities 7,010 1,830 (1,230) 7,610

Total 7,010 1,830 (1,230) 7,610

Balance at Additions/ Period Disposals/ Balance at

2007 01.01.07 Provisions Amounts Used 31.12.07

Provisions for environmental contingencies and liabilities 7,610 1,236 (1,236) 7,610

Total 7,610 1,236 (1,236) 7,610

Thousands of Euros

Thousands of Euros



“Other Services” includes mainly the expenses of EUR 2,662 thousand in 2006 and EUR 2,913

thousand in 2007 relating to the inerting of waste at the Company’s facilities.

“Extraordinary Expenses” includes the expenses relating to the adjustment of items for which

provisions had been recognised, included in the “Period Provisions” column in the foregoing

environmental provisions table.

74

2007 2006

Rent and charges 18 -

Repairs and upkeep 135 102

Transport 66 88

Other services 4,511 3,738

Total outside services 4,730 3,928

Extraordinary expenses 1,236 1,830

Total 5,966 5,758

Thousands of EurosEnvironmental expenses



22. INFORMATION ON GREENHOUSE GAS EMISSION

ALLOWANCES

The allowances assigned to CEPSA for no consideration during the period 2005 – 2007 were as

follows:

The assignment of allowances for no consideration each year is measured at the market price

prevailing at the time awarded, i.e. EUR 8.35/MT in 2005, EUR 22.35/MT in 2006 and EUR 5.86/MT in

2007. In 2006 and 2007 no allowances were purchased and no forward contracts referring to

allowances were traded.

At 2007 year-end the market price of the greenhouse gas emission allowances was EUR 0.02/mT.

Consequently, and in application of the criteria contained in the ICAC resolution mentioned earlier

(see Note 4-m), a decline in value of the allowances assigned for no consideration, recognised under

both “Intangible Assets” and “Deferred Income”, was recognised.

75

2005 2006 2007

Assigned allowances 3,287 3,287 3,287

Thousands of tons



The changes in 2006 and 2007 were as follows:

76

Greenhouse Tangible Deferred Provisions for

Gas Emission assets Income Current Cont.

Allowances (See note 7) (See note 13) and Expenses

Balance at 31.12.2005 103 27.449 1.437 26.012

Assignment for no consideration 3,287 74,172 74,172 -

Additions/period provisions - - - 21,809

Reductions/amounts used (3,190) (26,925) (21,809) (26,925)

Depreciation - (52,435) (52,435) -

Balance at 31.12.2006 200 22,261 1,365 20,896

MT Thousands of Euros

Greenhouse Tangible Deferred Provisions for

Gas Emission assets Income Current Cont.

Allowances (See note 7) (See note 13) and Expenses

Balance at 31.12.2006 200 22,261 1,365 20,896

Assignment for no consideration 3,287 18,568 18,568 -

Additions/period provisions - - - 63

Reductions/amounts used (3,139) (3,026) (63) (20,896)

Depreciation - (37,733) (19,863) -

Balance at 31.12.2007 348 70 7 63

MT Thousands of Euros

2006

2007



The value of the emissions made is recognised under “Other Operating Expenses” in the

accompanying income statement and a “Provision for Short-Term Contingencies and Expenses” was

recognised as a balancing item to cater for the obligation to deliver to the government the emission

allowances relating to each of the years. In 2006 CO2 emissions totalled 3,190 thousand tonnes, with

an equivalent value of EUR 21,809 thousand. In 2007 estimated CO2 emissions reached 3,139

thousand tonnes, with a value of EUR 63 thousand. The difference in the amount of the provision is

due mainly to the market price per tonne of CO2 at each year-end.

The use of the grant for allowances assigned for no consideration, which is recognised under

“Deferred Income” (see Note 13), gives rise to the allocation to extraordinary profit (see Note 19),

as the emissions are produced.

In 2006 and 2007 the estimated emissions were lower than the volume of allowances assigned for

each year and, accordingly, the Company had surplus allowances of 200 thousand tonnes in 2006

and 348 thousand tonnes in 2007. Company management does not expect any contingencies to arise

in this connection.

In 2008 the allowances relating to emissions made in 2007 will be delivered to the Spanish

government and the amount corresponding to such allowances will be derecognised from “Intangible

Assets” and “Provision for Short-Term Contingencies and Expenses”.

Company management does not expect any contingencies to arise in this connection.

77



23. RISK MANAGEMENT POLICY

CEPSA carries on its operations in environments subject to certain external factors that could

affect the manner in which transactions are performed and the results obtained therefrom.

The risks arising from the evolution of these external factors are managed by applying policies the

main purpose of which, per the strategy established by Company management, is to optimise the

ratio of costs to risks covered. In the strategic and budgetary planning processes the effect of

risks on the business segments is estimated and a sensitivity analysis is performed of the main

variables, with a view to gaining a comprehensive view of their impact.

The Chairman of the Board and Managing Director, the Managing Director, together with the

Directors of the respective divisions, oversee and monitor risks on a regular basis, and adjust risk

profiles, where necessary, depending on the circumstances.

The main risks can be grouped in the following categories:

Equity risks

The Company has taken out insurance to cover the risk of damage to property, including the

breakdown of machinery and the control of crude-oil wells involved in exploration and production;

the risk of personal injury to employees caused by occupational accidents; the risk of loss of profits

arising from damage to property; the risk of civil liability of both CEPSA and its employees during

the performance of work-related activities and deriving from damage to property or personal injury;

and the risk of loss or damage during the transport of crude oil, products and equipment.

Market risks

The nature of CEPSA’s businesses entails a certain degree of sensitivity to the changes in and

volatility of oil and gas prices, refining margins and energy product sales. In this connection the

Group's high degree of vertical integration, which has increased in recent years, is a strategy that,

of itself, mitigates the effects of economic cycles and their specific impact on the Group's business

units or areas.

In this sense, a rise in the level of crude oil prices has a positive impact on the earnings of the

Exploration and Production division. However, this impact can be dampened due to the application

of the clauses of the Production Sharing Contract (PSC)-type agreements and their effect on the

quantities of crude oil to be received by CEPSA and that are available for sale.

78



Fluctuations in crude oil prices also have an effect on product refining and marketing operations,

the scale of which depends, among numerous other factors, on the speed with which price changes

in energy products or base petrochemical products at source can be relayed to the international

and local finished goods markets.

With respect to fluctuations in prices of crude oil and oil products in international markets, CEPSA

arranges and operates a price risk hedging system that protects variations in stocks of crude and

oil products above and below levels of operating stock previously defined as stock at risk, from price

fluctuations. These fluctuations are hedged with Brent crude in the IPE futures market, where

excess operating stocks are offset by future sales and insufficient volume of operating stocks is

offset by future purchases.

Foreign currency, interest rate and other financial risks

The Company’s operations are exposed, in varying degrees, to risks of fluctuations in the financial

markets. The most serious risk arises from fluctuations in the euro exchange rate versus the US

dollar, the currency in which most crude oil and oil and petrochemical products are priced. A policy

has been established to hedge risks of this type.

From the operational standpoint, the corporate Finance and Risk Department centralises and

manages the foreign currency risk exposure of the Group companies’ net global foreign currency

cash flow position and also manages the recourse to financial markets for loans, investment of

surpluses and financial instruments.

In the case of foreign investments in long-term assets which will generate future cash flows in

foreign currencies, the Group minimises its foreign currency exposure by arranging financing in the

same currency, which hedges, to a certain extent, the foreign currency risk assumed in the cash

flows generated by such assets.

Operations are also sensitive to interest rate changes. The Group has arranged most of its debt at

floating rates, taking into account the low debt ratio and because it considers that this financing

method will entail a lower cost at long term.

79



In order to manage potential short-term fund requirements, the Company has credit facilities

available, the undrawn balance of which does not bear interest, as detailed in Note 15 of the notes

to the financial statements.

The banks with which CEPSA operates are leading Spanish and international entities of renown;

however, the counterparty risk in investments and financial instruments contracts is analysed.

Customer credit risks

Commercial credit and collection management is governed by internal rules and procedures, which

are periodically updated. These rules include the calculation of commercial credit limits for each

customer; the establishment of the most appropriate collection instruments; the steps to be taken

to collect past-due balances and the monitoring and control of the assigned credit limits.

CEPSA also uses risk analysis computer systems to process internal and external data in an

integrated and automated manner. Such data are assessed by applying the models established to

classify each customer’s commercial risk and assign the related credit limit. Insurance policies have

also been taken out to cover the risk of customer default in certain commercial areas.

80



24. INFORMATION ABOUT THE IMPACT OF THE TRANSITION TO NEW

ACCOUNTING STANDARDS.

Royal Decree 1514/2007 was published on 20 November 2007. This Royal Decree approved the new

Spanish National Chart of Accounts that came into force on 1 January 2008 and which must be

applied for all periods beginning on or after that date.

The Company has designed and is implementing a transition plan with a view to adapting to the new

accounting standards which includes, inter alia, analysing the differences in accounting rules and

standards, determining whether or not comparative information adapted to the new standards will

be presented and, consequently, the date of the opening balance sheet, selecting the accounting

rules and standards to be applied in the transition, training to personnel, and assessing the changes

that have to be made to the information systems and procedures.

At the date of preparation of these financial statements, the aforementioned plan was still at the

implementation phase and at present it is not possible to estimate fully, reliably and with all the

relevant information the potential effects of the transition.

25. EVENTS SUBSEQUENT TO YEAR-END

At the date of preparation of these financial statements, no significant events subsequent to 2007

year-end had taken place.

81



26. STATEMENTS OF CHANGES IN FINANCIAL POSITION

The 2007 and 2006 statements of changes in financial position are as follows:

82

SOURCE OF FUNDS 2007 2006

Funds obtained from operations 870,880 890,057

Grants related to assets and other deferred income 785 245

Non-current liabilities

A) Debt securities and other similar liabilities - -

B) Group companies 1,250 211,250

C) Associates - -

D) Other companies - -

E) Non-current assets and other suppliers 29,666 18,119

Non-current asset disposals/Disposal of:

A) Intangible assets 4,336 160

B) Property, plant and equipment 190 610

C) Long-term investments

1 Group companies 1,562 (25)

2 Associates 32,985 145

3 Other investments 3,311 253

Early amortisation or transfer to short-term of long-term investments

A) Group companies 245,668 111,912

B) Associates 3,680 4,762

C) Other investments 2,470 2,460

Deferred charges 43 6

Provisions for contingencies and expenses - -

Total funds obtained 1,196,826 1,239,954

Funds applied in excess of funds obtained (decrease in working capital) 20,536 219,466

Thousands of Euros



83

APPLICATIONS OF FUNDS 2007 2006

Non-current asset additions:

A) Intangible assets 102,684 89,224

B) Property, plant and equipment 279,860 233,346

C) Long-term investments

1 Group companies 70,770 520,967

2 Associates 84,119 12,045

3 Other investments 8,703 7,699

Deferred charges 840 762

Dividends 334,469 334,469

Repayment or transfer to short-term of long-term debt

A) Debt securities and other similar liabilities - -

B) Group companies 165,746 44,629

C) Associates - -

D) Other accounts payable 104,560 176,191

E) Non-current assets and other suppliers 24 232

Provisions for contingences and expenses 65,587 39,856

Total funds applied 1,217,362 1,459,420

Funds obtained in excess of funds applied (increase in working capital) - -

Thousands of Euros



FUNDS OBTAINED FROM OPERATIONS 2007 2006

Net profit for the year 612,242 686,818

Depreciation and amortisation charge and non-current asset provisions 237,758 182,180

Amortisation of expenses 1,059 985

Net provisions for contingencies and expenses 52,085 146

Net provisions for contingencies and expenses, CO2 (17,807) 21,809

Losses on disposal of non-current assets 38,111 52,456

Gains on disposal of non-current assets (31,439) (640)

Grants related to assets transferred to profit (21,101) (75,644)

Deferred interest (167) (220)

Long-term exchange difference 178 152

Deferred income of associates (271) (272)

Deferred income tax 882 (1,363)

Prepaid income tax (650) 23,650

Total 870,880 890,057

Thousands of Euros



85

CHANGE IN WORKING CAPITAL Increases Decreases Increases Decreases

1. Inventories - 82,199 111,421 -

2. Accounts receivable 567,272 - - 40,184

3. Accounts payable - 663,472 175,956 -

4. Short-term investments 186,276 - - 480,543

5. Cash - 21,228 23,712 -

6. Accrual accounts - 7,185 - 9,828

Total 753,548 774,084 311,089 530,555

Change in working capital - 20,536 - 219,466

2007 2006

Thousands of Euros

27. EXPLANATION ADDED FOR TRANSLATION TO ENGLISH

These financial statements are presented on the basis of accounting principles generally accepted in

Spain. Certain accounting practices applied by the Company that conform with generally accepted

accounting principles in Spain may not conform with generally accepted accounting principles in other

countries.


TABLE 1

Detail of companies in which CEPSA has significant direct holdings at December 31, 2007.


Registered Line of % of Share Capital Reserves & Net Cost of

Name Office Business Ownership Subscribed Paid Net Profit Investment

ASFALTOS ESPAÑOLES, S.A. C/ Orense, 34 Oil Refining for 50% 8,529 8,529 11,262 10,066

(ASESA) 4ª Planta. 28020 obtaining asphalt

Madrid. SPAIN products

ATLAS, S.A. COMBUSTIBLES C/ Playa Benitez, s/n. Oil and gas trading 100% 3,930 3,930 11,071 4,077

Y LUBRIFICANTES 51004 Ceuta. SPAIN

C.M.D. AEROPUERTOS Polígono Industrial Jet fuel distribution 60% 21,576 21,576 14,543 12,946

CANARIOS, S.L. Valle de Güimar

Manzana XIV,

parcelas 17 y 18

38509 Güimar

Santa Cruz de Tenerife. SPAIN

CEPSA AVIACIÓN, S.A. ES. Comb. Aviac. Oil and gas transport 100% 954 954 24,417 956

Camino de San Lázaro, s/n

Zona ind. Aeropuerto Tenerife

Norte Los Rodeos. 38206

San Cristobal de la Laguna

Santa Cruz de Tenerife. SPAIN

CEPSA COLOMBIA, S.A. Avda. Ribera del Loira, nº 50. Research and 100% 12,055 12,055 360 11,277

28042 Madrid. SPAIN exploration

CEPSA COMERCIAL C/ Embajadores Final, s/n. Oil and gas trading 100% 1,169 1,169 1,242 2,419

MADRID, S.A. (CECOMASA) Apartadero Santa Catalina

28018 Madrid. SPAIN

CEPSA E. P., Avda. Ribera del Loira, nº 50. Research and 100% 3,438 3,438 23,142 16,136

SOCIEDAD ANONIMA 28042 Madrid. SPAIN exploration

CEPSA EGYPT SA, B.V Amsteldijk 166 6Th Floor. Research and 100% 8,910 8,910 -9,827 12,128

1079 LH Amsterdam. exploration

THE NETHERLANDS

CEPSA GAS Avda. Partenón nº 12. Gas sale and 35% 3,060 3,060 12,233 1,071

COMERCIALIZADORA, S.A. 28042 Madrid. SPAIN distribution

CEPSA GAS LICUADO, S.A. Avda. Ribera del Loira, nº 50 Gas sale and 100% 36,752 36,752 54,838 42,012

1ª planta. 28042 distribution

Madrid. SPAIN

CEPSA ESTACIONES DE Avda. Partenón, 12. 28042 Service station 100% 82,043 82,043 158,540 120,017

SERVICIO, S.A. (CEPSA EE.SS.) Madrid. SPAIN operation

CEPSA INTERNATIONAL B.V. Steegoversloot 64. 3311 Oil and gas 100% 4,060 4,060 23,532 15,210

PR Dordrecht. trading

THE NETHERLANDS

CEPSA ITALIA, S.p.A. Viale Milanofiori Palazzo Petrochemicals 100% 6,000 6,000 8,879 6,934

A/6. 20090 Assago- trading

Milán. ITALY

CEPSA LUBRICANTES, Avda. Ribera del Loira 50 Lubricant trading 100% 15,000 15,000 27,716 15,025

S.A. (C.L.S.A.) 3ª planta. 28042

Madrid. SPAIN

CEPSA MARINE FUELS, S.A. Avda. del Partenón nº 10 Oil and gas trading 100% 25,060 25,060 18,849 25,060

(Campo de las Naciones)

1ª planta. 28042 Madrid. SPAIN

Equity

Thousands of Euros



87

Registered Line of % of Share Capital Reserves & Net Cost of

Name Office Business Ownership Subscribed Paid Net Profit Investment

CEPSA OPERACIONES Avda. de Anaga, nº 21. 38001 Corporate services 100% 60 60 11,919 60

MARINA-AVIACIÓN, S.A. Santa Cruz de Tenerife for bunkering- aviation

Tenerife. SPAIN. and oil transport

CEPSA PERU, S.A. Avda. Partenón, 12. 28042. Research and 100% 1,000 1,000 -154 1,000

Madrid. SPAIN exploration

CEPSA PORTUGUESA . Avda. Columbano Bordalo Oil and gas trading 96% 27,500 27,500 14,846 37,201

PETROLEOS, S.A Pinheiro, 108 3º. 1070-067

Lisbon. PORTUGAL

CEPSA QUÍMICA, S.A. Avda. del Partenón nº 12-14. Corporate Services 100% 60 60 -438 60

28042 Madrid. SPAIN

CEPSA UK, LTD. Audrey House 16 - 20 Petrochemicals trading 100% 136 136 8,622 154

Ely Place. EC1N 6SN

London. UK

CEPSA, S.A. Avda. del Partenón, 12. Corporate Services 100% 61 61 121 61

28042 Madrid. SPAIN

COMPAÑÍA LOGÍSTICA DE C/ Méndez Álvaro, nº 44 Oil product distribution 14% 84,070 84,070 202,014 61,821

HIDROCARBUROS CLH, S.A. Edificio 9 planta baja

28045 Madrid. SPAIN

DERIVADOS ENERGÉTICOS Avda. Partenón, 12 1ª Oil product distribution 100% 12,330 12,330 26,538 12,328

PARA EL TRANSPORTE Sector A. 28042

Y LA INDUSTRIA, S.A. (DETISA) Madrid. SPAIN

ERTISA, S.A. Avda. del Partenón, nº 12 Production and sale 100% 13,005 13,005 125,904 17,173

28042 Madrid. SPAIN of petrochemicals

INTERCONTINENTAL Avda. Partenón, 12 2ª Production and sale 100% 25,865 25,865 207,413 50,111

QUIMICA, S.A. (INTERQUISA) Sector D. 28042 of petrochemicals

Madrid. SPAIN

LUBRICANTES DEL SUR, S.A. Avda. Ribera del Loira, nº 50 Lubricant trading 100% 6,102 6,102 22,184 24,610

(LUBRISUR) 2ª planta. 28042

Madrid. SPAIN

NUEVA GENERADORA Avda. San Luis, nº 77 . Power generation 50% 96,000 96,000 29,175 71,100

DEL SUR, S.A. Edificio C 4ª planta

28033 Madrid. SPAIN

PETROQUÍMICA ESPAÑOLA, Avda. Partenón, 12 5ª Production and sale 100% 3,750 3,750 251,662 12,847

S.A. (PETRESA) Sector A. 28042 of petrochemicals

Madrid. SPAIN

PETRÓLEOS DE CANARIAS, Explanada de Tomás Quevedo, Bunkering services 100% 120 120 25,922 120

S.A. (PETROCAN) s/n. 35008 Las Palmas

de Gran Canarias

Gran Canaria. SPAIN

PRODUCTOS ASFÁLTICOS, Avda. Ribera del Loira, nº 50 Asphalt product sales 100% 3,150 3,150 8,424 5,312

S.A. (PROAS) 2ª planta. 28042

Madrid. SPAIN

PROPEL-PRODUTOS . Avda. Columbano Bordalo Supply point management 93% 224 224 2,621 1,356

DE PETROLEO, L.D.A Pinheiro, 108-3º. 1070-067 services

Lisbon. PORTUGAL

Equity

Thousands of Euros



MANAGEMENT DISCUSSION & ANALYSIS

of 2007 for Compañía Española de Petróleos, S.A., CEPSA

A review of the environment in which CEPSA conducted its operations, as well as an explanation of

the progress of the Company’s activities in its different segments, the risks associated with its

businesses, its financial position and its research & development work and initiatives, can all be

found in the Management Discussion & Analysis of the CEPSA Group.

Likewise, the description therein of key events that took place subsequent to the end of the year

and the Consolidated Group’s future prospects and outlook are fully applicable to the parent

company CEPSA.

RESULTS

In 2007, CEPSA’s revenues from product sales mainly on the domestic market amounted to �18,733

million (�16,391 million excluding the excise tax on oil and gas charged to sales), up �461 million from

the year before. The cost of crude oil and product purchases increased by a similar amount - �345

million – totaling �14,335 million in the year.

Income from ordinary activities came to ?925 million, evidencing a slight decline of 2% compared to

2006. Extraordinary results had a negative impact on the earnings statement of �46 million.

After deducting corporate tax and other tax-related expenses, net income stood at �612 million,

sliding 11% from the year before.

Based on CEPSA’s 2007 earnings, the Board of Directors will submit a proposal to the Annual

General Meeting of Shareholders to approve a dividend distribution of �1.25 per share, the same as

the dividend paid out on 2006’s earnings.

This proposed dividend entails a disbursement of �334.5 million, equivalent to a payout ratio of

approximately 52% of consolidated attributable income before non-recurring items. Out of this

total figure, an interim dividend of �0.55 per share was distributed in 2007.



89

FINANCIAL AND EQUITY POSITION

At December 31, 2007, CEPSA’s total net assets amounted to �6,778 million, �3,163 million of which

belonged to the net book value of long-term assets. At this same date, shareholders’ equity stood

at �3,508 million, financing 52% of net assets.

TRANSITION TO NEW INTERNATIONAL FINANCIAL REPORTING STANDARDS

Royal Decree 1514/2007 was published on November 20, 2007, authorizing the new Chart of

Accounts in Spain, which became effective January 1, 2008, and whose application is mandatory for

successive fiscal years.

The Company has drawn up and is putting a transition plan into place to adapt its financial

statements to these new accounting standards. Some aspects of the new plan include the analysis

of differences in accounting criteria and principles and their selection, workforce training courses

and the evaluation of required changes and modifications in information procedures and systems.

This plan is in the execution phase although for the time being, the Company is unable to fully and

reliably estimate the impacts arising out of this transition.

TREASURY STOCK

CEPSA and its Group of companies did not directly or indirectly repurchase, nor did it own, shares

of Compañía Española de Petróleos, S.A. in 2007.



OTHER INFORMATION

Pursuant to the provisions of the amended Securities Market Act 6/2007, the following additional

information which is required to be reported by listed companies in their management reports is

included herein, as follows:.

a) Share Capital Structure

At December 31, 2007, the fully issued and paid-up share capital of Compañía Española de Petróleos,

S.A. amounted to �267,574,941, divided into 267,574,941 ordinary bearer shares, with a par value of

one (1) euro each.

All CEPSA shares carry equal voting and dividend rights and trade on all four Spanish Stock

Exchanges in the Continuous Market.

At December 21, 2007, there were no outstanding capital increases or convertible bonds.

b) Restrictions on the Transferability of Shares

There are no legal or by-law restrictions for acquiring or transferring shareholdings in the Company,

except as otherwise provided for by law.

c) Significant Holdings in the Share Capital

At December 31, 2007, the direct and indirect holders of significant interests in the share capital of

Compañía Española de Petróleos, S.A. were as follows:

Number of voting rights

Corporate name of shareholder Direct Indirect Accumulated % shareholding

Total S.A. 0 130,668,180 130,668,180 48.83%

Banco Santander 76,832,401 7,849,886 84,682,287 31.65%

International Petroleum Investment Company (IPIC) 25,513,560 - 25,513,560 9.54%

Unión Fenosa S.A. 13,378,980 - 13,378,980 5.00%



d) Restrictions on Voting Rights

There are no legal or by-law restrictions on voting rights, except as otherwise provided for by law.

Nevertheless, Article 23 of the Company Bylaws states that right of admission to the Annual

General Meeting, with the number of votes entitled to each shareholder is reserved to those

shareholders of record who can demonstrate ownership of a minimum of sixty (60) shares, at least

five (5) days prior to the scheduled date of the Annual General Meeting on first call.

e) Shareholder Agreements

Compañía Española de Petróleos, S.A. is unaware of the existence of any agreements or concerted

actions among its shareholders.

f.1) Applicable Standards Regarding the Appointment and Replacement of

Members of the Board of Directors

Directors are appointed, ratified, re-elected or removed from office by the Annual Meeting.

Without prejudice to what is set forth in laws in force regarding the appointment of Directors

according to the system of proportionality, significant shareholders propose nominees to serve on

the Board, with the Board of Directors having express powers to co-opt members onto the Board

whenever vacancies arise and to accept, where applicable, resignations tendered by Directors, as

provided for in current regulations and the Company Bylaws.

Directors shall resign from their duties on the Board whenever, upon completion of the period for

which they were appointed, they are not re-elected by the first General, whether Ordinary or

Extraordinary, Meeting following completion of such period or the legal period for holding the Annual

Meeting that is supposed to approve the financial statements of the previous year has elapsed, or

whenever the Annual Meeting so decides, using the powers granted to them by law or in the

Company Bylaws.

Likewise, pursuant to the provisions of the Rules and Regulations of the Board of Directors,

Directors must relinquish their seats to the Board and tender, if this body deems it advisable, the

corresponding resignation in the following cases:

• In the event that they resign from the executive position with which their appointment is connected.

• In the event that they are involved in any of the cases of incompatibility or prohibition legally

provided for.

• In the event that they are convicted for a criminal offense.

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f.2) Applicable Standards Regarding the Amendment of the Company Bylaws

As provided for in Articles 20 and 21 of the Company Bylaws, the Ordinary or Extraordinary General

Meeting of Shareholders shall have broad powers to deliberate on and pass resolutions regarding

the amendment of said Bylaws.

However, to be able to lawfully make any amendment to such Bylaws, shareholders who hold at least

fifty (50) percent of the outstanding voting shares of the Company must be present in person or

represented by proxy at the Meeting, while twenty five (25) percent of this voting capital shall

suffice for the second call, in order for the Meeting to have a valid quorum to transact the

aforesaid business.

When attended by shareholders representing less than fifty (50) percent of the outstanding shares

of capital stock of the Company entitled to vote, the resolutions to which the preceding paragraph

refer may only be validly adopted with the affirmative vote of two-thirds of the capital present in

person or by proxy at the Meeting (Article 28 of the Bylaws).

For such purposes, the Company will abide by the system set out in the Corporations Act, in Article

114 and subsequent articles.

g)Powers Assigned to the Board of Directors

Powers delegated to the Chief Executive Officers of Compañía Española de Petróleos, S.A. include

those set forth in the Company Bylaws, as well as other powers delegated by the Board that may

be required to govern and represent the Company and to undertake transactions involving

ownership, management, negotiation and engagement. CEPSA’s current two Chief Executive

Officers act jointly and severally.

The resolutions of the Board of Directors shall be adopted by an absolute majority of Board members

in attendance at a meeting and in cases of a tie, the Chairperson shall have the casting vote.

The Board of Directors is expressly authorized, as resolved by the Annual General Meeting of

Shareholders held on June 23, 2006, to adopt a resolution to increase the Company’s share capital,

without prior consent from the Annual Meeting, by means of new cash contributions to

shareholders equity, in an amount not exceeding �133,787,471.

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The Board of Directors may use this authorization once or several times and in the manner and

amount it deems advisable, within a period of five (5) years starting from the aforementioned date

of June 23, 2006, and is required to report on the resolution or resolutions adopted in the first

Annual Meeting held thereafter. The Board is likewise authorized to nullify, where applicable, the

unsubscribed portion of the capital increase (s) resolved under this authorization.

The Annual General Meeting of Shareholders held on May 28, 2004, authorized the Board of

Directors to be able to issue, under the terms and conditions established for these purposes in

current legislation, fixed-yield securities that are not convertible into shares of the Company within

a maximum five-year period and up to the limit of �300 million.

No authorization has been granted by the Annual Meeting to the Board of Directors to acquire

treasury stock.

h)Significant Agreements Entered Into by the Company

There are no significant agreements that have been entered into by the Company and that may

become effective, be amended or finalize in the case of a change of control in the Company as a

result of a public takeover bid on shares.

i) Agreements Between the Company and its Directors, Executive Officers or

Employees Regarding Severance Payments

There are no clauses of this kind in effect for directors, executive officers or employees, including

executive directors, in the event of resignation, dismissal or changes in control as a result of a public

takeover bid. In the event of dismissal, they shall be entitled to the same severance payment system

that they would have had in the case of coming under the collective labor agreement.

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Documents

2007 LEGAL DOCUMENTS - Cepsa