Case 1:13-cv-00842-SAS Document 27 Filed 06/06/13 Page 1 of …securities.stanford.edu/.../201366_r01c_13CV00842.pdf · 2013-06-20 · Case 1:13-cv-00842-SAS Document 27 Filed 06/06/13

Case 1:13-cv-00842-SAS Document 27 Filed 06/06/13 Page 1 of 47

UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK

x MONROE COUNTY EMPLOYEES’ : Civil Action No. 1:13-cv-00842-SAS RETIREMENT SYSTEM, Individually and On : (Consolidated) Behalf of All Others Similarly Situated, :

: CLASS ACTION Plaintiff, :

: CONSOLIDATED AMENDED vs. : COMPLAINT FOR VIOLATIONS OF THE

: FEDERAL SECURITIES LAWS YPF SOCIEDAD ANONIMA, et al., :

Defendants. :

: DEMAND FOR JURY TRIAL

x


Lead Plaintiff Felix Portnoy (“Plaintiff”), by his undersigned attorneys, on behalf of himself

and the class he seeks to represent, for his Consolidated Amended Complaint for Violations of the

Federal Securities Laws (the “Complaint”), alleges the following based upon the investigation of

Plaintiff’s counsel, which included a review of the United States Securities and Exchange

Commission (“SEC”) filings by YPF Sociedad Anonima (“YPF” or the “Company”) and Repsol

YPF, S.A. (“Repsol”), as well as regulatory filings and reports, securities analysts’ reports and

advisories about YPF and Repsol, press releases and other public statements issued by YPF and

Repsol, and media reports about YPF and Repsol. Plaintiff believes that substantial additional

evidentiary support will exist for the allegations set forth herein after a reasonable opportunity for

discovery.

NATURE OF THE ACTION

1. This is a federal securities class action on behalf of a class consisting of all

purchasers, other than Defendants (defined below), of the American Depositary Shares (“ADSs”) of

YPF between December 22, 2009 and April 16, 2012, inclusive (the “Class Period”), seeking to

pursue remedies under the Securities Exchange Act of 1934 (the “Exchange Act”).

2. This action concerns materially false and misleading statements and material

omissions regarding YPF and its operations. YPF, which is based in Argentina, is focused on the

exploration and development of oil and gas within Argentina. Prior to 1999, YPF had been partially

owned by the Argentinean government. In 1999, Repsol, an oil and gas company based in Spain,

acquired 99% of YPF.

3. Prior to and during the Class Period, the Argentinean government became

increasingly dissatisfied with Repsol’s management of YPF and YPF’s operations. The Argentinean

government’s concerns included: (i) that Argentina was becoming a net importer of natural gas and

oil, despite having a sufficient supply of its own natural resources; (ii) that YPF was not adequately


producing oil and gas within Argentina; and (iii) that YPF was distributing a large portion of its

profits to Repsol and its other shareholders in the form of high dividends instead of reinvesting them

back into the Company and its operations.

4. Repsol knew that it could not outright ignore the concerns of the Argentinean

government since the Argentinean government had a track record of nationalizing companies that

ignored its criticisms. Accordingly, in an effort to allay the Argentinean government’s concerns, in

late 2007, Repsol agreed to sell (in stages) up to 25% of its YPF holdings to the Petersen Group, an

entity owned by businessman Enrique Eskenazi, who was closely allied with the Argentinean

government.

5. This effort at appeasement, though, did not have its intended effect. In December

2007, the Argentinean government, through its newly elected President, Christina Fernández

(“Fernández”), again warned YPF to lower its dividend payouts and increase its investment in

Argentinean concession contracts. Unbeknownst to investors, and despite its public statements to

the contrary, YPF failed to make the proper adjustments and continued to under-produce and failed

to adequately fund Argentinean energy projects.

6. In December 2009, at the start of the Class Period, YPF announced the adoption of

the Horizon 2014 Plan, a five-year plan that was seemingly aimed at increasing exploration in

untapped regions of Argentina. In reality, however, the plan was part of a scheme by Repsol to

appear responsive to the Argentinean government’s concerns regarding the lack of YPF’s production

and stave off any immediate attempt at nationalization so that, among other things, Repsol could

continue to reduce its stake in YPF at artificially inflated prices. For example, during 2009, YPF

invested 81% less than what Repsol estimated and 61% less than what the Company had promised

the government it would invest in the Barrancas, La Ventana, Vizcacheras and Seflal Picada-Punta

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Barda areas. Similarly, in 2010, YPF invested 64% less than its forecast and 53% less than what it

had promised to invest to authorities in Argentina.

7. In furtherance of this scheme, on December 7, 2010, Repsol announced what it

described as a “new discovery” in the Vaca Muerta field, a shale oilfield, which revealed “significant

non-conventional gas potential in that basin.” Following this announcement, Repsol began divesting

its shares of YPF through: (i) private sales to several investment funds; (ii) a $1 billion public

offering (the “Offering”); and (iii) the exercise of the option held by the Petersen Group to acquire

the balance of its 25% stake.

8. By late 2011, the Argentinean government’s dissatisfaction with the lack of

investment on behalf of YPF increased. On November 3, 2011, in an article entitled “Argentina:

Government rejects YPF dividends distribution proposal,” El Cronista Comercial reported that the

Argentine Government’s representative on YPF’s board of directors “rejected a proposal to

distribute dividends, as the State continues its efforts to contain capital flight.”

9. Then, on January 30, 2012, it was reported that Argentine officials were discussing a

takeover of YPF because of its lack of investment in Argentina. In response, the Company’s ADSs

declined $4.02 per ADS, or over 10%, to close at $35.86 per ADS.

10. On February 29, 2012, it was reported that Defendant Brufau (defined below) was

meeting with President Fernández regarding YPF’s lack of investment in Argentina. This news

caused the Company’s ADSs to decline $4.37 per ADS, or over 14%, to close at $26.23 per ADS.

11. Then, on April 16, 2012, President Fernández announced that the Argentinean

government would nationalize YPF and seize a majority stake in YPF from Repsol. Fernández also

ousted Defendant S. Eskenazi (defined below) as YPF’s Chief Executive Officer (“CEO”), among

others, and named two top government aides to run the Company.

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12. On the news of YPF’s nationalization, trading in the Company’s ADSs was halted on

April 17, 2012. When trading resumed on April 18, 2012, the price of the Company’s ADSs

declined $6.38 per ADS, or over 32%, to close at $13.12 per ADS, on significantly heavy trading

volume.

13. From April 16, 2012 to June 1, 2012, the Argentinean government, led by Deputy

Economy Minister Axel Kicillof and Planning Minister Julio de Vido, conducted an audit of

Repsol’s internal data and documents, and interviewed employees. The findings were published on

or about June 1, 2012 and became known as “The Mosconi Report,” a copy of which is attached

hereto as Exhibit A. According to the Argentinean government, the aim of the Mosconi Report was

to “provide evidence [of Repsol’s] strategy of depredation, disinvestment and failure to appropriately

supply the domestic market” since it took control over YPF in 1999. Mosconi Report at 3. The

Mosconi Report confirmed, among other things, that: (a) Repsol had used YPF to support and

finance its own strategy for global expansion by paying itself high dividends rather than investing in

“exploration and exploitation activities”; (b) Repsol had grown dissatisfied with the Argentinean

government’s “domestic price management policy” and, as a result, had gradually abandoned YPF’s

exploration activities in order to force international and domestic prices to converge; (c) Repsol was

focused solely on extracting oil from existing oil fields, which caused a “systematic decline of the

Company’s oil and natural gas production”; and (d) Repsol intended to sell YPF’s major discovery –

the Vaca Muerta – instead of making the necessary investment to develop it and thereby increase

domestic production. As Deputy Economy Minister Kicillof noted during his presentation of the

Mosconi Report, “The purpose of Repsol was to milk dry YPF, and make money at any cost since

they left a total mess of the company with record low production and record low reserves.”

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14. Thus, despite its representations to investors that it was prudently investing YPF’s

profits in YPF’s growth and operations within Argentina and was making the necessary changes to

address the Argentinean government’s specific concerns, throughout the Class Period, Repsol

continued to divert YPF’s profits to pay itself and the Eskenazi family abnormally high dividends

(80 to 90%) so that Repsol could use the money to finance its own international expansion and the

Eskenazi family could pay back the “no-money down” loans it had received from its lenders (which

included Repsol) to acquire its stake in YPF.

JURISDICTION AND VENUE

15. The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a) of the

Exchange Act [15 U.S.C. §§78j(b) and 78t(a)] and Rule 10b-5 promulgated thereunder [17 C.F.R.

§240.10b-5].

16. This Court has jurisdiction over this action pursuant to Section 27 of the Exchange

Act [15 U.S.C. §78aa], and 28 U.S.C. §1331.

17. Venue is properly laid in this District pursuant to Section 27 of the Exchange Act and

28 U.S.C. §1391(b) and (c). Many of the acts charged herein, including the preparation and

dissemination of materially false and misleading information, occurred in substantial part in this

District. YPF ADSs are traded on the New York Stock Exchange (“NYSE”), which is based in this

District.

18. In connection with the acts and conduct alleged in this Complaint, Defendants,

directly or indirectly, used the means and instrumentalities of interstate commerce, including, but not

limited to, the mails, interstate telephone communications and the facilities of the national securities

markets.

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PARTIES

19. Lead Plaintiff Felix Portnoy purchased the ADSs of YPF during the Class Period, as

set forth in his certification previously filed with the Court and incorporated herein by reference, and

was damaged thereby.

20. Defendant YPF, an Argentinean corporation, maintains its principal executive offices

at Macacha Guemes 515, 1106 Buenos Aires, Argentina.

21. Defendant Repsol, formerly known as Repsol YPF, S.A., is a limited liability

company that exists under the laws of the Kingdom of Spain. Repsol’s principal executive offices

are located at Paseo de la Castellana 278, 28046 Madrid, Spain.

22. Defendant Antonio Brufau Niubo (“Brufau”) was, at all relevant times, Chairman and

Chief Executive Officer (“CEO”) of Repsol.

23. Defendant Sebastián Eskenazi (“S. Eskenazi”) was, at all relevant times, YPF’s

Executive Vice-Chairman, CEO and Director.

24. Defendant Guillermo Reda (“Reda”) was, at all relevant times, YPF’s Chief Financial

Officer.

25. Defendants Brufau, S. Eskenazi and Reda are referred to herein as the “Individual

Defendants.”

26. During the Class Period, the Individual Defendants, as senior executive officers, and

Repsol, through its large ownership stake of shares of YPF and its representatives on YPF’s Board

of Directors, were privy to confidential and proprietary information concerning YPF, its operations,

finances, financial condition and present and future business prospects. The Individual Defendants

and Repsol also had access to material adverse non-public information concerning YPF, as discussed

in detail below. Because of their positions with YPF, the Individual Defendants and Repsol had

access to non-public information about its business, finances, products, markets and present and

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future business prospects via internal corporate documents, conversations and connections with other

corporate officers and employees, attendance at management and/or board of directors meetings and

committees thereof and via reports and other information provided to them in connection therewith.

Because of their possession of such information, the Individual Defendants and Repsol knew or

recklessly disregarded that the adverse facts specified herein had not been disclosed to, and were

being concealed from, the investing public.

27. By reason of their management/director positions and/or their ownership of shares of

YPF, and their ability to make public statements in the name of YPF, the Individual Defendants and

Repsol were and are controlling persons, and had the power and influence to cause (and did cause)

YPF to engage in the conduct complained of herein.

28. The Individual Defendants and Repsol, because of their positions with the Company

and large ownership stake, controlled and/or possessed the authority to control the contents of YPF’s

reports, press releases and presentations to securities analysts and through them, to the investing

public. The Individual Defendants were provided with copies of the Company’s reports and press

releases alleged herein to be misleading, prior to or shortly after their issuance and had the ability

and opportunity to prevent their issuance or cause them to be corrected. Thus, the Individual

Defendants and Repsol had the opportunity to commit the fraudulent acts alleged herein.

29. As senior executive officers and/or directors and as controlling persons of a publicly

traded company whose ADSs were, and are, registered with the SEC pursuant to the Exchange Act,

and were, and are, traded on the NYSE and governed by the federal securities laws, the Individual

Defendants and Repsol had a duty to promptly disseminate accurate and truthful information with

respect to YPF’s financial condition and performance, growth, operations, financial statements,

business, products, markets, management, earnings and present and future business prospects, and to

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correct any previously issued statements that had become materially misleading or untrue, so that the

market price of YPF ADSs would be based upon truthful and accurate information. The Individual

Defendants’ misrepresentations and omissions during the Class Period violated these specific

requirements and obligations.

30. The Individual Defendants and Repsol are liable as participants in a fraudulent

scheme and course of conduct that operated as a fraud or deceit on purchasers of YPF ADSs by

disseminating materially false and misleading statements and/or concealing material adverse facts.

The scheme: (i) deceived the investing public regarding YPF’s business, operations and management

and the intrinsic value of YPF ADSs; (ii) enabled Defendant Repsol to sell more than $1 billion of

its own shares of YPF ADSs in a public offering at artificially inflated prices; (iii) allowed

Defendant Repsol to divest its ownership of YPF at artificially inflated prices; (iv) enabled

Defendant Repsol and the Petersen Group (described below) to receive abnormally high dividends so

that Repsol could fund its international expansion and the Eskenazi family could pay back the “no-

money down” loans it received from Repsol and certain banks to acquire its stake in YPF; and (v)

caused Plaintiff and members of the Class to purchase YPF ADSs at artificially inflated prices.

CLASS ACTION ALLEGATIONS

31. Plaintiff brings this action as a class action pursuant to Federal Rule of Civil

Procedure 23(a) and (b)(3) on behalf of a class consisting of all those who purchased the ADSs of

YPF between December 22, 2009 and April 16, 2012, inclusive, and who were damaged thereby (the

“Class”). Excluded from the Class are Defendants, the officers and directors of the Company, at all

relevant times, members of their immediate families and their legal representatives, heirs, successors

or assigns and any entity in which Defendants have or had a controlling interest.

32. The members of the Class are so numerous that joinder of all members is

impracticable. Throughout the Class Period, YPF ADSs were actively traded on the NYSE. While

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the exact number of Class members is unknown to Plaintiff at this time and can only be ascertained

through appropriate discovery, Plaintiff believes that there are hundreds or thousands of members in

the proposed Class. Record owners and other members of the Class may be identified from records

maintained by YPF or its transfer agent and may be notified of the pendency of this action by mail,

using the form of notice similar to that customarily used in securities class actions.

33. Plaintiff’s claims are typical of the claims of the members of the Class as all members

of the Class are similarly affected by Defendants’ wrongful conduct in violation of federal law

complained of herein.

34. Plaintiff will fairly and adequately protect the interests of the members of the Class

and has retained counsel competent and experienced in class action and securities litigation.

35. Common questions of law and fact exist as to all members of the Class and

predominate over any questions solely affecting individual members of the Class. Among the

questions of law and fact common to the Class are:

(a) whether the federal securities laws were violated by Defendants’ acts as

alleged herein;

(b) whether statements made by Defendants to the investing public during the

Class Period misrepresented and/or omitted material facts about the business and operations of YPF;

(c) whether the price of YPF ADSs was artificially inflated during the Class

Period; and

(d) to what extent the members of the Class have sustained damages and the

proper measure of damages.

36. A class action is superior to all other available methods for the fair and efficient

adjudication of this controversy since joinder of all members is impracticable. Furthermore, as the

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damages suffered by individual Class members may be relatively small, the expense and burden of

individual litigation make it impossible for members of the Class to individually redress the wrongs

done to them. There will be no difficulty in the management of this action as a class action.

SUBSTANTIVE ALLEGATIONS

YPF, Repsol and the Petersen Group

37. YPF describes itself as “Argentina’s leading energy company, operating a fully

integrated oil and gas chain with leading market positions” across the domestic upstream and

downstream segments.

38. In 1999, Repsol, a Spanish-based integrated oil and gas company, acquired 99% of

YPF in a transaction that was largely financed by debt. Repsol paid close to $16 billion, or

$44.78 per share, to acquire its YPF stake. Repsol’s majority acquisition of YPF made it the largest

privately-owned energy company in Spain and Latin America.

39. From 2000 to the end of 2007, Repsol continued to own approximately 99% of YPF.

During this time, the Argentinean government grew increasingly dissatisfied with Repsol’s

management of YPF and YPF’s operations. The Argentinean government’s concerns included:

(i) that Argentina was becoming a net importer of natural gas and oil, despite having a sufficient

supply of its own natural resources; (ii) that YPF was not adequately producing oil and gas within

Argentina; and (iii) that YPF was distributing a large portion of its profits to Repsol and its other

shareholders in the form of high dividends instead of reinvesting them back into the Company and

its operations.

40. Repsol knew that it could not outright ignore the concerns of the Argentinean

government since the Argentinean government had a track record of nationalizing companies that

ignored its criticisms. Accordingly, in an effort to allay the Argentinean government’s concerns, in

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late 2007, Repsol agreed to sell up to 25% of its YPF holdings to the Petersen Group, an entity

owned by businessman Enrique Eskenazi, who was closely allied with the Argentinean government.

41. The deal would provide the Petersen Group with a 14.9% stake in YPF at a cost of

$2.235 billion, together with an option to purchase an additional 10.1% interest within the next four

years. At the time of the transaction, Repsol owned approximately 80% of YPF.

42. The Eskenazi family had risen to political, social and economic fame in Argentina

over the years through its various bank ownerships and construction companies. The Eskenazi

family’s patriarch, billionaire Enrique Eskenazi, was a close friend and confidant of Argentine

President Nestor Kirchner (“Kirchner”). The Eskenazi family’s ties with Kirchner stem from its real

property development projects in Kirchner’s home province of Santa Cruz, which he governed for

ten years before becoming President, as well as from Eskenazi being a majority stake-holder in the

state bank of Santa Cruz.

43. The Petersen Group’s acquisition of YPF shares was paid for by loans from a group

of banks, as well as loans from Repsol. As collateral for the loans, the Petersen Group was allowed

to post the actual YPF shares it was purchasing. In order to pay back the loans, the Petersen Group

used the dividend payments it received from its ownership interest in YPF stock. The Petersen

Group specifically structured this transaction with the expectation that it would receive abnormally

high dividends, which it would then use to pay back the loans.

44. After acquiring its stake in YPF, the Eskenazi family was quickly placed in

controlling positions at YPF. Enrique Eskenazi was ushered in as YPF’s Vice Chairman and

Director. Enrique’s son, Defendant S. Eskenazi, was placed as YPF’s Executive Vice Chairman,

CEO and Director. Matías Eskenazi Storey, Enrique’s other son, assumed the roles of Assistant

Director and Director of YPF.

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45. Despite the Eskenazi family’s involvement in YPF, the Argentinean government

continued to be frustrated with the way that YPF was being run. In December of 2007, Kirchner was

succeeded by his wife, Christina Fernández, as President of Argentina. Fernández warned YPF to

lower its dividend payouts and increase its investment in Argentinean concession contracts. Despite

these warnings, and unbeknownst to investors, YPF continued to under-produce and failed to

adequately fund Argentinean energy projects.

YPF Announces a Plan to Address the Argentinean Government’s Concerns

46. On December 22, 2009, YPF held a press conference to announce the Horizon 2014

Plan, a five-year plan that was seemingly adopted to respond to the Argentinean government’s

concerns regarding the Company’s production and domestic exploration. Although the plan was

purportedly aimed at increasing domestic exploration, in reality, it was part of a scheme to

temporarily allay the concerns of the Argentinean government about YPF’s production rates and

stave off nationalization while enabling Repsol to sell off large percentages of its holdings in YPF at

high prices.

Repsol Announces a New Discovery at the Vaca Muerta Field

47. In an effort to bolster the price of YPF ADSs as it sought to reduce its stake, on

December 7, 2010, Repsol announced a “new discovery” in the Vaca Muerta field (located in the

Neuquén basin) which revealed “significant non-conventional gas potential in that basin.” Despite

the characterization of this discovery, Diego Mansilla, a researcher at the Department of Political

Economics and Global CC, pointed out that the oil refineries in the Neuquén basin had been known

for many years before their official announcement in December 2010. According to Mansilla, the

main reason that this discovery was announced was to increase the value of YPF’s shares prior to the

$1 billion offering by Repsol of its YPF shares.

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48. Following the announcement of the Vaca Muerta “discovery,” Repsol began an

aggressive selling campaign of its YPF stake:

(a) On December 23, 2010, Repsol announced that it had agreed to sell 3.3% of

YPF to Eton Park Capital Management, among others, for $500 million. After the transaction,

Repsol owned 79.84% of YPF:

(b) On March 14, 2011, Repsol announced that it had agreed to sell a 3.83% stake

of YPF to Lazard Asset Management and other investment funds for $639 million. Following the

transaction, Repsol owned 75.9% of YPF.

(c) On March 23, 2011, Repsol announced that 26.21 million of its YPF ADSs

had been sold in the Offering at $41 per ADS, yielding proceeds in excess of $1 billion. Following

the Offering, Repsol owned 69.22% of YPF.

(d) On May 4, 2011, Repsol announced that the Petersen Group had exercised its

option to purchase 10% of YPF. Following the completion of the agreement, the Petersen Group

had a 25.46% stake in YPF, while Repsol’s stake was reduced to 58.23%.

49. While YPF touted Vaca Muerta as “especially significant,” in truth, this discovery

would never amount to anything meaningful because Repsol and YPF limited their investment to

$300 million for the development of shale oil, a minimal amount for a project this size (as compared

to the $1 billion that Repsol invested in similar unconventional fields in the United States).

Moreover, further financing for Vaca Muerta was never completed because, as was reported in The

Mosconi Report, Repsol’s strategy was to limit its investments in the Argentinean oil projects so that

domestic prices would increase (as the result of limited supply), thereby putting pressure on the

government to lift its pricing restrictions and enabling Repsol to increase its profits. The Mosconi

Report further states that Repsol anticipated that the “clearly expanding demand could only be

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satisfied by a similar increase in domestic supply provided that the regulatory framework would

ensure sufficient margins throughout all links of the value chain of the sector.” Id. at 30. (internal

quotations omitted). Put another way, Repsol was only willing to increase YPF’s investment in

Argentina if the price of oil and gas, and in turn its profit margins, increased. Absent such an

occurrence, Repsol’s preference was to invest YPF’s profits – which were distributed to Repsol in

the form of abnormally large dividends – in its own international developments.

YPF’s Nationalization

50. In a last ditch effort to save YPF from nationalization, on April 2, 2012, Defendant

Brufau sent a letter to President Fernández. In the letter, Defendant Brufau admitted that the recent

discoveries in “unconventional resources,” like Vaca Muerta, would exceed YPF’s current

investment capacity and that foreign investment and financing was necessary. Defendant Brufau

also stated that he planned to cede part of YPF’s interest in its concessions to third parties.

51. On April 16, 2012, Fernández announced that the government would nationalize YPF

and seize a majority stake in YPF from Repsol. Moreover, Fernández ousted Defendant S. Eskenazi

as YPF’s CEO and named two top aides, Julio de Vido and Axel Kicillof, to run the Company.

President Fernández cited to YPF’s lack of production and investment in Argentina as well as

Argentina’s history of spending billions of dollars on importing gas and petroleum despite its

plentiful natural resources.

52. Fernández implemented the nationalization of YPF via the Expropriation Act (Law

26,741) which was presented as bill to the legislature on April 16, 2012 and was passed on May 3,

2012.

The Mosconi Report

53. From April 16, 2012 to June 1, 2012, the Argentinean government, led by Deputy

Economy Minister Axel Kicillof and Planning Minister Julio de Vido, conducted an audit of

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Repsol’s internal data and documents, and interviewed employees. The findings were published on

or about June 1, 2012 and became known as “The Mosconi Report.” According to the Argentinean

government, the aim of The Mosconi Report was to “provide evidence [of Repsol’s] strategy of

depredation, disinvestment and failure to appropriately supply the domestic market” since it took

control over YPF in 1999. Id. at 3.

54. The Mosconi Report revealed that the linchpin of Repsol’s strategy was a systematic

divestment from YPF. Further, Repsol deliberately under-funded exploration and delayed

investments in Argentina and instead focused on monetizing its non-YPF assets internationally.

55. Moreover, according to The Mosconi Report, the Vaca Muerta discovery was not an

effort to increase domestic production; rather, Repsol planned to derive profit from Vaca Muerta by

either sale or a subconcession.

56. Repsol’s strategy gave priority to quick cash return over investment. This is

confirmed by YPF’s low investment in exploration and the lack of maintenance of domestic oil

sources. These factors had an adverse impact on the Argentinean oil and natural gas profile and, in

turn, led to the government’s takeover of YPF.

57. The Mosconi Report confirmed, among other things, that:

(a) Repsol used YPF to support and finance its strategy for global expansion

by paying itself high dividends rather than investing in “exploration and exploitation

activities.” Mosconi Report at 86. Beginning in 2000, Repsol began a process in which it

transferred international assets owned by YPF or its subsidiaries to itself or to third parties. See id.

at 21. The profits derived from these asset sales were ultimately transferred to Repsol in the form of

“extraordinary dividends.” Id. at 22. From 2008 to 2011 (with the exception of 2010), YPF paid

more dividends than its net earnings. See id. at 32. In fact, YPF’s dividends in 2008 more than

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doubled the Company’s net earnings. See id. In total, from 1999 to 2011, YPF paid more than

$13 billion in dividends. See id. at 32. The chart below illustrates the changes in YPF net earnings

and dividends paid from 1997 to 2011, in Argentinean dollars.

10

9

8

7

6 CY

5

4 Fn

3

2

1

0 N- Dn C'l 'i U 2.. C , F1 al Q1 C LD - ED cD C C

M c J UD LD C) LD C) C-

Ex. A at 32.

Moreover, in order to support these dividend payouts, YPF’s debt increased steadily year to

year from 2004 to 2011. See id. In 2004, YPF’s debt was slightly over $3 billion. In 2011, YPF’s

debt reached nearly $9 billion – almost three times 2004 levels. See id. at 32. The chart below

shows the changes in Repsol’s indebtedness in YPF from 1997 to 2011, in dollars:

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9000

8-000

7000

- e000

5_000

4c":'c'

3c":'c'

2. DDD

Ex. A at 40.

1997 199 1999 2000 2001 2002 2003 2004 20GE. 2006 2007 2008 2009 201G 2011

(b) Repsol grew dissatisfied with the Argentinean government’s “domestic

price management policy” and, as a result, devised a plan in which it gradually abandoned

YPF’s exploration activities in order to increase energy demand and drive up domestic prices

to international levels, thereby pressuring the Argentinean government to change its price

restrictions. Id. at 26. As international oil prices were rising from 2003 to 2011, Argentina

instituted a “domestic price management policy” whereby it enabled domestic purchasers to obtain

gas and oil at almost half the price that others paid internationally. Id. Argentina believed, and still

believes, that “fuel is a determining factor for the development of diverse economic activities” and is

the “main driver of Argentina’s economic competitiveness.” Id. Repsol viewed Argentina’s

“domestic price management policy” as a “threat” to its profits. Id. at 27. As such, YPF’s 2011

annual report filed on Form 20-F stated, in pertinent part, as follows:

Our domestic operations are subject to extensive regulation

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The oil and gas industry is subject to government regulation and control. As a result, our business is to a large extent dependent upon regulatory and political conditions prevailing in Argentina and our results of operations may be adversely affected by regulatory and political changes in Argentina. Therefore, we face risks and challenges relating to government regulation and control of the energy sector, including those set forth below and elsewhere in these risk factors:

• limitations on our ability to pass higher domestic taxes, increases in production costs, or increases in international prices of crude oil and other hydrocarbon fuels and exchange rate fluctuations through to domestic prices, or to increase local prices of natural gas (in particular for residential customers) . . .

[Emphasis in original.]

As a result of Repsol’s inability to increase domestic crude oil prices in Argentina, it began a plan to

divest itself of YPF and endorse a policy of under-financing Argentinean exploration projects so as

to increase demand and drive up the price of domestic oil. The government became aware of

Repsol’s strategy when the investigation uncovered a presentation in which Repsol stated that

“domestic gas prices would increase as a result of the upward pressure on the cost of the fuel

imposed by” buying fuels abroad. Ex. A at 29. Repsol’s business plan assumed the “total

elimination of oil export duties in 2014 and partial eliminations in 2012 and 2013.” Id. Below is a

slide from Repsol’s internal business plan which shows Repsol’s assumptions that domestic prices

would eventually equal international prices:

- 18 -


Go nvergence to Import Parity aumed in 2014

w.n I LISl&3i

ci - u ri B" 2WI AR

L'TI11 It I . 1 t

PM m. I

-- -

" — .7 % rra !T

I 00%d FL Di.l

I..•. .'P._._ ..-P,. ... ......

Ex. A at 29.

(c) Repsol focused solely on extracting oil from existing oil fields, which

caused a “systematic decline of the Company’s oil and natural gas production.” Id. at 4. The

government’s investigation revealed that, starting in 2004, some mature fields “began to show the

effects of the lack of investment and maintenance[.]” Id. at 47. For example, fields located in

Vizcacheras, Barrancas and La Ventana in the province of Mendoza, Seflal Picada-Punta Barda,

Chihuido de la Sierra Negra in the provinces of Neuquén/Río Negro and Los Perales in the province

of Santa Cruz, as well as other fields in the Golfo San Jorge basin were affected. See id. YPF’s lack

of investment contradicted the Company’s public statements in the Horizon 2014 Plan, which stated

its commitment to increase domestic exploration. During 2009, YPF invested 81% less than what

Repsol estimated and 61% less than what the Company had promised the government it would invest

in the Barrancas, La Ventana, Vizcacheras and Seflal Picada-Punta Barda areas. See id. at 48.

- 19 -


Similarly, in 2010, YPF invested 64% less than its forecast and 53% less than what it had promised

to invest to authorities in Argentina. See id . This is illustrated in the following graph:

ME

57.0

C

C

Id. at 48.

26..5

12.7

2009 . PE PLAN

26.6

20.4

2010

REAL

Moreover, the following graph shows that the actual investment in oil pipelines based on the

Company’s annual investment plan was less than half the total amount reported to the Secretariat of

Energy:

- 20 -

40

0

20

0


w N co M 0 0 Q i-I -

0 0 0 0 0 0FY

Año

. Oil pipeline investment plan Actual investment

Id. at 64.

(a) Repsol intended to sell its interest in YPF’s major discovery – Vaca

Muerta – rather than investing and increasing domestic production . See id. at 81. Although

Repsol had initially put $300 million into the discovery of Vaca Muerta, it failed to invest the

necessary funds to adequately explore the formation. See id . By stark contrast, Repsol invested

more than $1 billion in unconventional fields in the United States. Id. In fact, confidential reports

uncovered in The Mosconi Report show that Repsol “aimed at disclosing Vaca Muerta’s potential in

road show[s]” to foreign investors in order to sell off its interests or engage in subconcessions. Id. at

84. Toward this end, from December 1, 2011 to March 31, 2012, Repsol held 142 meetings with

Exxon, Chevron, Hess and Shell, among others. See id. at 85.

58. In sum, the goal of Repsol’s actions (or inactions) was to force Argentina to lift its

“domestic price management policy” on oil and gas so that it could strip YPF of its assets at higher

- 21 -


prices and use the money to expand Repsol internationally at the expense of YPF and its

shareholders. The plan was finally thwarted when the Argentinean government nationalized YPF.

Materially False and Misleading Statements Made During the Class Period

59. The Class Period begins on December 22, 2009. On that date, YPF held a press

conference to announce the Horizon 2014 Plan, a five-year plan to address the government’s

concerns regarding the Company’s production and domestic exploration. The plan was purportedly

aimed at increasing exploration in untapped regions of Argentina. The press conference regarding

the Horizon 2014 Plan was attended by Defendant S. Eskenazi and President Fernández, among

others.

60. According to YPF, the Horizon 2014 Plan involved two stages. In stage one, YPF

would negotiate concession contracts with provincial Argentinean governments, which owned the

reserves, and would seek the right to invest in exploration and in return gain priority access to those

blocks. YPF also offered to invest in exploration of the 163 blocks that had already been licensed to

other companies, and if oil or gas was discovered, YPF would develop the block together with the

license holder. During stage two, YPF would spend two years compiling existing information about

each reserve and conduct 2D and 3D seismic studies.

61. Defendant S. Eskenazi called the Horizon 2014 Plan the “most ambitious in the

history of YPF.”

62. YPF did not commit to a particular investment amount. However, Defendant S.

Eskenazi stated that the Company would “invest the resources that are necessary to explore all of the

country and find all the potential that our country has in terms of oil and gas reserves.”

63. Following this announcement, on December 23, 2009, the price of the Company’s

ADSs rose $2.00 per ADS, or 5%, to close at $41.95 per ADS.

- 22 -


64. The statements referenced above in ¶¶60-62 were each materially false and

misleading when made because Defendants misrepresented and failed to disclose the following

adverse facts, which were known to Defendants or recklessly disregarded by them: (i) that the

Company was deliberately not investing in Argentinean exploration projects and, instead, was using

the Company’s profits to pay unusually high dividends and to fund Repsol’s own international

expansion efforts; (ii) that YPF’s failure to finance domestic exploration and development caused the

Company to breach its concession contracts with various Argentinean provinces; (iii) that YPF’s

failure to invest domestically increased the risk that the Company would be nationalized; and

(iv) that nationalization by the Argentinean government would likely have a severe adverse effect on

shareholders and on the Company’s market value. Moreover, by speaking about Repsol's

commitment to investments in Argentina, Defendants created a duty to speak fully and truthfully

regarding its commitment and to disclose that it was engaging in the conduct described in ¶65 (i) and

(ii).

65. On February 4, 2010, Repsol issued a press release announcing that Defendant Brufau

had met with President Fernández and that Defendant Brufau expressed “Repsol’s commitment to

YPF and its development plans in Argentina.” The meeting was attended by Enrique Eskenazi and

S. Eskenazi as well as Julio de Vido, Argentina’s Minister of Federal Planning.

66. On February 25, 2010, Repsol issued a press release announcing its financial results

for the period ended December 31, 2009. With regard to YPF, Repsol stated that YPF was

increasing exploration and production efforts. The press release stated, in pertinent part, as follows:

YPF profit was 1.021 billion Euros

Operating income at YPF was 1.021 billion euros, 11.9% less than 2008. An increase in domestic prices, the Petroleum Plus programme and the savings plan partially offset lower income from products sold in Argentina but referenced to international prices, as well as lower revenues from exports and low gas prices.

- 23 -


In the fourth quarter, the YPF increased fuel prices that, added to the increased income from exports and from products sold in the domestic market but referenced to international prices, contributed to a 216.8% improvement is YPF’s operating income compared with the year-earlier period.

In 2009, YPF investments were 956 million euros, of which 66.8% was spent on exploration and production projects.

[Emphasis added.]

67. In a conference call held on February 25, 2010, Defendant Brufau discussed YPF’s

“Plata” project, which “covers all optimization and enhanced production projects in Argentina.”

Defendant Brufau stated, in pertinent part, as follows:

In YPF, a project called Plata covers all optimization and enhanced production projects in Argentina. The result of these projects are the main reason for the progress in reserve addition in Argentina. Plata also includes tight and shale gas projects that could be developed and marketed under the Gas Plus Program umbrella.

Due to our outstanding exploration performance and the progress of the growth projects , as well as the changes in the general environment we are working on a rollover of the strategic plan for the period of 2010 to 2014, which we expect to present in the next annual shareholders meeting.

[Emphasis added.]

68. On April 29, 2010, Repsol issued a press release announcing its financial results for

the first quarter of 2010, the period ended March 31, 2010. With regard to YPF, the press release

stated, in pertinent part, as follows:

YPF profit grows

The YPF operating income totaled 411 million euros, 27.2% more than the same period in 2009. The continued increase in domestic and international prices and stable costs explain this rise.

An increase in domestic fuel prices in dollars had a positive impact of 163 million de euros. Also, higher sales volumes contributed positively to the operating income (23 million euros), the increased income from exports and products sold in the domestic market but referenced to international prices (133 million euros) and the Petroleum Plus programme.

- 24 -


YPF production was 549,716 boepd [barrels of oil equivalent per day], representing 8.5% fall compared to the same period in the previous year, but slightly better than the previous quarter.

In the first quarter of 2010, YPF investments were 241 million euros, spent mainly on Exploration and Production .

[Emphasis added.]

69. In a conference call held on April 29, 2010 to discuss the Company’s financial

results, Defendant Brufau emphasized the “stable cash flow” on YPF’s balance sheet. Further,

Defendant Brufau stated, in pertinent part, as follows:

Now let me continue with YPF. YPF is a fully integrated business that produces more than a third of the oil and gas volumes in Argentina and has more than 50% of the market share in the refining and marketing segments. Our goal is to manage the Company to deliver growing results, self financing its investment plan and paying adequate dividends. This will be the consequence of the trend of prices approaching regional levels, specific government programs to encourage investments and tight cost management, which will widen our viable projects portfolio and improve the economics of the ongoing activity.

Even though many things have happened in the country, you can see on the screen how stable cash flow generation has been delivered from YPF, including 2009 with a drop significantly lower than the average in the industry . At the same time, the business has allowed to pay to Repsol an average dividend since 2000 of $1 billion per year.

On the screen you can see now some of the aspects I have already mentioned in the past in terms of oil and natural gas prices. You can also appreciate that domestic consumption is reaching total production of oil in the country. In natural gas, Argentina is already a net importer country...

As a result of studies and updates of our reservoir models since 2005, we have been putting together a viable portfolio of projects to increase the hydrocarbon production based on improvements of the recovery factor. You have to bear in mind that each point of increasing the recovery factor level means more than 240 million BOEs of additional reserve.

[Emphasis added.]

- 25 -


70. On July 29, 2010, Repsol issued a press release announcing its financial results for

the second quarter of 2010, the period ended June 30, 2010. With regard to YPF, the press release


YPF operating income result grows 84%

YPF’s operating income was 831 million euros, 83.8% higher than the same period of 2009.

The increased income was mainly due to a rise in domestic fuel prices in the local currency and in dollars, which had a positive impact of 416 million euros. Increased income from exports and products sold in the domestic market but referenced to international prices also contributed to the improvement.

YPF’s production was 550,590 boepd, representing a 8.1% fall compared to the same period of the previous year.

In the first half of 2010, YPF investments totalled 597 million euros, spent mainly on Exploration and Production.

[Emphasis added.]

71. On September 29, 2010, at an industry event in Buenos Aires, Defendant S. Eskenazi

stated that YPF planned to turn around a 12-year decline in oil production. Moreover, Defendant S.

Eskenazi stated that YPF would be “tripling its investment” in exploration compared to 2009. In that

regard, Defendant S. Eskenazi stated as follows:

We have stabilized oil production practically from the start of the year and this is going to be the first year without a reduction compared with the previous year.

We are at 248,000 barrels per day and this is because we are investing, we are incorporating technology and we are buying the latest-generation equipment.

[Emphasis added.]

72. On November 11, 2010, Repsol issued a press release announcing its financial results

for the third quarter of 2010, the period ended September 30, 2010. With regard to YPF, the press

release stated, in pertinent part, as follows:

YPF operating income grows 82%

- 26 -


YPF’s operating income continued its positive trend of the first semester, totaling 1.205 billion euros through September, 81.7% higher than the same period of 2009.

The increased income was mainly due to a rise in domestic fuel prices in the local currency and in dollars, which had a positive impact of 619 million euros. Increased income from exports and products sold in the domestic market but referenced to international prices also contributed to the improvement.

YPF’s total production was 550,862 boepd, representing a 6.3% fall compared to the same period of the previous year. Liquids output, however, increased 1.7% as a result of increased investment resulting from the state crude production incentives program.

YPF’s investments totaled 994 million euros, 60.8% more than the January-September 2009 period, spent mainly on exploration and production development projects.

[Emphasis added.]

73. The statements referenced above in ¶65-72 were materially false and misleading for

the reasons set forth above in ¶64.

74. On or about November 26, 2010, YPF filed with the SEC a Registration Statement on

Form F-3 (the “Registration Statement”) for the Offering. The Registration Statement incorporates

by reference several Company filings, including the February 24, 2011 Form 6-K. The Registration

Statement was not prepared in accordance with the rules and regulations governing its preparation.

75. Pursuant to Item 6 of Form F-3, registrants are required to provide in a registration

statement the information required by Item 503 of Regulation S-K [17 C.F.R. §229.503], and the

SEC’s related interpretive releases thereto, including a discussion of the most significant factors that

make the offering speculative or risky. At the time of the Offering, as detailed herein, YPF was not

adequately producing oil and gas within Argentina; and was distributing a large portion of its profits

to Repsol and its other shareholders in the form of high dividends instead of reinvesting them back

into the Company and its operations. Moreover, despite warnings from the government, YPF failed

to make the proper adjustments and continued to under-produce and failed to adequately fund

- 27 -


Argentinean energy projects. Thus, the risk of nationalization was reasonably likely to have a

material impact on YPF’s continuing operations and, therefore, was required to be disclosed in the

Registration Statement, but was not.

76. On December 7, 2010, Repsol issued a press release announcing its “exploration

developments and [] a new discovery” in the Neuquén basin – the location of the Vaca Muerta

formation. In that regard, the press release stated, in pertinent part, as follows:

During the event held at YPF headquarters in Buenos Aires, the Argentine President, was accompanied by numerous government officials, political representatives and trade unions. All were received by the Repsol YPF chairman, Antonio Brufau, YPF’s Vice President, Enrique Eskenazi, and YPF’s CEO Sebastián Eskenazi, in an atmosphere of great understanding between the Argentine Government and its public authorities, and the country’s largest company.

Repsol YPF’s latest discovery is included in its 2010-2014 Exploratory Development Program, and adds to other exploration projects carried out in the Neuquén basin which have revealed significant non-conventional gas potential in that basin.

The Argentinean government and international investors have valued positively YPF’s strategy, which has attracted a growing interest in the markets: This has resulted in significant share transactions of YPF shares on Wall Street, and its incorporation into the Madrid Stock Exchange’s Latibex Index.

[Emphasis added.]

77. On February 24, 2011, YPF filed a Form 6-K with the SEC. In describing the

Company’s political and regulatory risk factors, YPF stated, in pertinent part, as follows:

We currently face risks and challenges relating to government regulation and control of the energy sector, including those set forth below and elsewhere in these risk factors:

-limitations on our ability to pass higher domestic taxes, increases in production costs, increases in international prices of crude oil and other hydrocarbon fuels and exchange rate fluctuations through to domestic prices, or to increase local prices of natural gas (in particular for residential customers);

-higher taxes on exports of hydrocarbons;

- 28 -


-restrictions on hydrocarbon export volumes driven mainly by the requirement to satisfy domestic demand;

-in connection with the Argentine government’s policy to provide absolute priority to domestic demand, regulatory orders to supply natural gas and other hydrocarbon products to the domestic retail market in excess of previously contracted amounts; and

-the implementation or imposition of stricter quality requirements for petroleum products in Argentina.

78. On March 23, 2011, the Prospectus with respect to the Offering, which forms part of

the Registration Statement (the Registration Statement and the Prospectus are hereinafter referred to

as the “Registration Statement”), became effective and more than 26.2 million shares of YPF ADSs

were sold to the public at $41 per share, thereby valuing the total size of the Offering at more than $1

billion. In Repsol’s press release announcing the Offering, it stated to investors that the “success of

the share offering highlights investor confidence in YPF’s potential and its management team.”

79. The Company’s Form 6-K stated the following regarding Argentine regulations and

polices:

The Argentine government has made certain changes in regulations and policies governing the energy sector to give absolute priority to domestic supply at low, stable prices in order to sustain economic recovery. As a result of the above-mentioned changes, for example, on days during which a gas shortage occurs, exports of natural gas (which are also affected by other government curtailment orders) and the provision of gas supplies to industries, electricity generation plants and service stations selling compressed natural gas are interrupted for priority to be given to residential consumers at lower prices. We cannot assure you that changes in applicable laws and regulations, or adverse judicial or administrative interpretations of such laws and regulations, will not adversely affect our results of operations. See “Item 4. Information on the Company—Regulatory Framework and Relationship with the Argentine Government” in our annual report on Form 20-F for the fiscal year ended December 31, 2009 (the “2009 Form 20-F”). See “Item 1. Company Overview—Recent Regulatory Developments” in our September 30, 2010 Form 6-K. Similarly, we cannot assure you that future government policies aimed at sustaining economic recovery or in response to domestic needs will not adversely affect the oil and gas industry.

- 29 -


80. In addition, with regard to the concession contracts, the Registration Statement stated,

in pertinent part, as follows:

Exploration permits and production or transportation concessions may be terminated upon any of the following events:

• failure to pay annual surface taxes within three months of the due date;

• failure to pay royalties within three months of the due date;

• substantial and unjustifiable failure to comply with specified production, conservation, investment, work or other obligations;

• repeated failure to provide information to, or facilitate inspection by, authorities or to utilize adequate technology in operations;

• in the case of exploration permits, failure to apply for a production concession within 30 days of determining the existence of commercially exploitable quantities of hydrocarbons;

• bankruptcy of the permit or concession holder;

• death or end of legal existence of the permit or concession holder; or

• failure to transport hydrocarbons for third parties on a non-discriminatory basis or repeated violation of the authorized tariffs for such transportation.

[Emphasis added.]

81. In describing the concession contracts that YPF held with the Argentine provinces,

the Company’s Form 6-K stated, in pertinent part, as follows:

The Hydrocarbons Law provides for oil and gas concessions to remain in effect for 25 years as from the date of their award, and further provides for the concession term to be extended for up to 10 additional years, subject to terms and conditions approved by the grantor at the time of the extension. The expiration of part of our and other Argentine oil companies’ concessions occurs in 2017. Such concessions represented approximately 50% of our proved reserves at December 31, 2009. The authority to extend the terms of current and new permits, concessions and contracts has been vested in the governments of the provinces in which the relevant area is located (and the federal government in respect of offshore areas beyond 12 nautical miles). In order to be eligible for the extension, any concessionaire and permit holder must have complied with its obligations under the Hydrocarbons Law and the terms of the particular concession or permit, including evidence of payment of taxes and royalties, the supply of the necessary technology, equipment and labor force and compliance with various environmental, investment and development obligations.

- 30 -


Under the Hydrocarbons Law, non-compliance with these obligations and standards may also result in the imposition of fines and in the case of material breaches, following the expiration of applicable cure periods, the revocation ofthe concession or permit. We cannot provide assurances that concessions that have not yet been renewed will be extended or that additional investment, royalty payment or other requirements will not be imposed on us in order to obtain extensions. The termination of, or failure to obtain the extension of, a concession or permit could have a material adverse effect on our business and results of operations.

[Emphasis added.]

82. The statements referenced above in ¶¶76-77 and 79-81 were materially false and

misleading for the reasons set forth above in ¶64.

83. On May 12, 2011, Repsol issued a press release announcing its financial results for

the first quarter of 2011, the period ended March 31, 2011. With regard to YPF, the press release


YPF: Discoveries of non-conventional resources

YPF’s operating income in the first quarter totalled 383 million euros, a 6.8% decline from the previous year. The reduced earnings are mainly a result of significantly higher costs and lower production as a result of strikes in the last few months.

Exploration activity in Argentina continued in the first quarter, with the work carried out in the Vaca Muerta formation being especially significant as it has confirmed the great potential of non-conventional hydrocarbons (shale oil and shale gas) in the country.

The discovery of 150 million barrels of oil equivalent of shale oil recoverable resources announced this week adds to the significant shale gas finds in the Neuquén basin and the 4.5TCF (approximately 800 million barrels of oil equivalent) of tight gas resources in Loma La Lata announced in December of 2010.

Investment in YPF during the quarter totalled 302 million euros, spent mainly on exploration and production. YPF’s hydrocarbons production was 523,882 boed, a 4.7% decline from the year earlier period.

- 31 -

[Emphasis added.]


84. With regard to the Vaca Muerta exploration, Defendant S. Eskenazi stated that YPF

wanted to “continue investing” and that he hoped the government would come up with “new rules of

the game for something that is new” with respect to developing unconventional oil and gas.

85. On July 28, 2011, Repsol issued a press release announcing its financial results for

the second quarter of 2011, the period ended June 30, 2011. With regard to YPF, the press release


YPF: lower production

YPF’s operating income in the first half totalled 601 million euros, a 27.7% decline from the previous year. The reduced earnings are a result of prolonged strikes, now resolved, and their inflationary effect on costs.

The strikes also affected output in the first half of the year, when production of hydrocarbons was 484,957 boe/d, a 12% fall from the previous year.

YPF in July announced a new shale oil find in the Bajada de Añelo exploration well in the Bajada de Añelo block in the Neuquén basin. The well produced an average 250 barrels of high quality oil a day in line with the results obtained previously in the same formation in Loma la Lata. The results confirm the positive expectations of the Vaca Muerta formation.

Investment in YPF during the semester totalled 741 million euros, of which 582 were spent on exploration and production. Of the E&P investment, 72% was dedicated to developing projects.

[Emphasis added.]

86. On November 7, 2011, Repsol issued a press release announcing “its largest ever oil

find. . . in the Vaca Muerta formation in Argentina’s Neuquén province, one of the world’s largest

non-conventional reservoirs.” According to the press release, the area has “significant potential for

large volumes to be developed in the future once the appropriate studies and preliminary work to

determine resources is completed.”

87. On November 10, 2011, Repsol issued a press release announcing its financial results

for the third quarter of 2011, the period ended September 30, 2011, and highlighting the importance

- 32 -


of the Vaca Muerta discovery. With regard to YPF, the press release stated, in pertinent part, as

follows:

YPF: Historic discovery of non-conventional crude

YPF’s operating income in the first nine months of 2011 totalled 1.008 billion euros, a 16.3% decline from the previous year. The reduced earnings are a result of prolonged strikes during the second quarter of the year, now resolved, and the inflationary effect on costs.

Production of hydrocarbons was 489,567 boepd, an 11.1% fall from the previous year as normal production has not yet resumed following the strikes in previous months.

Internal prices have continued their trend toward parity with import prices in dollars, posting an average 15% rise at service stations.

Investment in YPF during the period totaled 1.218 billion euros, of which 912 were spent on exploration and production. Of the E&P investment, 77% was dedicated to development projects.

In the first half of the year, Repsol carried out a number of share sales which, added to the execution of a purchase option by Petersen Group, result in Repsol currently holding a 57.4% stake in the [A]rgentine company.

In the fourth quarter, Repsol YPF confirmed its largest oil find to date, located in one of the world’s largest non-conventional reservoirs-the Vaca Muerta formation in Argentina’s Neuquén province. The company has confirmed recoverable resources of 927 million barrels of oil equivalent of non-conventional hydrocarbons, of which 741 million are high quality oil (40-45º API), in an area of 428 km 2 of the Loma La Lata Norte formation in the Neuquén province.

Repsol YPF has also begun activity in another discovery, in a 502 km 2 producing area in the same Vaca Muerta formation. The well is producing similar volumes to those in the previously mentioned area of high quality shale oil (35° API). This new area can thus be expected to have large resources to develop in the future once the appropriate studies and preliminary work to determine resources is completed.

The find is in Argentina’s Neuquén province in the formation know as Vaca Muerta, covering an extension of 30,000 km2 of which Repsol owns rights to 12,000 km2.

Wood Mackenzie identified the Vaca Muerta shale as one of the best in the world, describing the formation as “excellent.”

- 33 -

[Emphasis added.]


88. On February 8, 2012, Repsol issued a press release announcing its findings in the

Vaca Muerta formation as a result of an audit conducted by Ryder Scott. In that regard, Defendants


The audit has determined that in an area of 1,100 km 2 there are 1.115 Bbbl of oil in associated contingent resources, and 410 Mboe of gas, making a total of 1.525 Bboe. For the YPF participation the contingent resources would amount to 883 Mbbl of oil and 330 Mboe of gas, resulting in a total of 1.213 Bboe.

To reach these results, Repsol YPF has made a significant technical effort in a record time, leading the exploratory effort for non-conventional resources in Argentina, after analyzing all the successful technologies used in the USA and adapting them to the geological conditions in the country. To do this, the company co-operated with a number of leading shale developers in the US that, because of the expectations generated by the Vaca Muerta shale, have partnered YPF for exploratory activity in a number of areas. Repsol YPF’s technical teams have since 2009 developed the project, spending $300 million on exploration, mapping and initial development in the Vaca Muerta formation. By 31 December 2011, the Vaca Muerta formation had produced 700,000 boe.

The encouraging results obtained so far have prompted Repsol YPF to continue exploring the area to determine the play’s full extension and productivity in oil, gas and wet gas. The company aims to drill 20 wells in 2012, solely and jointly with several partners, to continue investigating prospective resources.

With the current results, Argentina has the opportunity to reproduce the revolution in nonconventional hydrocarbons seen in the United States by developing the resources contained in the Vaca Muerta formation.

The development of the 1,100 km2 explored so far by Repsol, containing gross contingent resources of 1,525 Bboe could make possible a 50% increase in Argentina’s current gas production. This would require a total investment by all stakeholders of $28 billion in the coming years to drill 2,000 producing wells which would require 60 drilling rigs more than currently operating in Argentina.

If the positive results of the exploratory wells underway are confirmed, the country’s gas output could rise 50%. This would require 1,000 wells to be drilled in a first phase, with an additional required investment of $14 billion, necessitating 40 drilling rigs more than Argentina currently has.

These 100 new rigs would more than double the current number of rigs in the Argentine, currently totaling 80.

If exploration proves successful in the Vaca Muerta formation and immediate intensive development began in the area, in 10 years its capacity could double

- 34 -


Argentina’s existing gas and oil production. This would require a vast investing effort that would reach $ 25 billion per year in order to develop all the existing prospective resources.

A programme of such magnitude would require an important capital investment in Argentina from international markets; a powerful domestic industry (equipment, services, etc.) and competitive and highly technically qualified human resources since Argentina competes against other similar developments worldwide (USA, China, Australia, Eastern Europe, etc.).

[Emphasis added.]

89. On February 29, 2012, Repsol issued a press release announcing its financial results

for the fourth quarter and year end of 2011, the period ended December 31, 2011. In an attempt to

appease the Argentinean government and stave off nationalization, Repsol further touted the Vaca

Muerta discovery and YPF’s purported commitment to invest in the region. The press release stated,

in pertinent part, as follows:

YPF: The Vaca Muerta discovery; a successful reflection of investment in exploration

YPF’s recurring operating income in the 2011 totalled 1.352 billion euros, a 16.8% decline from the previous year. The reduced earnings are a result of the effect on production of prolonged strikes, the inflationary effect on costs and the suspension of the Petróleo Plus program.

Production of hydrocarbons was 495,100 boepd, an 8.5% fall from the year-earlier period due to the effect of strikes, which had an 20,200 bbld impact on oil output, and caused a 6,000 boepd drop in gas output.

Noteworthy is the reserve replacement rate which reached 112% in 2011 compared with 84% in 2010, with the crude reserve replacement rate climbing to 169% from 100% in the previous year.

YPF’s investment was 2.182 billion euros in the period, of which 1.499 were spent on exploration and production. Development projects represented 72% of the total and 18% was spent on exploration, significantly 128 million euros spent on the Vaca Muerta formation.

On February 8th, Repsol YPF announced an increase in the estimate of reserves and resources in the giant Vaca Muerta formation in the Argentine province of Neuquén.

An evaluation carried out by Ryder Scott of a total area of 8,071 km 2 (1,994,378 acres), of which Repsol YPF holds a net interest of 5,016 km 2 (1,239,407 acres)

- 35 -


determined that in an area of 1,100 km 2 there are 1.115 Bbbl of oil in associated contingent resources, and 410 Mboe of gas, making a total 1.525 Bboe. YPF’s share of the contingent resources would amount to 883 Mbbl of oil and 330 Mboe of gas, resulting in a total of 1.213 Bboe.

The encouraging results obtained so far have prompted Repsol YPF to continue exploring the area to determine the play’s full extension and productivity in oil, gas and wet gas. The company aims to drill 20 wells in 2012, solely and jointly with several partners, to continue investigating prospective resources.

With the current results, Argentina has the opportunity to reproduce the revolution in non-conventional hydrocarbons seen in the United States by developing the resources contained in the Vaca Muerta formation.

[Emphasis added.]

90. The statements referenced above in ¶83-89 were materially false and misleading for

the reasons set forth above in ¶64.

91. On April 16, 2012, Fernández announced that the government would nationalize YPF

and seize a majority stake in YPF from Repsol. Moreover, Fernández ousted Defendant S. Eskenazi

as YPF’s CEO and named two top aides, Julio de Vido and Axel Kicillof, to run the Company.

President Fernández cited to YPF’s lack of production and investment in Argentina as well as

Argentina’s history of spending billions of dollars on importing gas and petroleum despite its

plentiful natural resources.

92. Fernández implemented the nationalization of YPF via the Expropriation Act (Law

26,741) which was presented as bill to the legislature on April 16, 2012 and was passed on May 3,

2012.

93. Upon the new of YPF’s nationalization, trading in the Company’s ADSs was halted

on April 17, 2012. When trading resumed on April 18, 2012, the price of the Company’s ADSs

declined $6.38 per ADS, or over 32%, to close at $13.12 per ADS, on significantly heavy trading

volume.

- 36 -


94. The market for YPF ADSs was open, well-developed and efficient at all relevant

times. As a result of these materially false and misleading statements and failures to disclose stated

herein, YPF ADSs traded at artificially inflated prices during the Class Period. Plaintiff and other

members of the Class purchased or otherwise acquired YPF ADSs relying upon the integrity of the

market price of YPF ADSs and market information relating to YPF, and have been damaged thereby.

95. During the Class Period, Defendants materially misled the investing public, thereby

inflating the price of YPF ADSs, by publicly issuing false and misleading statements and omitting to

disclose material facts necessary to make Defendants’ statements, as set forth herein, not false and

misleading. Said statements and omissions were materially false and misleading in that they

misrepresented the truth about the Company, its business and operations, as alleged herein.

96. At all relevant times, the material misrepresentations and omissions particularized in

this Complaint directly or proximately caused, or were a substantial contributing cause of, the

damages sustained by Plaintiff and other members of the Class. As described herein, during the

Class Period, Defendants made or caused to be made a series of materially false or misleading

statements about YPF’s business, prospects and operations. These material misstatements and

omissions had the cause and effect of creating in the market an unrealistically positive assessment of

YPF and its business, prospects and operations, thus causing the Company’s ADSs to be overvalued

and artificially inflated at all relevant times. Defendants’ materially false and misleading statements

during the Class Period resulted in Plaintiff and other members of the Class purchasing the

Company’s ADSs at artificially inflated prices, thus causing the damages complained of herein.

Additional Scienter Allegations

97. As alleged herein, Defendants acted with scienter in that Defendants knew that the

public documents and statements issued or disseminated in the name of the Company were

materially false and misleading; knew that such statements or documents would be issued or

- 37 -


disseminated to the investing public; and knowingly and substantially participated or acquiesced in

the issuance or dissemination of such statements or documents as primary violations of the federal

securities laws. As set forth elsewhere herein in detail, Defendants, by virtue of their receipt of

information reflecting the true facts regarding YPF, their control over, and/or receipt and/or

modification of YPF’s allegedly materially misleading misstatements and/or their associations with

the Company which made them privy to confidential proprietary information concerning YPF,

participated in the fraudulent scheme alleged herein.

98. Defendants knew and/or recklessly disregarded the falsity and misleading nature of

the information which they caused to be disseminated to the investing public. The ongoing

fraudulent scheme described herein could not have been perpetrated during the Class Period without

the knowledge and complicity or, at least, the reckless disregard of the personnel at the highest levels

of the Company, including the Individual Defendants and Repsol.

99. Indeed, according to the Mosconi Report, Repsol used profits from YPF to leverage

and finance its expansion in the international realm. Repsol’s international strategy was reflected in

YPF’s lack of investment in Argentina, which placed YPF at a high risk for nationalization – a risk

that ultimately came to pass.

100. The Mosconi Report also revealed that Repsol had grown dissatisfied with the

Argentinean government’s “domestic price management policy” and, as a result, devised a plan in

which it gradually abandoned YPF’s exploration activities in order to increase energy demand and

drive domestic prices up to international levels.

101. Moreover, the Mosconi Report confirms that, contrary to YPF’s public statements,

the Vaca Muerta discovery was never adequately financed and Repsol intended to use the discovery

for sale or sub-concession to third parties and not to improve the domestic Argentinean oil supply.

- 38 -


102. Defendants were further motivated to engage in this course of conduct in order to: (i)

enable Defendant Repsol to sell more than $1 billion of its own shares of YPF ADSs in a public

offering at artificially inflated prices; (ii) allow Defendant Repsol to reduce its ownership of YPF at

artificially inflated prices; and (iii) enable Defendant Repsol and the Petersen Group to receive

abnormally high dividends so that Repsol could fund its international expansion and the Eskenazi

family could pay back the “no-money down” loans it received from Repsol and certain banks to

acquire its stake in YPF.

Loss Causation/Economic Loss

103. During the Class Period, as detailed herein, Defendants engaged in a scheme to

deceive the market and a course of conduct that artificially inflated the prices of YPF ADSs and

operated as a fraud or deceit on Class Period purchasers of YPF ADSs by failing to disclose and

misrepresenting the adverse facts detailed herein. When Defendants’ prior misrepresentations and

fraudulent conduct were disclosed and became apparent to the market, the price of YPF ADSs fell

precipitously as the prior artificial inflation came out. As a result of their purchases of YPF ADSs

during the Class Period, Plaintiff and the other Class members suffered economic loss, i.e., damages,

under the federal securities laws.

104. By failing to disclose to investors that: (i) that the Company was deliberately not

investing in Argentinean exploration projects and, instead, was using the Company’s profits to pay

unusually high dividends and to fund Repsol’s own international expansion efforts; (ii) that YPF’s

failure to finance domestic exploration and development caused the Company to breach its

concession contracts with various Argentinean provinces; (iii) that YPF’s failure to invest

domestically increased the risk that the Company would be nationalized; and (iv) as a result of the

foregoing, the risk that the Company would be nationalized was increased. Defendants’ false and

- 39 -


misleading statements had the intended effect and caused YPF ADSs to trade at artificially inflated

levels throughout the Class Period, reaching as high as $54.58 per ADS on January 5, 2011.

105. As a direct result of the disclosures on January 30, 2012, February 29, 2012 and April

16, 2012, the price of YPF ADSs fell precipitously, falling from their Class Period high of $54.58

per ADS to $13.12 per ADS, a decline of approximately 75%. These drops removed the inflation

from the price of YPF ADSs, causing real economic loss to investors who had purchased YPF ADSs

during the Class Period.

106. On January 30, 2012, the Company’s ADSs declined $4.02 per ADS, or over 10%, to

close at $35.86 per ADS on news that Argentinean officials were discussing a takeover of YPF. In

an article entitled “YPF Tumbles Most in Six Months on Report of Takeover,” Bloomberg reported

that “Argentine government officials, lawmakers and oil industry specialists discussed re-

nationalizing” YPF because of its lack of investment in Argentina. Moreover, Bloomberg revealed

that the Argentine government was “probing alleged fuel-price fixing by YPF . . . and other

producers.”

107. In early February 2012, the Argentinean Planning Minister criticized YPF’s lack of

production and investment in Argentina, stating that YPF had “not conducted the investment

necessary to expand its refineries in the timeframe needed by the sustained growth in demand in the

country.”

108. On February 29, 2012, on the same day that Repsol issued its financial results for the

fourth quarter and year end of 2011, Defendant Brufau met with President Fernández to discuss her

criticism of the Company’s lack of investment in Argentina. In response to the news of this meeting

and speculation that the Company could be nationalized, the Company’s ADSs declined $4.37 per

ADS, or over 14%, to close at $26.23 per ADS.

- 40 -


109. Finally, on April 16, 2012, President Fernández announced that the government

would nationalize YPF and seize a majority stake in YPF from Repsol. Moreover, President

Fernández ousted Defendant S. Eskenazi as YPF’s CEO. President Fernández cited to YPF’s lack of

production and investment in Argentina as well as Argentina’s history of spending billions of dollars

on importing gas and petroleum despite its plentiful natural resources. Upon the news of YPF’s

nationalization, trading in the Company’s ADSs was halted on April 17, 2012. When trading

resumed on April 18, 2012, the price of the Company’s ADSs declined $6.38 per ADS, or over 32%,

to close at $13.12 per ADS, on significantly heavy trading volume.

110. The 75% decline from the Company’s Class Period high was a direct result of the

nature and extent of Defendants’ fraud finally being revealed to investors and the market. The

timing and magnitude of the price decline in YPF ADSs negates any inference that the loss suffered

by Plaintiff and the other Class members was caused by changed market conditions, macroeconomic

or industry factors or Company-specific facts unrelated to Defendants’ fraudulent conduct. The

economic loss, i.e., damages, suffered by Plaintiff and the other Class members was a direct result of

Defendants’ fraudulent scheme to artificially inflate the prices of YPF ADSs and the subsequent

significant decline in the value of YPF ADSs when Defendants’ prior misrepresentations and other

fraudulent conduct were revealed.

Applicability of Presumption of Reliance: Fraud on the Market Doctrine

111. At all relevant times, the market for YPF ADSs was an efficient market for the

following reasons, among others:

(a) YPF ADSs met the requirements for listing, and were listed and actively

traded on the NYSE, a highly efficient and automated market;

- 41 -


(b) as a regulated issuer, YPF filed periodic public reports with the SEC and the

NYSE;

(c) YPF regularly communicated with public investors via established market

communication mechanisms, including regular disseminations of press releases on the national

circuits of major newswire services and other wide-ranging public disclosures, such as

communications with the financial press and other similar reporting services; and

(d) YPF was followed by several securities analysts employed by major

brokerage firms who wrote reports which were distributed to the sales force and certain customers of

their respective brokerage firms. Each of these reports was publicly available and entered the public

marketplace.

112. As a result of the foregoing, the market for YPF ADSs promptly digested current

information regarding YPF from all publicly available sources and reflected such information in the

prices of the stock. Under these circumstances, all purchasers of YPF ADSs during the Class Period

suffered similar injury through their purchase of YPF ADSs at artificially inflated prices and a

presumption of reliance applies.

No Safe Harbor

113. The statutory safe harbor provided for forward-looking statements under certain

circumstances does not apply to any of the allegedly false statements pleaded in this Complaint.

Many of the specific statements pleaded herein were not identified as “forward-looking statements”

when made. To the extent there were any forward-looking statements, there were no meaningful

cautionary statements identifying important factors that could cause actual results to differ materially

from those in the purportedly forward-looking statements. Alternatively, to the extent that the

statutory safe harbor does apply to any forward-looking statements pleaded herein, Defendants are

liable for those false forward-looking statements because at the time each of those forward-looking

- 42 -


statements was made, the particular speaker knew that the particular forward-looking statement was

false, and/or the forward-looking statement was authorized and/or approved by an executive officer

of YPF who knew that those statements were false when made

COUNT I

Violation of Section 10(b) of the Exchange Act and Rule 10b-5 Promulgated Thereunder

Against All Defendants

114. Plaintiff repeats and realleges each and every allegation contained above as if fully set

forth herein.

115. During the Class Period, Defendants disseminated or approved the materially false

and misleading statements specified above, which they knew or deliberately disregarded were

misleading in that they contained misrepresentations and failed to disclose material facts necessary

in order to make the statements made, in light of the circumstances under which they were made, not

misleading.

116. Defendants: (a) employed devices, schemes, and artifices to defraud; (b) made untrue

statements of material fact and/or omitted to state material facts necessary to make the statements not

misleading; and (c) engaged in acts, practices, and a course of business which operated as a fraud

and deceit upon the purchasers of the Company’s ADSs during the Class Period.

117. Plaintiff and the Class have suffered damages in that, in reliance on the integrity of

the market, they paid artificially inflated prices for YPF ADSs. Plaintiff and the Class would not

have purchased YPF ADSs at the prices they paid, or at all, if they had been aware that the market

prices had been artificially and falsely inflated by Defendants’ misleading statements.

118. As a direct and proximate result of Defendants’ wrongful conduct, Plaintiff and the

other members of the Class suffered damages in connection with their purchases of YPF ADSs

during the Class Period.

- 43 -


COUNT II

Violation of Section 20(a) of the Exchange Act Against the Individual Defendants and Repsol

119. Plaintiff repeats and realleges each and every allegation contained above as if fully set

forth herein.

120. The Individual Defendants and Repsol acted as controlling persons of YPF within the

meaning of Section 20(a) of the Exchange Act as alleged herein. By reason of their positions as

officers and/or directors of YPF, and their ownership of shares of YPF, the Individual Defendants

and Repsol had the power and authority to cause YPF to engage in the wrongful conduct complained

of herein. By reason of such conduct, the Individual Defendants and Repsol are liable pursuant to

Section 20(a) of the Exchange Act.

WHEREFORE, Plaintiff prays for relief and judgment, as follows:

A. Determining that this action is a proper class action, certifying Plaintiff as a Class

representative under Rule 23 of the Federal Rules of Civil Procedure and Plaintiff’s counsel as Class

counsel;

B. Awarding compensatory damages in favor of Plaintiff and the other Class members

against all Defendants, jointly and severally, for all damages sustained as a result of Defendants’

wrongdoing, in an amount to be proven at trial, including interest thereon;

C. Awarding Plaintiff and the Class their reasonable costs and expenses incurred in this

action, including counsel fees and expert fees; and

D. Such other and further relief as the Court may deem just and proper.

JURY TRIAL DEMANDED

Plaintiff hereby demands a trial by jury.

- 44 -


DATED: June 5, 2013 ROBBINS GELLER RUDMAN & DOWD LLP

SAMUEL H. RUDMAN DAVID A. ROSENFELD MARIO ALBA JR. AVITAL 0. MALJNA

MARIO LBA R.

58 South Service Road, Suite 200 Melville, NY 11747 Telephone: 631/367-7100 631/367-1173 (fax) srudmanrgrdlaw.com drosenfe1d(rgrd1aw.com [email protected] [email protected]

Attorneys for Lead Plaintiffs and the Class

-45-


W :

I, Mario Alba Jr., hereby certify that, on June 5, 2013, I caused a true and correct

copy of the attached:

Consolidated Amended Complaint for Violation of the Federal Securities Laws

to be: (i) filed by hand with the Clerk of the Court; and (ii) served by electronic mail on

the following counsel:

Thomas J. Hall Marcelo M. Blackburn CHADBOURNE & PARKE LLP 30 Rockefeller Plaza New York, NY 10112 212/408-5100 [email protected] [email protected]

Attorneys for Defendant YPFSociedad Anonirna

Jonathan Rosenberg Edward Moss OMELVENY & MYERS LLP 7 Times Square New York, NY 10036 212/326-2000 jrosenbergomm.com [email protected]

Attorneys for Defendants Morgan Stanley & co, Inc. Credit Suisse Securities ('USA) LLC, and Goldman, Sachs & Co.

Iq 8E2A Mario Alba Jr(,,J

Case 1:13-cv-00842-SAS Document 27-1 Filed 06/06/13 Page 1 of 47

I lb"

THE MOSCONI REPORT

Comptroller: Julio de Vido

Deputy Comptroller: Axel Kicillof

MithStaiQ de Planiflcaciori Federal,

- Iriversón Püblica y Servicios MINISTERIO DE

ECONOMIA V FINANZAS PUBLICAS


Contents

Section 1: YPF's Role in the International Strategy of the Repsol Group 5

Birth and evolution of the Repsol Group 5

Internationalization

6

Changes in shareholdings

9

Analysis of Repsol Group and YPF S.A. profits

10

Section 2: Repsol's Policies regarding YPF: Depredation, Disinvestment and Undersupply 24

Repsol's attitude with respect to domestic prices 26

The Second Stage of Repsol’s Financial Strategy regarding YPF 36

Deepening of the Market Segmentation Strategy in the context of the drop in YPF’s production 39

Repsol’s Commercial Strategy regarding YPF 42

Technical Aspects of Repsol’s Management of YPF 44

Section 3: The "Discovery of Vaca Muerta". The (Re)sale of the “Crown Jewels”. 76

Repsol-YPF’s strategy regarding unconventional resources 76

A brief history of Vaca Muerta 78

Section 4: Main Conclusions

84

Exhibit 1: Classification of Environmental Issues and Progress 86

Exhibit 2: Fire Prevention Network Pictures

88

2


Introduction

This report compiles the results of the investigation conducted from April 16, 2012 to June 1, 2012

by the team that placed YPF under government control, which was led by the Comptroller, Mr.

Julio De Vido, and the Deputy Comptroller, Mr. Axel Kicillof. The purpose of this document is to

provide evidence on the strategy of depredation, disinvestment and failure to appropriately supply

the domestic market implemented by the Repsol Group since it took control over YPF in 1999. Such

strategy was evidenced as from 2003, when the effects of the neoliberal policies adopted during

the three previous decades started to be offset in Argentina through the implementation of the

model of economic growth with social inclusion.

The findings of this investigation conclusively prove the arguments presented in the message sent

by the Executive Branch to the Argentine Congress on April 16, 2012, together with the bill that

was subsequently enacted as Law No. 26,741. Government control of the Company made it

possible both to obtain information that would not have been available otherwise and to channel

the company's policies in accordance with the energy -related needs of Argentina, thus putting an

end to the strategy of depredation, disinvestment and failure to appropriately supply the market

implemented by the abovementioned control group and also preventing any kind of ploy by such

group. This report shows that:

a. The Repsol group used YPF to support and finance its strategy for global expansion, thus

predating Argentina’s oil and gas resources with a short -term vision that gave priority to the

transfer of dividends to its headquarters over the exploration and exploitation activities

characteristic of the best practices of the oil business.

b. This strategy was deepened when, as from 2003, Argentina began to walk the path of

reindustrialization and rapid economic growth in which oil once again became an essential strategic

resource and its price became a core element in the economy, as being a fundamental lever of the

country's systemic competitiveness. The inconsistency between the evolution of domestic

hydrocarbon prices and their international parity led, under Repsol’s management, to the gradual

abandonment of YPF's exploration and exploitation activities within a context of increasing

international prices.

c. Soon after acquiring YPF, Repsol began a systematic process of underinvestment in Argentina

with the express goal of "reducing its exposure to risk in this country". However, as a result of the

convergence of an upturn in international prices and the development of new technologies, the

exploitation of the so -called "unconventional resources" present in the Vaca Muerta field became

profitable. In the face of this scenario, instead of seeking to improve its performance in terms of

production, the Repsol group started to "delineate" the Vaca Muerta field with a view to

quantifying its potential in order to dispose it at a later time, either through a sale or

subconcession. This new strategy by Repsol further hindered investments in conventional

3


resources, since the financial resources that entered Argentina were mostly used to investigate the

unconventional resources that they intended to transfer to third -parties.

Hence, the strategy implemented by the Repsol Group as regards YPF may be summarized as

follows:

1. Reduction of investments in the expansion of production to focus exclusively on

extracting oil from already discovered fields, which was evidenced by the systematic

decline of the Company's oil and natural gas production .

2. Interruption of all the projects aimed at increasing natural gas production since the

yield was lower than the ones obtained by the company in other international

businesses.

3. Liquidation of international assets and companies that YPF had acquired during its

previous development.

4. Delineation of Vaca Muerta with a view to selling the business or partnering with a

third party that might contribute capital, rather than investing and increasing

production.

5. Gathering of as many short -term resources as possible to finance the global expansion

and productive diversification of the Repsol Group to the detriment of YPF and the

hydrocarbon needs of Argentina.

In order to prove the above statements, this report has been structured as follows. The first section

describes the international strategy of the Repsol Group so as to provide a comprehensive

framework to analyze its local operations in YPF. The second section describes the policies

involving depredation, disinvestment and undersupply the market implemented by the Repsol

Group during its management of YPF. The third section shows how this strategy was deepened as

from the technical changes and price increases that caused the exploitation of the unconventional

resources in Vaca Muerta to become profitable. The fourth and last section summarizes the main

conclusions in the report and introduces the main goals and challenges to be faced by the new YPF,

in which the government is a majority shareholder.

4


YPF's Role in the International Strategy of the Repsol Group

Birth and evolution of the Repsol Group

The Spanish Hydrocarbons Institute ( Instituto Nacional de Hidrocarburos , INH) was created in Spain

in 1981 for the purpose of centralizing the management of public activities relating to

hydrocarbons. Subsequently, in 1987, within the framework of the admission of Spain into the

Economic Community, Repsol —a corporation whose purpose was putting an end to the

governmental monopoly of hydrocarbons— was formed. Between 1988 and 1998, a gradual

process for deregulating hydrocarbon production in Spain took place, which ended with the

enactment of Hydrocarbon Law No. 34/1998. The activities related to the refining, transport,

storage, distribution and sale of oil products were deregulated during this period.

Thus, from the very beginning, Repsol's activity covered the exploration, production, transport, and

refining of oil and gas, although it focused on the refining stage. The Group was structured as

Holding Corporativo Repsol S.A. with five subsidiaries, just like the large international companies:

Exploration (former Hispanoil), Oil (former ENPETROL), Butane (former Butano S.A.), CAMPSA, and

Petronor. At first, Repsol Química (Alcudia) was a subsidiary of Repsol Petróleo, but it later

became another subsidiary.

Despite the existence of these subsidiaries, during its first stage, Repsol mainly conducted

downstream activities —i.e. refining— and its products were mostly allocated to the Spanish

market. This focus on the Spanish market resulted from a significant number of investments, such

as the acquisition of interests in other Spanish refining companies and the purchase of

petrochemical companies. Furthermore, from its organization as a group in 1987 to the year 1998,

Repsol made several investments in reserves in the North Sea, Northern Africa and Egypt with a

view to gradually expanding its exploration and production activities.

Repsol’s privatization began in 1989, after it went public, and the process concluded in 1997.

During the first stage, the BBV Group entered the company by giving shares of Petronor and other

companies in exchange for 4.2% of Repsol’s capital stock. In that same year, the first stock offering

to institutional and retail investors was made. Pemex entered Repsol in 1989 and received 2.9% of

the shares in exchange for 34.3% of the shares it held in Petronor. Finally, in that same year, the

company made a public stock offering (PSO) whereby shares amounting to 26.4% of the Group's

capital stock were offered. The second PSO was made in March 1993 and was aimed at

institutional investors. The government kept about 40% of the shares. In 1996, Repsol bought Astra

Compañía Argentina de Petróleo. This process was completed in 1997 with the fifth and last PSO.

5


Immediately after the end of the privatization process in 1999, Repsol acquired 97.81% of the

Argentine company YPF S.A. This entailed a US$ 15.168 billion investment, even though, in fact, it

used US$ 13.158 billion to acquire bonds recognized at a face value of US$ 15.169 billion. With this

purchase, Repsol increased its capital to 288 million shares as part of the refinancing plan after the

acquisition of YPF. The purchase of YPF S.A. turned Repsol into a multinational company and led to

a change of its corporate name to Repsol YPF S.A. This event was the beginning of a new

international expansion strategy by Repsol, mainly in Latin America, as was the case with numerous

Spanish companies in that period. In fact, in 1999 it became the largest privately -owned energy

company in Spain and Latin America.

As a result of the acquisition of YPF, Repsol began to diversify its activities by engaging in the

production of electric power and transportation and distribution of natural gas, for which purpose

it used YPF’s synergies in the energy sector. Before the purchase of YPF, Repsol was a company

with little experience in exploitation, exploration and development of crude oil and natural gas.

With the purchase of YPF, the Group also acquired the assets that YPF had in turn purchased from,

among others, Maxus Energy Co., thus positioning itself as a significant international player.

Furthermore, the approximately US$ 13 billion disbursed by Repsol for the purchase of YPF were

recovered by the Group in the short term and, in addition, the transfer of profits by YPF S.A. from

1999 to 2010 involved a similar amount.

Internationalization

Ever since its creation, the purpose of the Repsol Group was to compete at an international level,

following the example of the multinational companies that it considered as symbols of

competitiveness in the oil sector. In this line, not only did it adopt a diversification strategy, but it

also modified its organizational structure emulating multinational companies and sought to expand

its activities geographically.

Although Repsol had already invested moderately outside Spain, the purchase of YPF S.A. was the

first step towards its expansion in Latin America and the world and gave rise to its first

diversification phase. One of the main objectives sought through geographic expansion was a

modification in the composition of Repsol’s activities, which enabled the Company to increase its

exploration and production business. Later, the goal changed to the diversification of risks.

This strategy was carried out within a context where the large oil companies in the world applied

similar internationalization criteria, with a view to achieving vertical extraterritorial integration and

sustaining and expanding markets.

In early 2000, Repsol was making progress in its internationalization process with the purchase of

Gas Natural SDG. In that year, it entered into agreements in Cuba, Chile, Argentina, Colombia, and

Venezuela; it acquired 45% of Lipigas, a leading firm in the Chilean LPG market; and it closed deals

with British Petroleum (BP) to purchase assets in Trinidad and Tobago. In December 2001, it closed

6


with Petrobras an asset swap, whereby it received 30% of the REFAP refinery and a network of 240

gas stations, thus becoming the second integrated oil company in Brazil. In September, it created

Repsol YPF Gas Bolivia together with SAMO S.R.L. The company announced new discoveries in

Libya, Spain, Argentina, Venezuela, Bolivia and Indonesia and decided to develop its electric power

business -both the generation and the sale of electricity - through Gas Natural SDG.

In 2002 and 2003, the Repsol Group started a new phase in its international expansion and

diversification strategy since it reduced its share in the gas subsector (in 2000 Repsol YPF sold 23%

of its shareholding in Gas Natural SDG, currently Gas Natural Fenosa) and focused on its basic

business; at the same time, it increased its geographic diversification in order to reduce and

diversify the country risk premium. In this respect, Repsol stated that: "Within the framework of an

international scenario complicated by the serious Argentine crisis and the stagnation of the

economy, Repsol has become a leading private company in the production of hydrocarbons in

Venezuela". Moreover, it was authorized by the National Oil Company (NOC) of Libya to develop

Block A of the Murzuq basin.

In 2003, the Company increased its hydrocarbon production and reserves threefold in Trinidad and

Tobago after increasing its interest in BPTT’s gas reserves from 10% to 13% Futhermore, it

strengthened its presence in Algeria and it became the first international company to take part in

the development and exploitation of hydrocarbons in Mexico, through an agreement for the

Reynosa -Monterrey gas block. In parallel with this growth in the hydrocarbon production capacity

in the rest of the world, the data for Argentina shows a 3.8% reduction in the production of oil by

Repsol YPF in that same year, as detailed in the following section.

In 2005, Repsol added new areas and businesses and intensified its presence in markets with high

yield levels or future projection: Northern Africa, the Caribbean, North America, Russia and Central

Asia, among others. In this respect, it bought three oil fields and one gas field in Trinidad and

Tobago, it partnered with Gas Natural to develop new upstream projects directed to the

production of liquefied natural gas (LNG), and it formed a partly government -owned company to

conduct midstream operations. As a result, it became the third largest company worldwide in

terms of LNG volume managed and obtained 16 exploitation areas in Brazilian waters in the

productive basins of Campos, Espíritu Santo and Santos. These blocks were added to the 8 blocks

already owned in Brazil and, thus, the firm became the second largest oil company in Brazil. In late

2005, it signed an agreement to operate a regasification plant in Canada in order to supply the

North American market.

In 2006, the Company invested in an integrated gas project in Perci LNG to supply the west coast of

the United States and Mexico through the liquefaction plant in Pampa Melchorita. In addition, it

bought 10% of West Siberian Resources to participate in Russian projects and executed a

preliminary agreement with Gazpom to develop joint projects in Europe, Latin America, Africa and

the Russian Federation. Moreover, it acquired 28% of Shenzi, one of the largest fields in the

American Gulf of Mexico.

7


In 2007, Repsol started developing the megafield I/R together with the National Oil Company

(NOC) of Libya and executed an agreement for the supply of LNG with Manzanillo (Mexico) to

supply electric power plants.

In 2008, Repsol sold the gas station network it owned in Ecuador and Brazil, as well as its interest in

the Manguinhos refinery, located in the latter. In that same year, it also sold 14.9% of YPF to the

Petersen Group for US$ 2.235 billion. This transaction was financed mainly with loans from banks

(Credit Suisse, Goldman Sachs, BNP, and Itau) and Repsol itself. This group's interest in YPF

continued to grow later on through two subsequent transactions. In late 2008, the second

purchase —involving 0.56% of YPF's shares— took place, and finally, in May 2011, the group

acquired an additional 10% in exchange for US$ 1.304 billion. As in the case of the first transaction,

this purchase was financed with loans from banks and Repsol.

Furthermore, in 2008, Repsol signed with NOC of Lybia an agreement to extend its exploration and

production agreements in that country until 2032. Such agreement guarantees Repsol the

exploitation of the substantial resources discovered in both blocks.

In 2009, Repsol engaged in an international exploration campaign with 15 significant discoveries in

Algeria, in the Santos basin in Brazil, in Morocco, in the Gulf of Mexico and in Venezuela. In the

following year, it entered into an agreement with the Chinese company Sinopec to jointly develop

deep -water hydrocarbon exploration and production projects in Brazil 1 . In Argentina, one of the

new business drivers in which Repsol YPF focused relates to unconventional resources (tight and

shale), which will be discussed in further detail in section 3.

In contrast to this global expansion, in 2009, Repsol’s operations in YPF evidenced a 4.2%

disinvestment of capital in several transactions which were part of a "partial disinvestment policy

in the Company to rebalance Repsol's asset portfolio." Following this strategy, in 2011, Repsol

agreed on the sale of an additional 3.8% share interest in YPF and on the making of a PSO involving

7.1% of YPF's capital stock.

1 In December 2010, Repsol Brasil increased its capital stock to include Sinopec as partner, thus creating one of the largest private

energy companies in Latin America, which is valued at USD 17.777 billion. Repsol holds 60% of its shares and Sinopec holds the

remaining 40%.

8


Changes in shareholdings

After the privatization process, Repsol had a stable group of shareholders. In fact, in late 2005, it

comprised: 2 La Caixa (14.1%) through Caixa Holding; Pemex (4.9%) through its subsidiary Repcon

Lux; Sacyr Vallehermoso (20%); and Mutua Madrileña (2%). The rest of the capital was divided as

follows: Spanish shareholders held 28.7% (18.6% belonging to institutional investors and 10.1% to

retail investors) and foreign shareholders held 30.3% (13.6% belonging to investors from the

United States and 16.7% to investors from the rest of the world) 3 .

Significant shares in the capital stock of Repsol, selected years, in percentages

Year

Caixa 10.03% 9.10%

BBVA 9.78% 5.47%

Repinves 5.94% 5.02%

Pemex 5% 4.81%

2006 Year Sacyr Vallehermosos

9.10% SA

Criteria Caixa Corp

5.02% PeMex

4.83% Chase Nominees Ltd

20.01% 10.01%

14.29% 12.84% (1)

4.90% 9.49%

9.83%

Sacyr 20.01% Axa SA 4.21%

Free float 69.25% 75.60% 61.04% Free float 46.76%

67.66%

(1) for Caixa Bank.

Source: Repsol financial statements for 2000, 2005 -2007, and 2011.

It should be noted that the main portion of the stock structure is free float. The 68% of shares in

the “free float” category as of 2011 was made up as follows: institutional holders from Spain, 9.9%;

foreign institutional holders, 42%; minority holders from Spain, 10.8% and Repsol´s own holding,

5%. Hence, the significance of foreign capital in Repsol’s stock structure is evident.

2 Data from the Annual Corporate Governance Report of Repsol.

3 Bosch Badía, María Teresa, 2008, “Repsol: de empresa püblica a multinacional del petróleo”, Tribuna de Economía, ICE.

9


Analysis of Repsol Group and YPF S.A. profits

Changes in Repsol Group equity and assets

With the purchase of YPF in 1999, the assets of the Repsol Group showed a 242% increase with

respect to the previous year. In the following 12 years (1999 -2011), the assets and net worth rose

by 169% and 216%, respectively.

Changes in Repsol Group Net Worth, years 1998-2011, in billions of euros

80

70

60

so 40

30

20

10

00 0i Vq N en ' Ln tO o 0 V4 0 -1 'l

M a o 0 i1 C4 4 N r. N N rq C14 N

• Net worth Assets

Source: own, based on Repsol YPF S.A.'s Consolidated Financial Statements.

Share in profits by the different business units in the Repsol Group

In 1998, the hydrocarbon exploration and production segment only accounted for 6% of Repsol’s

net operating revenues (EUR 92.6 million), which was far below the amount obtained for that item

in 1999 (EUR 1.186 billion; 1,181% year -to-year increase), when YPF was incorporated into the

Group's equity. Considering only the second half of 1999, YPF contributed EUR 866 million to this

business area. At the time, 85% of the operating income of the Spanish Group was made up of

refining and marketing activities, plus gas and electricity.

Repsol’s business structure was completely modified by 2007; as a result, the relative share of the

hydrocarbon production and exploration activity rose to over 50% of the operating profitability.

10


Relative share of the business units in the operating income (loss),

1998-2002-2007, in percentages

I I LLUO

80%

50%

20%

-10%

1998 2002 2007

• Exploration and production • Refining and marketing • Chemical

Gas and electricity Corporate and others

Source: own, based on Repsol Group's Consolidated Annual Reports

During 2011, the operations of YPF S.A. accounted for 26% of the Group's operating income (loss)

for that year, which was only exceeded by the upstream segment in the rest of the world, which

comprises hydrocarbon exploration and production activities in 28 countries. On the other hand, in

the 2008 -2011 period, the average share of the company´s business related to Argentina

accounted for 25% of the total operating income (loss), which was only exceeded by the average of

the upstream segment in the rest of the world.

As from January 2008, the Repsol Group adopted a new organizational structure under which the

integrated activities of the value chain (exploration, production, refining, logistics, sale, and

chemical products) undertaken by YPF S.A. in Argentina and its subsidiaries are reported

separately. In essence, most of the transactions, property, and customers of YPF are located in

Argentina, although it currently has the following affiliates:

11


Subsidiaries and affiliates of YPF S.A., 2011, in ARS million and percentages

yPF5.. 2 51, 22: Ii € -tn€it - 333

PF H oklrngs Inc. 310,314 I n•.•estment and finance -361 -432 100.06

Opera dora de Ectacionec 163,701,747

Commercial management of Subsiliares deServiciosS.A. gas stations owned by IPFS.A.

A-Evangelistas.A. 8,683,698 Engineering and construction

services

Compaiia Megas.A. 77,292,000 Separation, fractionating and

transport of natural gas liquids

Jolit-owiership Production and sale of

Profertil S.A.

Reflneria del NorteS.A.

Oleodndos del VaIIeS.A.

Terrninales Maritiniac

P at a gon Ira s

Oiltan kin g Ebytern S. A.

Gasoducto del PacIfico

(Argentina)

Central Dock SudS.A

S)griFticart irsfIucrce lnversora Dock SndS.A.

Exploration and exploitation

of hydrocarbons and Plus Petrol Energy S.A. 30,006,540

generation, production and

sale of electric power

27,018,720 Pipeline transport of oil Oleoducto Tra candino

(Argentina)

143 336

99.996

40 243

99.91

180 627

38.009%

1201 50.00

536 50.CN)

254 4 37,00%

148

116

86 10.0076

226 9.9876

254 42.8696

23 568

45.W%

-3 36

36.0076

391,291,320 Production

45,303,655 Refining 137

4072,749 Pipeline transport oloil

-22

476,034 -I Storage and dispatch 01 oil

Transport and storage of 251167 23

hydrocarbons

15,579,578 -6 Pipeline transport of gas

Generation of electric power 2822342992 70

and sale in block

103,501823 Investment and finance 57

Other Companres Others

*YPF Inversora Energética S.A., A -Evangelista Construçôes e Serviços Ltda., Gasoducto del Pacífico (Cayman)

Ltd., A&C Pipeline Holding Company, Poligãs Lujãn S.A.C.I., Oleoducto Transandino (Chile) S.A., YPF Services

USA Corp, Bizoy S.A., Civeny S.A., Bioceres S.A., Energía Andina S.A., Compañía Minera Argentina S.A., YPF

Perci S.A.C. and YPF Brasil Comercio de Derivados de Petróleo Ltd.

Source: own, based on data in the Financial Statements for 2011 of YPF SA.

12


Changes in the net income (loss) of the Repsol Group, its main company Repsol YPF S.A. and YPF S.A.

This section shows the connection between the Net Profit of the Repsol Group, its subsidiary

Repsol YPF S.A. and YPF S.A. —based in Argentina—. As shown in the chart below, the net profits of

the Repsol Group grew year after year from EUR 1.014 billion in 1998 to a maximum amount of

EUR 4.997 billion in 2010, ending the year 2011 with EUR 2.544 billion in net income.

Changes in the net profits of the Repsol Group, Repsol YPF S.A.

and YPF S.A., 1998 -2011, in EUR billion*

6 .....

4947 :: .. :

Repsol - Repsol YPF S.A. Group YPF .•:: .. ...

Source: own, based on the Stand -Alone and Consolidated Financial Statements

of Repsol YPF S.A. and YPF S.A.

*The rate used to convert YPF S.A.’s amounts in Argentine pesos into euros was the average exchange rate

for the year.

13


Upon substracting the income obtained by Repsol YPF S.A. from the net income of the consolidated

financial statements of the Repsol Group and then the income obtained by YPF S.A. from that

obtained by Repsol YPF S.A., it is clear that a major portion of the final income of the Group is

derived from the income of the Argentine -based company (and its subsidiaries) and, in some years,

it amounts to a significant portion of the total income.

Contribution byYPF S.A. to the net profits of the Repsol Group, 1998 -2011, in EUR billion

5

4

3

2

1

' . ... .. . . : .

•11 P'F S.A• e:is':'I P'F- i:P'F F.!e:isi:iI I:rI:IiJr:I- i:I.'er:'s':'I P'F:i

Source: own, based on the Stand -Alone and Consolidated Financial Statements of

Repsol YPF S.A. and YPF S.A.

Looking at the ROE ratio, which links the Company´s income of the year to its net worth, it is clear

that from 1998 to 2001, the Repsol Group had a higher ratio than its local subsidiary; in contrast, as

from that year, YPF S.A. exceeded the income margin. This means that the increase in income in

Argentina, as compared to the increase in capital, was higher than those increases for Repsol.

14


ROE Ratio (net income/net worth) of the Repsol Group and YPF S.A., 1998 -2011, in percentages

30%

25%

20%

15%

10%

5%

rN r' rN r'i

-Grupo Repsol -YPFS.A.

Source: own, based on the Stand -Alone and Consolidated Financial Statements of Repsol YPF S.A. and

YPF S.A.

This means that while the equity remained stable and even dropped in recent years as a result of

the disinvestment policy, income followed an upward trend. On the contrary, the equity of the

Repsol Group grew exponentially and income remained stable.

Changes in the operating income (loss) of YPF S.A. and the Repsol Group

Over the past few years, the operating profits of Repsol YPF S.A. and YPF S.A. were relatively stable,

ranging from EUR 1.5 billion to EUR 2.1 billion and from EUR 1.3 billion to EUR 1.8 billion,

respectively. That was not the case with the Repsol Group´s operating profits, which were more

variable. For instance, between 2009 and 2010, the Group more than doubled its operating income.

15


Changes in the operating income (loss) of the Repsol Group, Repsol YPF S.A. and YPF S.A.,

2008-2011, in EUR billion *

7.5

6

4.5

3

1.5 4 4. ..: 2.143 Wi 11111 ___t 1 231

[u-f Cy r3 0

0

- F.!epsol (FF S.A. F.epsi:iI 17, ri-iijp F'F S.A.

Source: own, based on the Stand-Alone and Consolidated Financial Statements of Repsol YPF S.A. and YPF S.A.

This is evidence of the large share of operating income (loss) over sales in YPF S.A., as compared to

the same indicator of the consolidated Repsol Group. As of 2006, YPF S.A.´s the ratio dropped due

to a relative increase in the operating costs.

16


Operating profits/operating revenues of the Repsol Group and YPF S.A., 1998 -2011, in

percentages

0,60

0,50

@40

030

020

0.10

I I I I I I I I I I I I I

QQ C C N UI LD r- 00 0 c c C C C 0 0 C C C 0 0

U L) Lj L? L.? L.? L.? Lj L) L. L' L

GrL p o Re:-oI

Source: own, based on the Stand -Alone and Consolidated Financial Statements of Repsol YPF S.A. and

YPF S.A.

17


The Stripping of YPF's Assets by the Repsol Group

As regards the history of the company, it should be noted that in 1993 the shares of YPF S.A. were

held by an heterogeneous group of shareholders: 20% was held by the Argentine Federal

Government, 11% was held by the hydrocarbon -producing provinces, 10% was held by its

employees, and the remaining 59% was held by private investors. The Company was managed by

private parties, but the Argentine government was represented in the Board of Directors and kept

the golden share for the most important decisions of the company. The main goal was to make the

company more professional, increase its production and expand its reserves horizon.

By 1993, YPF was engaged in hydrocarbon exploration and exploitation activities almost exclusively

in Argentina, except for Block 14 in Ecuador, resulting from a competitive bidding process that was

opened by the government of that country in 1987 and was awarded to YPF, ELF (French company)

and Braspetro (international subsidiary of Petrobras). However, after the privatization of YPF, the

need to make the Company more international —not only in order to expand Argentina’s horizons

in the search for hydrocarbons, but also to allow its employees to gain greater experience in

different types of fields and access to new technologies— translated into the sustained growth of

the company both in Argentina and in the rest of the world.

Consequently, YPF E&P Overseas was formed in 1994 with a view to partnering with YPFB in Bolivia

in the Montero, Charagua, and Securé blocks. In 1995, YPF decided to acquire the shares of the

Dallas-based Maxus Energy Corporation for US$ 740 million. At that time, Maxus was one of the

largest private (unlisted) oil and gas (O&G) companies and had operations and assets in the United

States, Indonesia, Venezuela, Ecuador, Colombia, and Bolivia. The purpose of acquiring this

company was, in addition to gaining ownership of its assets, to incorporate personnel with

experience in offshore operations and gain access to the United States market, the main

hydrocarbon consumer in the world.

In 1996, Bolivia began the capitalization process of YPFB through the privatization of the O&G

companies ANDINA SAM and CHACO. YPF, together with Perez Companc and Pluspetrol, acquired

50% of the shares of ANDINA and, as a result, took part in the discovery and development of some

of the largest natural gas -producing fields in Bolivia located in the San Alberto and San Antonio

blocks which, paradoxically enough, currently supply natural gas to Argentina and Brazil.

In 1997, YPF and Maxus acquired a 35% interest in Block 16 in Ecuador and a 30% interest in the

Monteagudo block in Bolivia. Both blocks were operated by YPF.

In Indonesia, through Maxus and YPF International, YPF partnered with Pertamina, the

government -owned O&G company of that country, and, by 1998, it held interests in at least 5

offshore blocks in Indonesia, many of which it operated.

18


In Venezuela, through the acquisition of Maxus, YPF held an interest in the Quiriquire and

Guarapiche blocks.

In Brazil, YPF decided to take an active part in the opening process of the hydrocarbon industry

and, as part of its strategic alliance with Petrobras, it partnered with such company and became

the first company to sign a joint exploration and production agreement with Petrobras. YPF

became the operator of block BES -3 (offshore) and, together with Santa Fe Energy, it acquired an

interest in the Carauna and BPOT -2 blocks in the Río Grande del Norte basin. The goal of the

company was to secure its position in Brazil for the new competitive bidding round that the

National Hydrocarbon Agency (Agencia Nacional de Hidrocarburos ) was to launch in 1999.

In 1998, YPF entered into a strategic alliance with Bitech Petroleum Corporation to develop oil and

gas assets in Russia through the acquisition of 18.67% of such company’s shares.

Apart from the abovementioned countries, by 1999, YPF Internacional had operations in Guyana,

Malaysia, Colombia, Peru and the Gulf of Mexico (USA).

As a result of this strategy, in 1999, YPF’s international production reached more than 85,000

barrels of oil per day and about 200 million cubic feet of natural gas. Furthermore, its international

reserves exceeded 400 million barrels of oil equivalent.

Map of the international assets of YPF S.A. as of 1999

£ F anb al ] B

aid Oklahoma

Colombia: M%Quinquire

Ecuador: 35%BIoque16 OIoquel4

Peru: 6bques Marnore

explorabnos secuire Cipipdi Charaua LaguniIa monlern

I Indonesia: 56% South Easl Sumaira PSC

BPOT2 24% NW Java PSC 45% South Sokang 167% DJor 25%Jnbi Merrig

19


As regards the downstream segment, apart from the development of and its presence in the

domestic refining, lubricant, and retail (gas stations) markets, as from 1995, YPF began a process

aimed at making this business international. The oil and fuel trading business included —in

addition to the neighbouring countries— the United States and some countries in West Africa.

YPF started to sell refined fuels to the United States, thus adding value through the oil

industrialization process and expanding the company's profit margins.

In 1995, YPF acquired a network of gasoline stations in Chile with a market share of about 6%.

In Peru, in 1996 it acquired, together with other companies, a percentage of the La Pampilla

refinery, which processed over 33 million barrels per year and represented more than 55% of the

oil processing activity in Peru. In 1998, YPF owned 57 gasoline stations under the name YPF.

In 1997, YPF began operating in Brazil through the distribution of fuels, lubricants and

petrochemical products exported from Argentina. In addition, in 1997 and as part of a strategic

alliance with Petrobras, two gas stations were opened simultaneously, one in Rio de Janeiro under

the YPF brand and the other one in Zarate, Argentina, under the Petrobras brand. This agreement

was the first of its kind to be signed by Petrobras with any company in the world. Likewise, in 1998,

YPF acquired a 29% interest in the Manguinhos refinery, which in turn had 82 gasoline stations.

In December 1998, YPF acquired 51% of Global Petroleum Corp., a American company engaged in

the import of refined oil products for use throughout the United States, with 41 terminals and fuel

supply capacity in 9 USA states. This acquisition was part of the strategy pursued to secure markets

for Argentine refined products.

In sum, by the end of 1998 and prior to its acquisition by Repsol, YPF had about 1,800 employees

outside Argentina, assigned to different upstream and downstream operations around the globe.

YPF was considered to be a company with a brilliant present and future (twelfth O&G company

listed on the NYSE based on its reserve amounts), with presence in the main oil producing

countries in Latin America and with potential for growth in countries like the United States, Russia,

and Indonesia. YPF was present in 12 countries in 3 continents and had gone from being an

exclusively Argentine company to becoming an international company. This expansion took place

in just over 4 years and in spite of the fact that oil prices at that time were below US$ 20 per barrel.

However, this situation changed dramatically as from 1999, when YPF was acquired by Repsol.

During the first few years after the acquisition of YPF by Repsol, the liquidity needed to pay back

the debts Repsol incurred to acquire YPF translated into a process of disinvestment and sale of

some assets to third -party companies, mainly the assets of Crescendo in the Texas' Panhandle and

the assets of Indonesia. During those years, the price of oil was below US$ 20 per barrel and these

assets could be considered easier to sell or convert into cash as they were in production and were

in two of the most attractive areas, based on their geographic location and geological potential at

an international level. With these sales, YPF lost two of the goals set in its previous

20


internationalization strategy: access to the North American market and gaining offshore experience

with the Indonesian assets.

As from 2000, Repsol began a process through which it transferred the rest of the international

assets owned by YPF or its subsidiaries to itself. Thus, YPF lost management of those assets almost

immediately after Repsol´s acquisition of YPF.

All the exploration and production assets included in Figure 1, which YPF held as of 1999, were

transferred during the first 4 years and no longer belong to YPF. The following table details the

process whereby YPF’s Argentine and international assets were transferred to Repsol and other

companies:

Process of sale and transfer of YPF’s assets, in US$ million

Year YIN Restrucluiring U5Oii,n To Type

2999 Crserd Te rhsrdIeE Id to Apshe in kII 624 Third E&P

parties

-

1999 The interest in YPF PERUnd REFINDORES DEL PERU is oId tepI 75 REP5OL DOWN

1 YPF BFBSil S.A. is oId to RepoI YPF 140 REISOL E&P/DOWN

21 YPI'linternacinnalsells itsinterest in Ecuadortz RepsolYPF Ecuador 307 REFSOL E&P

21 YPF S.A. IlsitS interest in Ecuador to RepI YPF Ecuador 6 REPOL E&P

2(301 YPF sells 3696of the OIodto Tr.ndino (Trn-Anden PipIi nI to thid-irties 66 • d

DOWN prt

Ar—ent with Porr whereby 20.7% of Andina and interest in MrntisIe

Behr and Restinp All we acquir2d and 3% of Santa Crm I, 62.2% of S—t CF10 II and

2M)I other minor asset were sold

2301 YPF sells its inteet in fletrodd Argentina .A to EF Intern

435 Third

p rti

Third

p rti

E&P

Other

$M YPF Internacional sells 101D% of Repol YIF Venezuela SA to RpoI Explorwi6n. 2G REPWL E&P

2Wfl YPF Interns.iorI sells 1Pl% uf Maxus Vmezuela SA.nd Maxus Gurpi che to RpoI 47 REPiOL E&P

YPF sel Is its interest in Astra Prod PtraIer (V—I) to Repol

$M Exploraci6n Venezuela I REPWL ERLP

VPF International Wis. its interest in petroleum Corpto Lkil

21301 0—irs— Canada 11 Third

prt- E&P

21 VPF -I IS its O% interest in RpI 3s S.A. - sham resulting from the merger between

YPFsrd RepI3s LIZ REPSOL OTHER

)2 YPFsallSitsitl—Stin YPFC.Im to Ro YFF 1134 REPiOL DOWN

22 YPF International sellsYPF Bior. YPF Mmus 5o.tht Sumatra, YPF Jvs

BrtIut, YI'F Madura Barad, YPF Poleng and PT IIAPCO Semiries 174 REPWL E&P

YPF sells intertE, YPI'GastoRepol Butano 45 REPWL DOWN

22 YPF sells all of its wwh in flIir (din nd Mmus EolivW t Rep" YPF Santa

Cruz W3 REPWL E&P

2lU1 GIobI Third

DOWN parties

704 YPF-II,YPFIndmesia Ltd.litsellsalitheoperationsi i ttt rn.n1ryI 41 Third EP

parties

21105 YPF sells its interest in PBB PoIr 7.5 Third

DOWN parties

2005 5 Third

DOWNparties

TOTAL SALES EXCLUDING I'[CUM EXCHANGE

Note: data extracted from YPF S.A.'s 20F as from 1999.

21


As observed in the above table, Repsol started a massive asset transfer process from YPF to the

affiliates of the Spanish group and/or in some cases decided to sell those assets to third parties.

The transfer of assets for an amount of about US$ 3 billion was recorded in YPF’s accounting books,

but such amount was subsequently transferred to Repsol as extraordinary dividends. That is to say,

not only did Repsol take advantage of its position in YPF to keep strategic assets, but it also

appropriated the funds arising from these sales. Included in the asset transfers, there were

certain proven oil and gas reserves which are disclosed below, together with the implied relative

values paid per barrel of oil equivalent. The analysis of the information in the table and the map

included above show the significant reduction of YPF’s net worth as a result of the loss of its

strategic assets, which translated into a sharp reduction in the reserves and production level.

Thus, Repsol’s actions, whether related to the transfer of hydrocarbon reserves to affiliates or the

lack of investment in Argentina, caused the Company’s total reserves to plummet.

International reserves of YPF sold or transferred to RepsoL

YEAR Country USDmillon Reserves PD + PND MBOE Value/Boe

1999 USA 624 133 4.69

2001 ECUADOR 313 99 3.16

2001 VENEZUELA 73 117.3 0.62

2002 INDONESIA 174 234 0.74

2002 BOLIVIA 883 548 1.61

2004 INDONESIA 41 9.1 4.51

TOTAL 2,108 1,140.4

Changes in the net reserves of YPF, in barrels of oil equivalent

Rest of South YEAR Argentina America USA Indonesia Worldwide

1999 2768.5 191.8 41.7 191.3 3193.3

2000 2931.5 180.1 1 206 3318.6

2001 3171.1 40.5 1 252.3 3464.9

2002 2969.3 0.9 14.9 2985.1

2003 2336.8 0.8 13.4 2351

2004 2067.4 7.8 2075.2

2005 1603.6 7.7 1611.3

2006 1387.8 7.6 1395.4

2007 1276.3 6.9 1283.2

2008 1131 2 1133

2009 1012 1 1013

2010 992 0 992

2011 977.6 0 977.6

Note: amounts from the 20F of YPF with the 2005 restatement.

22


These amounts are better appreciated in the following chart showing the fall by over 70% in the

certified proven reserves of oil and natural gas that YPF owned before being acquired by Repsol, as

compared to the year 2011.

Changes in Total Reserves, in barrels of oil equivalent

4000

3500

3000

2500

2000

1500

1000

500

0

in reserves

• Indonesia

In USA

• Rest of South America

Argentina

r-. cu —i

cD c c'J c..J c..J r14 c'i CN C14 N r14 (N C.J

Note: values from YPF's 20F with the 2005 restatement.

23


A Paradigmatic Case: the Liabilities of Maxus Energy

After the mass transfer of assets carried out from 1999 to 2005, YPF lost almost all of the assets

that Maxus Energy had at the time of their acquisition by YPF; however, as of December 31, 2011,

YPF Holdings Inc. carried liabilities previously held by Maxus in the amount of US$ 221 million, out

of which US$ 155 million relate to short - and long-term environmental liabilities. The rest are debts

related to pension plans. In 2005, the Department of Environmental Protection of New Jersey filed

a lawsuit before the Superior Court of New Jersey Law Division, Essex County in connection with

the environmental liability of the Lister Site. Such lawsuit was brought against:

• Occidental Chemical Corporation,

• Tierra Solutions, Inc.,

• Maxus Energy Corporation,

• Repsol

• YPF

• YPF Holdings, Inc. ~ CLH Holdings

The arguments of the State of New Jersey against Repsol and YPF are:

1. Fraudulent transfer of assets: The plaintiff holds that Repsol and YPF sought to abandon

their environmental responsibilities while systematically taking from Maxus and Tierra

their assets and their ability to meet their obligations in New Jersey. It also states that no

reasonable market value was paid for the assets transferred.

2. Alter ego theory: The plaintiff holds that Repsol and YPF abused the corporate forms and

that all the companies (Maxus, Repsol, and YPF) operated as a single economic unit.

Surprisingly, it is the same diagnosis as the one presented in the current report.

24


Iepsol's Policies for YPF: Depredation, Disinvestment and Undersupply

Much of the exceptional macroeconomic performance of Argentina in the period 2003 through

2011 resulted from a policy which made it possible to partially insulate the local economy from the

high volatility of international commodity prices of both food and fuels. In fact, upon comparing

the evolution of the local price of fuels with the one that would have resulted from the

international marker, it can be seen that the policy of imposing duties on exports, coupled with the

management of local prices, made it possible to insulate Argentina from the upward cycle

experienced by fuels, which was mainly driven by the presence of speculative capital that began to

see such resources as an alternative investment in the light of the collapse of other short -term

investment options within the context of the violent international financial crisis.

Changes in domestic and international fuel prices

GOOO

5.000

4 000 E

3000

2 . 000

I000

0

I 34

11111111111111111111DIftrencia (2).(1) Priclo IrftQrnodQI CombustJbe (1)

Pr6ot6'Ico1ntervacIonal del combustible (2)

(1) Average price of gasoline and diesel of YPF weighted on the basis of refining percentages. Source: Secretariat of

Energy, Resolution No. 1,104.

(2) Average real gross margin for the sector (including taxes, refining, and marketing) applied to the historical local price

of oil.

25


As shown in the chart above, the dissociation of the local price from its international benchmark

allowed local consumers (both families and companies) to pay for fuel on the domestic market, in

years with strong changes in international prices -such as 2008 - almost half the amount that would

have resulted from import parity. This means, that for example in 2008, while the average cost of

gasoline and diesel oil would have been ARS 4,029 per cubic meter in the absence of a price

management policy, on the domestic market the price only amounted to ARS 2,026 per cubic

meter.

The domestic price management policy is a natural consequence of understanding that fuel is a

determining factor for the development of diverse economic activities, since it is a widely used

input in Argentina's productive structure; it participates as a direct cost in a wide variety of

industrial processes. Likewise, as fuel for transport, it is also involved in the marketing and

distribution chain of almost every type of product. Thus, the competitiveness of local production

relies to a great extent upon the cost of energy and, therefore, on the domestic price of oil.

Government involvement in managing the offer and the prices of oil and gas is understood as a

main driver of Argentina’s economic competitiveness.

However, since international markets treat oil simply as a generic product for export (a

commodity), the evolution of its price is subject to the fluctuations of the global economy.

Recently, for example, the international crisis impacted harshly on the international oil market,

which caused the price of the barrel (WTI) to increase significantly and also to become highly

volatile: while from 1991 to 2002 the price of the barrel averaged US$ 21 with an average volatility

of US$ 4, between 2003 and 2011, it increased by 215% with an average of US$ 67 per barrel and

an average volatility of US$ 21. It is in this context that it is possible to understand the policies

applied by the Argentine Government for the purpose of managing domestic fuel prices with the

ultimate goal of insulating the domestic economy from the fluctuations of international prices.

26


Fepsol's attitude with respect to domestic prices

The measures aimed at managing domestic energy and fuel costs and supplying the domestic

market were interpreted by Repsol as a threat to the extraordinary profits that it intended to

obtain in Argentina. In its 2011 financial statements, the Company stated its position in the

Argentine affiliate (YPF S.A.): "The main economic risks faced by Repsol YPF as a result of its

operations in such country (Argentina) are: limitations in its capacity to transfer to domestic prices

the increase in the international price of crude oil, other fuels, and other costs affecting operations,

as well as the impact of foreign exchange fluctuations; restrictions on the volume of hydrocarbon

exports resulting mainly from the requirement to satisfy domestic demand with the subsequent

impact on the Company's previously assumed commitments to its customers; the need to extend

the concessions, part of which will expire in 2017; labour union strikes and interruptions; potential

alterations of the current regulatory framework through government measures and/or legislative

changes that could affect the Group's operations and the profits expected from them (increase in

taxes on oil and gas exports, setting of rates for acquiring goods or services which are necessary to

perform activities; renegotiation and termination of agreements; changes in policies affecting trade

and investments, etc.); the evolution in the exchange rate of the Argentine peso and restrictions

on access to the foreign exchange market in order to pay obligations and dividends abroad”.

It subsequently claims that "in addition, YPF has had to sell on the local market a portion of its

natural gas production that was originally intended for export, so it has been unable to meet

contractual export commitments in certain cases (...)”.

This means that, as Repsol was unable to increase domestic crude oil prices in Argentina, it put into

practice a clear country exit strategy and a predatory policy both in terms of hydrocarbon

production and disinvestment.

However, it should not be believed that profits were insufficient because, as already shown, YPF

income collected by Repsol was substantial. The problem is that the Repsol Group compared this

income to other business opportunities which, at the prices prevailing on the international market,

were even more profitable and, therefore, it neglected local exploration and production activities.

27


Evolution of YPF S.A. oil and gas production, 1993 -2011, in m3 and millions of m 3

tj 1 icJc —.

• - - .500.

I I

. ,000 ..

. . I. . .F. . . F - - - - - - .

ci ci ci ' ci 0 0 0 00 C c'

- i - - .1 .. r- -- -fl'; r------- .- .j -

::::::-:-.-.-.-.-.-.-:-:::::::-:-:-.-.-.-.-- - '.:3asi:R-irri3:i

Source: own, based on Energy Secretariat data.

The above chart evidences that Repsol adopted a production strategy based almost exclusively on

the existing wells (which were discovered in years before the privatization, as is the case of the

megafield of Loma La Lata), since oil and gas production between 1999 and 2011 fell by 39% and

31%, respectively. However, what is most remarkable about the disinvestment, market

segmentation and ongoing pressures to increase fuel prices by Repsol is the fact that the Group

itself was one of the main parties responsible for the shortage of oil and gas in the market -a

shortage that, far from affecting the Company's profits, clearly contributed to a strategy aimed at

making domestic prices converge with international prices.

This strategy is reflected in the classified and restricted reports found after the Company was

placed under government control, in which Repsol made explicit references. In a classified

presentation about its business plan, Repsol argued that the much sought -after (by the Group)

"convergence between domestic and international prices of oil and gas would be completed by the

year 2014”. It is interesting to understand the mechanisms whereby this convergence would

effectively take place.

In a confidential document (see figures below) in which Repsol mentioned the main guidelines of

its business plan, a potential date was mentioned for the desired equalization of domestic and

external prices that would apparently take place as a result of the free supply and demand of fuels.

However, that same business plan states that the Company's action tends to consolidate a

situation in which domestic supply is always below demand.

28

Dwtrem; Diesel PBT vs. IF

LJS$Ir,o NO

2208 2)02 2010 2011

IN 13% 42% 51% 10%

2211 0,3 2014

77% 21% 0014


YPF business plan

:1

Convergence to import Parity assumed in 2014

Upstream: Crud, dntft price vs, WT1'

USibbI

120

IN

4$ AN 2000 2011 2012 201

35l 0.1012 %Z 11

122 l2lI4..m)0a127.nS ItO '0I! 0111L )0,.P)0.,4P*4o r4flp, .1v...l'I1-1,..o2b, &44.2 S2l1.d pt*lPF

Repsol's business plan poses as a work hypothesis an equalization of the price of crude oil on the

domestic market with its import parity arising from an alleged -but not substantiated - "evolution of

crude oil export duties that would allow our domestic prices to increase”. That is to say, far from

this being a natural consequence of the free market, Repsol prepared its business plan on the basis

of the alleged total elimination of oil export duties in 2014 and partial eliminations in 2012 and

2013. As to natural gas, Repsol's plans are even more revealing. Based on this confidential business

plan, domestic gas prices would increase as a result of the upward pressure on the cost of the fuel

imposed by higher import levels.

29


However, and as proven by the current report, the need to import fuels was directly generated by

the actions of Repsol at YPF, whose disinvestment led to a fall in oil and gas production and to the

subsequent need to buy these fuels abroad.

This business plan created by Repsol for YPF also helps understand the causes of the disinvestment

in exploration and exploitation of hydrocarbon resources by the Company. The document

recognizes that Argentina's economic growth since 2003 is "among the highest in the world" and

that, consequently, demand for fuels expands at annual rates over 5%. This increased growth

imposes pressures on hydrocarbons supply as it generates a need for more investment - in both the

upstream and downstream segments - with a view to expanding exploitation and refining capacity

in line with the increase in demand while at the same time preventing production from depleting

the fields and causing a reduction in oil and gas reserves.

However, Repsol's disinvestment created exactly that effect on domestic supply: the lack of

investment entailed an increasing need to import fuels and the abandonment by Repsol of

exploration and recovery activities meant the depletion of YPF's oil and gas reserves. According to

this confidential business plan, the clearly expanding demand could only be satisfied by a similar

increase in domestic supply provided that the "regulatory framework would ensure sufficient

margins throughout all links of the value chain of the sector”. Two points should be made in this

regard. Firstly, reference to sufficient profit margins "throughout all links of the value chain of the

sector" clearly reflects the way Repsol understood business. As discussed in further detail in the

subsection devoted to analyzing the Group's marketing and pricing strategy, its profit calculation

method completely disregarded the vertical integration at YPF. That is to say, Repsol computed a

revenue margin in, for example, its marketing segment, in the same way as this could be done by a

company exclusively engaged in marketing fuels. The marketing segment computed its fuel

"acquisition cost" as if the product were bought at market prices thus applying a marketing margin

on fuels whose cost already included refining, exploitation, and exploration margins. In this way it

multiplied profits throughout the whole productive chain.

30


Secondly, it should be asked whether the profit margins obtained by Repsol at YPF were not

"sufficient”. As shown, the profits obtained by Repsol at YPF were far from "insufficient" since they

allowed the group to leverage its international expansion as well as to make a very good deal

through the acquisition of YPF. Therefore, it is possible to believe that the profits obtained by

Repsol at YPF were "insufficient" in some other sense. Repsol's own business plan shows that this

insufficiency arises from a very specific calculation: comparing the profit obtained by the Group on

the domestic market with the profit that the Group could have made if domestic fuel prices had

been the same as international prices. As pointed out at the beginning of this section, the export

duties and price management policies implemented by the Argentine Government entailed

differences of up to 100% between the domestic price and the -theoretical - import parity. Although

a preliminary analysis could suggest that these differences only impacted negatively on Repsol's

profits in YPF, the Group's performance during the period 1999 through 2011 disproves such an

assumption. In order to understand this apparent contradiction, it should be borne in mind that

although the Argentine Government's macro and microeconomic policies were the reason for the

dissociation of domestic fuel sale prices from international prices, those policies also dissociate the

evolution of domestic prices from the costs of the rest of the world. Therefore, Repsol deliberately

failed to mention that, apart from domestic fuel prices departing from international fuel prices,

there was also -thanks to the policies implemented by the Argentine Government, which were

criticized by the Group - dissociation between domestic and foreign costs thus enabling the hefty

profits mentioned above. It also disregarded the fact that such policies underpinned the important

growth in the economy and, consequently, the Company's prosperity.

The disinvestment process of Repsol in YPF was consequently not the result of the "insufficient"

profitability obtained by the Group at YPF, but rather of continuously comparing such profitability

with the theoretical value that could have been attained if domestic prices had risen, such rise

being promoted by Repsol's own policy at YPF as it reduced oil and gas supply to a domestic market

that was clearly expanding.

This domestic disinvestment process becomes evident upon analyzing the level of remittance of

earnings, as the Repsol Group chose to maximize earnings in Argentina in order to subsequently

transfer them abroad.

31

10

9

8

7

6

5

4 u-i

3

2

1

LI


Changes in YPF S.A. net earnings and dividends paid 1997 -2011, in ARS billion

N r NJ r- c,:.

- ---i — ' i ri •ri n.J rJ rJ ri n. c'.: '.

Source: own, on the basis of the Annual Report of YPF and its subsidiaries.

The chart shows how earnings remittances increased as from 2008: in the period 2008 through

2011 the Company paid dividends similar to those paid during the previous 10 years (1997 -2007).

It should also be noted that the Repsol Group as a whole distributed dividends in the amount of

US$ 13.370 billion during the period 1999-2011, an amount which is almost equivalent to the amount remitted from the Argentine affiliate. “In other words, the international expansion of the

Group was mainly based on the depredatory policy implemented by Repsol in Argentina within

the framework of a process of sharp disinvestment and asset stripping in relation to the main

company of Argentina”. 4 As explained in the first section, Repsol started off as a downstream

(refining, sale, and distribution) company and in just a few years it expanded internationally. The

main companies in the group, their interests and results for 2011 are shown below:

4 Message by the Federal Executive, Law No. 26,741.

32


Main companies of the Repsol Group - December 2011, in percentages and EUR billion

Income (loss) for Company Country Activity Interest 2011 (in EUR

million)

YPF S.A. Argentina Exploration and production of hydrocarbons 57.43% 1,095.40

Repsol Sinopec Brasil S.A Brazil Exploration and marketing of hydrocarbons 60.10% 82.2

GAS Natural SDG SA Spain Gas distribution 30.10% 1,021

Repsol YPF Bolivia SA Bolivia Holding company 100.00% 5.8

Repsol Petróleo, S.A. Spain Refining 99.97% 319.10

Repsol Internacional finance BV Holland Financial and holding of interests 100.00% 129.90

Repsol Portuguesa, S.A. Portugal Distribution and marketing of oil products 100.00% 44.20

Repsol Química S.A. Spain Manufacturing and sale of petrochemical products 100.00% 18.60

Repsol YPF Tesorería y Gestión Spain Treasury services rendered to group companies 100.00% 83.90

Financiera, S.A.

Repsol Exploración, S.A. Spain Exploration and production of hydrocarbons 100.00% 26.50

Petróleo del Norte (PETRONOR) Spain Refining 85.98% 291.20

Repsol YPF Perú B.V Holland Holding company 100.00% 4.70

Repsol Overzee Finance, B.V Holland Holding company 100.00% 41.30

Compañía logística de Spain Transportation and storage of oil products 10.00% 155.30

Hidrocarburo

Repsol Butano S.A. Spain Marketing of LPG 100.00% 56.30

RepsolItalia Italy Marketing of oil products 100.00% 4.80

Repsol Comercial de Productos Petrolíferos S.A.

Spain Marketing of oil products 96.67% 277

Other interest

Source: financial statements of Repsol

YPF for 2011

In 2008, the Repsol Group segmented the Company into the following business units.

The first three are the so -called "integrated strategic businesses".

• Upstream (hydrocarbon exploration and production);

• LNG (midstream phase operations (liquefaction, transportation and regasification) of

natural gas and marketing of natural gas and liquefied natural gas);

• Downstream (refining, marketing of oil products, chemical and liquefied petroleum

gas).

And two strategic interests:

• YPF, including the operations of YPF, S.A. and all its group companies in all businesses

(as of December 31, 2011, the Group held a 57.43% interest in YPF).

• Gas Natural Fenosa, whose main activities are natural gas marketing and

electric power generation, distribution and marketing (as of December 31,

2011, the Group held a 30.10 % interest in Gas Natural Fenosa).

33


The Group’s market penetration worldwide is shown in the following graph: Repsol’s presence worldwide by business unit, 2010

Repsol en ci mundo

tfvr-~~, iiil, fT4

,•4l

-

'V

U-

0 CWKJ*SI

'p

BASES ANTAPermanentes Jubany Orcadas Esperanza M bi

Source: 2010 Consolidated Annual Report

But even after the marked disinvestment process that Repsol carried out in YPF, the importance of

the Company to the Group is still evident. Despite the significa nt decrease in the reserves of oil and

gas that Repsol generated in YPF, the exis ting oil reserves in YPF exceeded even those held by the

whole Repsol Group. In fact, by 2011 Repsol’s es ti mated proven reserves (excluding YPF´s)

according to the Securi ties Exchange Commission’s (SEC) methodology totalled 1.167 billion barrels

of oil equivalent (BBOE), of which 393 MMBOE involved crude oil and the rest, 774 MMBOE,

involved natural gas5. By late 2011, YPF’s proven reserves totalled 1.103 BBOE, of which 585

MMBOE involved crude oil and 427 MMBOE were natural gas. This means that in spite of the

deliberate divestment, reduc tion in reserves and decrease in pr oduction caused by Repsol in YPF,

the latter reserves as of 2011 accounted for 60% of the Group’s reserves and 36% of its natural gas

reserves.

In this regard, YPF’s strategic importance, its reserve levels, produc tion levels, export and

commerc ialization capacity help understand the signi ficant changes that Repsol Group experienced

following its acquisition of the local company, acquis ition that would later go on to exhaust in order

to finance its global expansion. This fact can be illustrated simply by comparing the main variables

of the Group’s economic- fi nancial equ ation before and after the acquisition of YPF. The following

table shows these variables for 1998 and 1999.

5 Source: http ://www.repsol.com/es_es/corporacion/conocer-repsol/ac tividad/exploracion-

produccion/descubrimientos-produccion/default.aspx

34


Repsol’s income before and after the acquisition of YPF, in US$ billion

1998 1999 Variation

Operating revenues 18.989 26.295 38%

Income after taxes 0.815 1.011 16%

Operating income 1.658 2.629 59%

Assets 11.351 42.050 142%

Shareholders equity 6.043 12.526 107%

Minority shareholders 1.513 1.810 24%

Long-term financial debt 2.215 10.223 349%

Other long-term debt 1.118 3.173 85%

Trade payables 3.412 5.488 61%

Short-term financial debt 2.390 8.769 267%

Source: own, based on YPF data.

An analysis of the above table makes Repsol’s strategy clear: in order to finance an expansion of

142% of its assets through the acquisition of YPF it had to increase both its short (267%) and long

term (349%) debt. YPF’s acquisition by Repsol allowed the Group to significantly increase its

income (38%) and particularly its operating income (59%), resulting in cash flows that later enabled

Repsol to finance the diversification strategy in the rest of the world with the liquidity it extracted

from YPF.

In fact, looking longer -term at the performance of the Repsol Group in YPF clearly shows that the

economic-financial business was done at the expense of the Company’s production performance.

The following graph shows the changes in YPF’s net and operating profits, net worth and oil and

crude oil production for the period 1997 -2003. This clearly shows that when comparing the year in

which Repsol took over the Company with the year 2011, the two profit indicators improved

significantly, while net worth, as well as the production of oil and gas, drop sharply. In fact, while

between 1999 and 2011, operating profits multiplied by 2.6 times and net profits did so by 1.3

times, net worth decreased by 41%, oil production fell 43% and gas production dropped 31%. As

already mentioned, Repsol’s financial business was done at the expense of a reduction in YPF’s oil

and gas production and exploration.

35


YPF: Change in selected variables, 1999 -2011 (with base index number 1999=100)

600

500

400

300

200

100

0

261

132 69 59 57

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

- Net Profit Operating Profit - Net worth

Oil Production Gas Production

Source: YPF Annual Report

36


The Second Stage of Repsol’s Financial Strategy for YPF

The second stage of Repsol’s financial strategy for YPF was marked by the Group’s plans to sell the

Company thanks to the business opportunity created by the enhancement of the Vaca Muerta field

(for a thorough description of this point, see Section 3). For this reason, the last two years show an

increase in the divestment strategy implemented by the Group, along with an increase in debt that

left YPF in a financially delicate situation. Below is a description of the main aspects of this second

stage of Repsol’s financial strategy in YPF that can be characterized as an acceleration in its exit

from the Company.

First of all, during 2011, the Company’s shareholders’ equity dropped almost by 7%, from US$

4.868 billion to US$ 4.537 billion. This reduction is explained by an increase in the Company’s total

liabilities, which increased by 26% over the course of those two years, from US$ 7.043 billion to

US$ 8.879 billion.

YPF’s shareholders’ equity, in US$ Million

Assets Liabilities A Shareholders'

equity

13,416

2':HF9 21F1 I:F 21:F1 I


37


At the same time, this increase in liabilities was mainly the result of dividend payments that largely

exceeded YPF’s payment capabilities. As seen in the graph below, while during 2011 the net profits

earned by the Company amounted to US$ 1.283 billion, the payment of dividends exceeded this

amount by 16%, reaching US$ 1.491 billion.

Changes in net profits and in dividend payments in YPF (Consolidated),

2009-2011, in US$ billion

ao 1.312

3200-

0.988

S00

--

2009

. Net ::rc::fitE; • E::'i.iclE.r -I:l I:;\rrIE;titE;

1.480

1.191

2010

1.491

1.283

2011


Even in spite of its divestment policy, the prevalence of the payment of dividends in the Company’s

setting of short -term objectives deteriorated its finances and caused the net debt to multiply

threefold in just three years. In fact, the cash flow generated by the Company during the period

2009 -2011 was insufficient to sustain the capital expenditures (which explains part of the

deterioration in the exploration and production business mentioned earlier) and the payment of

dividends, and the only way of continuing to make those dividend payments was through

indebtedness.

38


YPF Statement of cash flows (Consolidated), 2009 -2011, in US$ billion

• 2.009 2.010 2.011

3.500

3.000

2.500

2.000

1.500

1.000

500

-

-500

-1.000

-1.500

Cash generated in

operations

Investing Net indebtedness Payment of dividends Net change in cash

activities

3.000

2.000

1.000

-1.000

-2.000

-3.000

-4.000


YPF’s Statement of Cash Flows (Consolidated), 2008 -2011, in US$ billion

2008 2009 2010 2011


39


Changes in Repsol’s level of indebtedness in YPF, 1997 -2011, in US$ billion

9.000

8.000

7.000

ig 6.000

D

0

5.000

4.000

3.000

2.000

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: YPF, Annual Report for 1997 through 2011.

At the same time, in this second stage the indebtedness strategy was clearly short -term in nature,

given the imminent sale to foreign capital by Repsol Group, as much of the indebtedness is short -

term.

The deterioration in operating income experienced by YPF in recent years as a result of the

deliberate divestment by Repsol and the concentration of the debt structure in the short term

makes it clear that the Group was planning an imminent sale of the Company.

Deepening of the Market Segmentation Strategy in the Context of the drop in YPF’s Production

The market segmentation strategy pursued by Repsol was even more evident after certain findings

by the Comptrollership. In fact, the evolution of production, the import of fuels and the increase in

prices by Repsol in YPF are the clearest evidence of the Company’s market segmentation strategy,

which aimed to keep the premium market segment for itself in a context of divestment and waning

domestic production.

40


In fact, the divestment implemented by Repsol in YPF led to a significant increase in operating

costs, mainly due to the growing need to import fuels, which was not only the result of the lack of

exploration and production of new fields, but which also enabled Repsol to continue applying

pressure towards the convergence of domestic prices of fuels with their international benchmarks.

As shown in the following graph, YPF's operating costs in 2011 increased 32% if compared to 2010,

and 57% if compared to 2009 (which is when the international crisis and the domestic economic

slowdown minimized the need of the Company to import fuel).

Change in YPF operating costs (consolidated), 2008 -2011, in US$ billion

2008 2009 2010 2011


Thus, within the context of YPF's waning domestic production of crude oil and gas and a genuinely

expanding domestic market, Repsol’s strategy aimed to cover part of the increase in its demand

with greater fuel imports. The greater import volumes clearly deteriorated the Company's

operating income, whose revenues increased as a result of the mere effect of higher sales prices, in

a context in which production amounts and even sales were falling. As an example, between 2010

and 2011, while the sales of gasoline and diesel increased only 9% (mainly the result of the higher

import amounts of premium fuels, in both gasoline and diesel), the average prices of these fuels

increased 21%. With regard to fuel oil, the situation was even more dramatic, since while the

amounts dropped 46%, prices rose 22%.

14.000

12.000

10.000

8.000

6.000

4.000

2.000

41


Changes in domestic market

Domestic Market 2008 2009 2010 2011 2010vs 2011

amount price total amount price total amount price total amount price total MUSD %

Diesel Oil 8,285 421 3,486 7,733 417 3,228 7,577 505 3,828 7,644 602 4,603 1,117 32%

Euro Diesel 0 0 0 0 0 0 452 764 345 901 904 814 814 100%

Premium Gasoline 755 471 355 619 473 293 782 567 444 1,126 682 768 413 116%

Super Gasoline 1 2,084 379 790 1 2,550 408 1,041 2,647 474 1,255 2,757 541 1,493 1 703 89%

Normal gasoline 216 312 67 213 321 68 85 379 32 1 0 0 (67) -100%

Sub-total of gasoline and diesel oil in 11,340 414 4,698 11,115 417 4,631 11,543 511 5,904 12,429 618 7,678 2,980 63%

thousands of M3

Curde in thousands M3 437 273 119 496 261 130 363 331 120 333 383 127 8 7%

Natural gas in thousands M3 15,864 73 1,153 14,238 65 925 12,238 74 903 12,170 83 1,007 (146) -13%

Kerosene in thousands M3 0 0 0 0 0 37 577 21 36 633 23 23 100%

Aero Kerosene in thousands M3 67 419 28 44 444 20 444 662 294 382 892 341 313 1121%

LPG -Up in thousands of Tn 372 838 312 420 524 220 0 0 0 0 0 0 (312) -100%

LPG -Down in thousands of Tn 12 259 3 10 337 3 688 520 357 701 630 442 439 14544%

Lubricating oils in thousands of M3 624 537 335 667 322 215 108 1,917 208 117 2,263 264 (71) -21%

Base lubricants in thousands 103 2,056 211 101 1,693 171 79 840 67 56 1,097 61 (150) -71%

Fuel Oil in Thousands of Tn 42 1,011 42 60 652 39 650 397 258 353 483 170 128 302%

Fertilizers and grains in thousands of Tn 931 424 395 529 334 177 361 389 140 787 407 320 (75) -19%

Asphalt in thousands of Tn 161 436 70 237 384 91 221 434 96 223 488 109 39 55%

Residual carbon in thousands of Tn 1,014 102 103 962 82 79 988 98 97 976 145 141 38 37%

Petrochemicals in thousands of Tn 676 683 461 678 410 278 548 556 305 665 647 431 (31) -7%

Sub-total 7,931 6,978 8,770 11,113 3,182 40%

Others 375 366 409 416 41 11%

TOTAL DOMESTIC MARKET 8,306 I 7,344 9,179 11,530 3,224 39%

At the same time, and as shown in the following table, Repsol’s strategy also involved neutralizing

the fall in income from exports as a result of decreased production and the fall in external demand

with price increases throughout the period 2008 -2011.

42


Changes in YPF sales to the export market

Domestic Market 2008 2009 2010 2011 2010vs 2011

amount price total amount price total amount price total amount price total MUSD %

Diesel Oil in thousands M3 376 897 337 117 536 63 114 669 76 83 874 73 (264) -78%

Virgin gasoline in thousands of Tn 434 888 386 336 471 158 304 684 208 206 942 194 (192) 100%

RON2 gasoline in thousands of M3 446 636 284 301 387 117 19 539 10 0 0 0 (284) - 100%

Sub -total of gasoline and diesel oil 1 1,006 1 338 1 295 1 267 1 (739) -73%

Crude in thousands of M3 321 579 186 2 264 1 7 446 3 1 575 1 (186) - 100%

Natural gas in millions of M3 580 536 311 630 426 268 315 432 136 91 877 80 (231) -74%

Petrochemicals in thousands of Tn 530 815 432 430 506 218 461 715 330 334 980 327 (105) 100%

LPG in thousands Tn 252 687 173 212 413 87 168 689 116 165 863 142 (31) -18%

Aero kerosene in thousands of M3 501 839 420 491 461 226 507 595 302 544 829 451 31 7%

Fuel Oil in thousands of Tn 1,138 471 536 828 372 308 677 473 320 490 605 296 (240) -45%

Lubricating oils in thousands of M3 69 1,424 98 41 1,231 50 32 1,453 47 34 1,765 61 (38) -38%

Flour and Oils in thousands of Tn 0 0 0 0 0 0 186 420 78 278 589 164 164 100%

Sub -total 3,163 1,496 1,626 1,788 (1,375) -43%

Others 12 8 13 18 6 44%

TOTAL EXPORT MARKET 3,175 1,504 1,639 1,806 (1,369) -43%

TOTAL SALES YPF 11,481 8,848 10,817 13,335 1,854 16%


Lastly, when the changes in both markets, domestic and export, are compared, there is an evident

marked increase in the prices of both destinations, along with a higher import of fuel oil.

Repsol’s Commercial Strategy regarding YPF

Worldwide, Repsol Group had a great deal of experience in the commercialization segment, but

not in the downstream area, and much less so in the upstream area. Thus, it directed the

commercial area to be largely independent from the rest of the Company, a feature whose

consequences took the form of higher prices, a greater segmentation of the market, clear disregard

for the nature of YPF as a vertically integrated company and, consequently, greater appropriation

of income by the Company.

This was also reflected, internally, in the way in which each one of its areas determined its costs,

which always included the related segment's profits, such profits being included as an additional

cost in the subsequent segment. In other words, the upstream area calculated the exploration,

extraction and transport costs, to which it added a rate of profit (generally, around 12% on the

assets committed to the operation, in addition to the related depreciation) and thus determined

the "sale price", which the downstream area was to compute as a cost. In turn, the downstream

area did the same with the refining and transport costs, adding the related profit for the segment,

so that these "costs" would later be computed by the commercial area. Finally, the commercial

area allocated the “costs” of the upstream and downstream areas (which of course included the

rates of profit for each one of these segments) and added the related marketing margin (that could

reach gross values of up to an additional 30%). Thus, the final sale price of fuels included the rates

43


of profit of each one of these three segments as if they were independent companies. This

“particular” pricing method meant that in 2011, YPF had a production “cost" per barrel that ranged

between US$ 100 per barrel of oil equivalent, when the price on the international market for that

same year was USS 103.

In fact, the Comptrollership was able to prove that the Company’s commercial area determined its

“costs” of acquisition of crude oil in the same way as a company that does not have its own

production and refining processes, and which must acquire fuel from another production

company. This pricing method meant that Repsol was obtaining extraordinary income from YPF,

which income could be realized thanks, at the same time, to the retraction in supply generated by

Repsol itself, that enabled it to set up a market with a structural deficit, with the consequent

pressures to increase the domestic price. Thus, the rationing of quantities supplied by Repsol in

YPF, the market segmentation in favour of the premium segment and the consequent increase in

prices allowed the Company to “compete” through prices with other companies, which did not

have vertical integration like YPF. The Comptrollership has verified that in many instances the

pricing method described above was plainly and simply replaced by price increases that sought to

"follow the competition", so as not to create a price gap that would redirect demand from the rest

of the companies to YPF. These kinds of price increases created an extraordinary profitability in

YPF, even above the profitabilities that each one of the segments assessed in an absolutely

independent manner.

Why was the company not using the advantages from its vertical integration to increase its market

share against the other companies, thus appropriating the demand segments from others for

itself? The explanation for this phenomenon has at least two central aspects. First of all, this

strategy would have required a significant increase in the quantities sold by YPF which, in order to

maintain this comparative advantage, should have come from its own oil wells and not from the

import of fuels. Accordingly, capturing a greater portion of the market would have required

substantial investments in exploration and production, which was clearly the opposite of Repsol’s

economic -financial strategy in YPF. At the same time, YPF’s concentration in the premium

segments of demand offered higher rates of return than those obtained by the Company in the

non -premium segments. In fact, in a context of continuous shrinkage of domestic supply (brought

about, as already mentioned, mainly by the deterioration in production in YPF itself) YPF began to

position the brand in the premium segment, so that in the future the Company would be in a

favorable position to fight its competitors for this high -profitability segment of the market.

This also explains that a significant portion of the Company's financial resources went into

improving the image of its service stations and the positioning of the YPF brand through aggressive

advertising campaigns, as part of its positioning strategy for the premium segment.

Repsol also aimed at appropriating the right sales points for that strategy, that is to say, the best

strategically located service stations. Through the financial strangulation of third party service

stations, it was able to acquire the stations considered “key” to its commercial strategy. In the

same regard, many third party service stations located in middle to low - income areas were forced

44


to shut down due to a shortage in the supply of non -premium fuels. These shutdowns, far from

dragging down Repsol’s profitability in YPF, were key in its geographic concentration in areas with

sufficient purchasing power to absorb larger quantities of premium fuels.

Technical Aspects of Repsol’s Management of YPF

The arguments given in Law No. 26,741 aimed to expose Repsol’s asset stripping, divestment and

depredation of YPF’s oil and natural gas resources. The investigations conducted by the

Comptrollership, make it possible to present this type of conduct by the Group in great detail.

Fall in the Production of Oil between 1999 and 2011

Since Repsol took over control of YPF in 1999, the Company experienced a substantial loss in the

production of oil in Argentina that totalled 39%. The reasons for this decline are explained mainly

through the policy used by the Group to maximize the primary production of oil and gas to the

detriment of other production alternatives that involve the recovery of the longer -term

investment, but which at the same time guarantee a higher final recovery factor.

45


Changes in the production of oil YPF 1999 -2011

2000D

18000

100

14000

12000

E 10000

8000 C

5000 C 0

4000

o 200:

CL

In = 1 -,1 •-'l

Source: Argentine Secretariat of Energy

Additionally, this situation was made worse by minimum exploration activities, insufficient

investment in surface facilities and a delay in the implementation of secondary recovery projects.

In fact, the small changes in 2008 and 2009 in the decline curve are due to the incentives created

by the Federal Government (mainly, the Petróleo Plus Program) which caused intense work to be

performed on optimizing the basic production of fields (although it continued the trend by Repsol

not to invest in secondary recovery and surface facilities). Once this optimization of baseline

production was achieved, the only way of continuing to maintain a production level that would

allow receiving the benefits of Petróleo Plus was to drastically increase drilling activities.

46


Lack of Investment in Facilities

The investigations conducted by the Comptrollership found that starting in 2004 there are

indications that some mature fields of significant production for the Company began to show the

effects of the lack of investment and maintenance in surface facilities and wells, which was

reflected by an increase in production losses and shortages. The policy of maximizing primary

extraction, postponing secondary recovery and not making investments in maintenance noticeably

affected the useful lives of the fields, with a loss in the final recovery and in a manner contrary to

the industry’s best practices.

Among the fields that were affected by this exploitation strategy are Vizcacheras, Barrancas and La

Ventana in the province of Mendoza, Señal Picada -Punta Barda, Chihuido de la Sierra Negra in the

provinces of Neuquén/RIo Negro and Los Perales in the province of Santa Cruz, as well as other

fields in the Golfo San Jorge basin. As an example, the graph included below shows the drop in

production due to the decommissioning of production wells that existed prior to 2010 in the

Vizcacheras field, Papagayos formation, which contain a larger percentage of water, to allow the

entry of new wells with lower percentages of initial water. The reason for this well

decommissioning is the lack of capacity in the facilities to handle total fluid volumes (oil and water),

with the consequent loss of total production. The graph also shows the subsequent drilling

campaigns.

Vizcacheras - Papagayos

Ak

m

C

C 1)

C

LO LO

P

C

LI

C

::•i ::: .20 1. , 2 0-,

Wells wells wells wells 000 old Liquid

2011 2010 2009 2008 Calday calday


47


This lack of investment is also evident in the following example, where in four significant fields of

the cuyana and neuquina basins (Barrancas, La Ventana, Vizcacheras, Señal Picada, Punta Barda)

there is a great difference between the needs for investment in facilities shown by the business in

the Strategic Plan (SP), which is the plan pledged before the Secretariat of Energy (PLAN) and the

one that was actually carried out in the last few years. As shown in the graph below, during 2009,

Repsol failed to comply with its plan, investing 81% less than what had been estimated as

necessary by Repsol itself and, moreover, investing 61% less than what they had promised to invest

to the application authority, the Secretariat of Energy. The same thing happened in 2010, when

Repsol invested 64% less than its forecast and 53% less than what had been promised to the

Secretariat of Energy.

Changes in total investments in surface facilities at the Barrancas, La Ventana, Vizcacheras and

Seflal Picada -Punta Barda areas

68.0

57.0

26.5

12.7

I 26.6 20.4

2009 2010

• PE PLAN REAL


The current condition of these facilities, which have not been duly maintained and conditioned, is

the effect of an operating strategy that sought to maximize profit margins, prioritizing well drilling

due to the shorter return times and jeopardizing the accumulated return that is obtained at the

end of the field’s life. In the particular case of these four fields, the damage in terms of loss of

proven reserves only with relation to the events of 2012 is estimated at 750,000 m3. This fact not

only significantly affects the supply of Argentina’s fuels, but is also clearly detrimental to the future

value of the Company. Thus, these facts constitute irrefutable evidence that Repsol’s interest was

centered around obtaining the maximum profit possible in the short term, a strategy that is

explained, in turn, by the Group’s interest in divesting itself of YPF once it had used it to leverage

its international expansion strategy and could obtain a greater benefit than expected from selling it

48


thanks to the “enhancement” of the Vaca Muerta formation (see Section 3).

Resolutions 785 and 1460

The investigation carried out by the Comptrollership also focused on understanding the main

aspects of the analysis of the condition the surface facilities were in 2011, year in which Repsol

studied the condition of the Tanks and Pipelines of the operating fields based on Resolution 785

(Tanks) and 1460 (Pipelines), consequently coming up with an investment plan.

The analysis carried out by Repsol involved an assessment of the criticality of the condition of all

E&P tanks. The table below shows that as of that date there were 254 tanks in a critical state

(marked in red) and 625 tanks in a semi -critical state (orange) out of a total of 2042 tanks.

5

4 I 3

2

1

Excessive

High

Significant

Low

Considerably lower

25

32

132

184

0

Highly unlikely

1

7

21

146

181

0

Unlikely

2

35

48

339

414

0

Likely

3

28 27

30 26

116 60

142 49

0 0

Highly likely Possible

4 5

With regard to Resolution 1460, the Company performed the criticality assessment on all of the

pipelines covered by the regulation. The criticality matrix included below shows that 13 of them

(36%) are in a critical state (red), which accounts for 412 km out of 961 km, that is to say, 50% of

the existing pipelines.

5

4

3

2

1

Excessive

High

Significant

Low

Considerably lower

2

48.751 Km

1

59 Km

2

15.2 Km

0

0 Km

1

84.5 Km

Highly unlikely

1

0

0 Km

8

205.438

5

48.4 Km

0

0 Km

0

0 Km

Unlikely

2 49

3

22.2 Km

6

198.8 Km

3

85.5 Km

0

0 Km

0

0 Km

Likely

3

2 0

11 Km 0 Km

2 1

131.6 Km 49.2 Km

0 0

0 Km 0 Km

0 0

0 Km 0 Km

0 0

0 Km 0 Km

Highly likely Possible

4 1 5


Based on this analysis made in 2011, the Company prepared an investment plan of about US$ 1.5

billion for the purpose of adapting the facilities with the profile shown in the table below, and

which was entered in the Company’s Resource Database, the main management tool for these

kinds of actions.

Evolution in investment in facilities - Argentina

21.

1'J

I flu 11

01A

121

-)

0

--

• rI\( \ ) 2

-I io

n 11TO

50 1b 4" 44 43 154 69

52 1/

1-4 14

Resource Plan

database


50

illi..

1 ,

120

100

SO

ILI

=

-o - 60

-o

9,6

bl}

40

21)

-

-

w L)

ci

H


As shown, in 2012 the investments approved were approximately 50% lower than required. Given

the above, we conclude that currently 54% of the tanks are not in optimum conditions for use,

while 76% of the pipelines also require investments to make them meet the regulation’s standards.

In view of this, the Company is already working on the goal of minimizing the risks associated with

this situation and restoring optimum operating conditions for the Company’s Tanks and Pipelines.

Evolution in Exploration

As shown in the following graph, exploratory well drilling activities in Argentina dropped

significantly in 1999. Although this abrupt fall in exploratory activity is partly explained by the

significant drop in the WTI price of oil during 1999, it is evident that the activity never again

regained a momentum similar to the one it enjoyed during the years prior to Repsol’s

administration, in spite of significantly higher oil prices.

Drilled exploratory wells (Argentina Gross)

ci 109116 74 98 67 32 37 36 26 fl 28 15 19 23 17 15 24L

I I I I I I I I I I I

. -r r'-.- :c f•

G C- O I 1 D ON C' G' O Q c2p C, CD

1 1 11 1 1 1 -q r1 4

, Exploratory wellsgross

Source: Form 20F

WTI Price

• The first one between 1993 and 1998, where the average number of exploratory wells

drilled was 77 per year.

• A second stage followed between 1999 and 2004, in which the average dropped to 26

wells a year, which accounted for a 70% contraction in activity.

51


• A third stage between 2005 and 2010 in which activity again dropped to an average of

13 wells drilled per year, leading to an 84% contraction with regard to the reference

period (1993 -1998). Only 2011 shows a slight recovery in exploratory activity related

mainly to the drilling of Vaca Muerta wells (Shale Oil), although the values reached

continue to remain below the average activity carried out between 1999 and 2004 (see

Section 3).

If the fall in exploratory wells is analyzed from the point of view of the changes in the ratio

between the investments in exploration and total investments in Exploration and Production (see

graph below), no defined policy can be distinguished; rather, they seem to be random variations in

terms of the efforts invested in exploration, which clearly shows the lack of a plan to incorporate

replacement reserves from exploration activities. Analyzing the phenomenon on an accumulated

level, the budget earmarked for exploration accounts for only 6.7% of the total budget intended for

E&P, well below the values that previously enabled the reserve replacement and organic growth to

be achieved. Furthermore, as already indicated in Section 1, Repsol favoured its international

exploratory projects to the detriment of its projects in Argentina.

Changes in the % of investment in exploration over the total Argentina budget

E

E i.J

C

C

0 x u-i

Average 6.7%

I

"Jill

:11 0


A review of this information leaves no doubt as to the priorities set by Repsol in the different

Annual Plans carried out in Argentina during the years in which it ran the Company, giving absolute

priority to the monetization of the already -discovered reserves over the incorporation of new

volumes, thus reducing the risk investment that is typical of a healthy business practice in terms of

the replacement of reserve volumes. Thus, the effects of low exploratory investment significantly

52


influenced the drop in YPF’s reserves (which is shown further ahead in this section) and affected

the future production profile of the Company. For these reasons, the Company is already working

to ensure that this situation is reversed.

Delay in the Secondary Recovery Projects

The best practices in the development of the reserves of a field entail the use of coordinated

techniques of primary recovery, secondary recovery and tertiary recovery. These recovery methods

must begin as soon as possible so as to have an earlier response, to maximize the final recovery of

the field’s oil and gas and to optimize the use of surface facilities. Acting contrary to these basic

practices of the oil and gas business, Repsol’s policy was to favour the drilling of production wells

with rapid payback, to the detriment of a balanced development and better recovery of reserve

volumes. A way of illustrating this policy followed by Repsol is to study the following graph, which

shows the change in the ratio between the injection and production wells on the western flank of

Golfo San Jorge Basin (Las Heras). The change in this ratio could reach a maximum notional limit of

0.5 (2 production wells for each injection well) and a practical limit of between 0.3 and 0.35.

53


Change in the ratio of injection wells/production wells Las Heras

.L . i::hri:e in strategy

with regard to Sec. Stabilization stage without Drop in ratio due to shut-

reaching rri:tI_1rit: don of injection wells ru_jo

(i .10

to mechanical problems

C

Stage of mass

irrijIerrieritatii:iri of (1.15 secondary projects

C •1

CI HF

Stage of recover:/ stage of inactive injection P

oils to stabilize jOsir: production

C In areas of rriati_ire secrriclarit recovery and with development

L) geometries similar to those used in the southern fields, the

maximum notional ratio is II.5. and considering it to be

rriati_ire trorni 11.

Dec Dec

Dec Dec Dec Dec Dec Dec Dec Dec Dec

90 92

94 96 98 00 02 04 06 08 10


The ratio curve between both wells shows that starting in mid -1996 and through late 2000, there

was a strong increase which was due to the mass implementation of new secondary recovery

projects. Subsequently, this curve remained stable through late 2006, which evidences the change

in policy by Repsol and a slowdown in the implementation of new secondary recovery projects, in

spite of being far from developing the maximum secondary potential in the analyzed fields. By late

2006, there was a sharp drop in the ratio, which was the result of a pitiful maintenance policy that

caused the loss of integrity in the injection wells and the shut -down of approximately one third of

them by the Department of Environmental Affairs of Santa Cruz. The subsequent recovery entails a

slow recovery of the number of active injection wells and a fall in production wells.

In another example, involving the Manantiales Behr area in the province of Chubut (see the graph

below) the effort is observed to have been centered almost exclusively on the drilling of new wells,

parallel to a delay or stagnation in the amount of injection wells. The number of wells in late 1999

was 187 production wells and 25 injection wells and in late 2011 they numbered 473 production

wells and 59 injection wells. This shows that the production/Injection ratio not only became

stagnant, but it decreased over time, showing a preference in the development of primary projects

above that of secondary ones, which are, basically, the projects that maintain baseline production

in the long run.

54


Manantiales Behr

600

500

100

300

200

100

0

0,30

':•2S

i.F .2

i

ir C

Jan Jan Jan -Ian Jdrl Jdrl Jan Jan Jan Jan Jaii

91 93 95 97 99 01 03 05 07 09 11

Production M Injection - Injection/ Production Ratio

wells wells


The Production Potential of the Concessions

When analyzing to what degree the production potential of the concessions controlled by Repsol

reveals that, systematically, the plans carried out were below the reserve exhaustion profiles

presented according to the affidavit to the Secretariat of Energy. This phenomenon is clearly

evident in the following graph, which shows the changes over time of the different exhaustion

profiles and the actual activity of the entire southern flank of the Golfo San Jorge Basin. It is

evident that, as the years went by, the activity that was not carried out in prior years was

postponed, mounting on subsequent years until in some cases it reached projected activity levels

that are not compatible with the equipment available, the limit of the concession and the

availability of other resources. This practice was aimed at incorporating volumes in the book of

reserves, which the Company evidently had no intention whatsoever of developing.

55


SOUTHERN FLANK - New Real Wells vs. Projected

350

300

250

200

150

100

50

0

2IO 2001 2J2 2fX3 2004 2005 200€ 2007 218 2(X)9 MO 20 2012 2013 2014 2015 2016

Years

• Real •E2(X)O E2001 0 E200 0 E2003 0 E2t'O4 0 E205 E2006 M E27 0 E2QO E2009 0 E2010 0 E201

Fepsol’s strategy in the natural gas business in Argentina

This section deals with the main guidelines related to the strategies adopted by Repsol with

respect to natural gas exploration and exploitation and how they were modified over time,

particularly with respect to the Neuquén basin, where the Company has the main natural gas

production areas. The following graph compares the changes in natural gas production for YPF -

Operated Areas from 1999 through 2011 (Loma La Lata, El Portón, Rincón de los Sauces) and the

changes in production for non -YPF-Operated Areas in the Neuquén basin (Aguada Pichana, Aguada

San Roque and Lindero Atravesado), where the natural gas exploitation strategy is established by

the operator of areas to which YPF is associated.

56


Neuquén basin – Actual changes in gas production

Operated and non -operated areas (SEC volume)

60

50

40

30

20

10

0

C C C C C 0 C C C C 0 C 0 0 F 0 0 0 0! 0 0 0 C!

• LLL Prod. • PP Prod • RDLS Prod. Nor. op. prod.


It is obvious that, while production in non -operated areas has remained at an annual average

production plateau from 20 to 23 Mm3/d as from 2001 (demand contraction peak due to the

country’s economic crisis), the production curve performance in Operated Areas has shown a

pronounced reduction since 2004, considering a yearly average from 36 Mm3/d to 20 Mm3/d in

2011, with a net production loss representing a 45% fall in a 7 -year term.

After analyzing the physical activity in operated areas, the graph below shows an increase in activity

between 2007 and 2008, decreasing abruptly from 39 drilled wells per year in 2007 -2008 to only

1 drilled well in 2011. This effort is closely related to the commitments assumed to perform

contracts for the provision of gas to third parties under delivery -or-pay clauses, which were

significantly reduced in 2009 and subsequent years, as shown in the second graph below.

Summing up, upon expiration of the material delivery or pay commitments, the Company gave

priority to the monetization of Bolivian gas reserves or to the sale of LNG over drilling and the

development of fields operated in the country.

57


Neuquén basin – Drilling activity

Operated, non -operated (SEC volume)

60

60

40

2

U

1

20

10

0

120

100

80

C

-60 1

• 40

20

-0

C C C C C' C C C C ci'

ILLL Prod. • PP Prod. • RDLS Prod. • lioo op. Prod. • Oporniod oron notivity • lion Opornied oren ectivity


202CC

ro

Isom

I 10000

1000

Changes ingas sale contracts plus own consumption.Period 2000 -2020

iIIII'I MME IIIuIIIuIII Pii1!!!IIIIII1IIIIII uIIIuuu.uIuuIIIuIII IIIIHhIII!!!uiI ininn,miniii 0 .

2000 2001 2002 2003 2004 2005 2006 2007 2006 2000 2010 2011 201.2 2013 2024 2013 2016 2057 2021 2016 2020

—*-Annual CDQ + consumplion


58


In contrast, if we observe the changes in the physical activity curve in Non -operated Areas from

2008 to date, it is clear that there was quite a consistent activity comprising around 20 wells per

year. Note that a good portion of this activity is related to the development of Gas Plus projects in

the area of Main Aguada Pichana, Cañadón de la Zorra and Las Cárceles, where gas is sold at prices

of up to 6.5 US$/MMBTU.

The following graph shows the production of gas in Loma La Lata, El Portón and Rincón de los

Sauces fields until late 2011 and its projection with no subsequent drilling, while the line shows

the production forecast included in the 2008 Strategic Plan (2008 SP), as well as the drilling activity

that sustained this increase in production. This increase was basically supported by the Tight Gas

Lajas project designed to reach a sustained gas plateau of 5 Mm3/d. This project required a sale

price of 6 US$/MMBTU, which is similar to that in other unconventional gas projects (Gas -Plus)

developed at the basin in order to be monetized. As observed in the graph, far from increasing, the

actual activity performed in 2009, 2010 and 2011 decreased abruptly. It is obvious that the Tight

Gas Lajas project ceased to be a development priority for the Company, which preferred to replace

this project with the import of its own gas from Bolivia and LNG, since these types of businesses

showed more profitability for Repsol in the short term.

PE2008 forecast – Expected and performed activity / Operated areas (SEC volume)

E

= 0

20

2

tJ 10

0

3 40

120

100

80

40

lJ

0

LLL Prod. EP Fad. RDLS Prod. Actual op.rt.d area 2008 SP Activity - 200 SP activity


59


The following graph shows an annual comparison between incremental production volumes

related to the projects that formed part of the 2008 Strategic Plan portfolio and the volumes

provided by LNG vessels. This comparison shows that if the Tight Gas Lajas project had been

developed, Repsol could have postponed the LNG project until 2011, which would have also

implied an estimated saving of US$ 780 million for the Federal Government. This difference arises

from the gap between the rate at which gas from the Tight Gas Lajas project would have been

offered and that of the LNG project.

PE2008 projects v. LNG project

10

q

E -,

6

4

2

1

0 N-

[N

2118 SP i,renenI& prododio, LNG


Summing up, the abovementioned arguments are sufficient proof of the total responsibility arising

from the failure to develop unconventional gas fields since the Group focused on maximizing its

short-term profits, a strategy that in turn contradicted what had been implemented by the

remaining operators in that basin.

60

2009 2010

2011 2012

Año

• Accumulated soil volume Treated soil volume


Environmental management policy – Oil and gas land deposits

In order to evaluate Repsol’s environmental management policy in YPF, the main obstacle found

by the Comptrollership was the fact that there were upstream centralized data available only as

from 2008 onwards, such data enables an analysis of the tendency of polluted (with hydrocarbons)

land accumulations within repositories. The main contributions to repositories derive from land

polluted by spills, land created from remediation if environmental liabilities and drilling cutting

with oil -based mud (the latter in the provinces that still allow such practice.) The following graph

shows the changes in volume. According to preliminary calculations, generated accumulation

implies a cost of about US$ 115 million for YPF (1,764,000 m3 x US$ 65), which should be invested

for the treatment and final disposal thereof.

Volume of O&G -accumulated soil in repositories

1-980.000

1.800.000

1.620.000

1,440,000

(j 1.20.000 ca o 1.080.000

900.000

720.000 LA

M E 540.000

360.000

180.000

0

Source: MASC Upstream Monthly Report

61


Environmental management policy – Spill frequency ratio

This indicator, which has been measured since 2006, shows a decreasing trend until 2008.

As from 2009, there was a significant increase in the number of spills, totalling over 4,500 spills in

2010 and 2011 and making a significant contribution to the increase in the volume of oil and gas

soils in repositories.

4.000

20

3500

2000

N I 10

L1

2Ow 2cu:

21:111

Ti 1

• Nu rriber of spills Frequency ratio

Source: MASC Upstream Monthly Report! Year 2012 comprises only until March

NOTE: Spill frequency ratio = (Number of incidents comprising spills! Gross volume produced +

Injected water) x 10 6 .

In addition, in the last six years the main identified reason for pipeline leakage is corrosion, which

results from the lack of investment to replace pipes in poor condition or from flaws in managing

the integrity of critical assets.

62


Percentage distribution of spill causes in December – Year 2006

[GRÁFICO]

15 ,5%

Corrosion

Corrosion

Operating errors

Other failures

DOperative errors Material failures

Others


11 7 5 1

5,41%

74 1 51.28%

• Corrosion • Start-up failure

•Joint!eonection failures

Operative errors

Mechanical failures

Others

63



.13.

I 11,66' -

[

• Corrosion failure • Joint Failure • Mechanical failures Operating errors Others

The following graph shows the actual investment in oil pipelines based on the annual investment

plan and the total amount reported to the Secretariat of Energy pursuant to effective resolutions.

The differences between both magnitudes speak for themselves.

dI

2 ao

o

8 — ri f' e,4

Año

.OiI pipeline investment plan Actual investment


64


Environmental management policy – Upstream and downstream environmental issues and environmental liabilities

Environmental issues are classified -according to their magnitude, risk and management

complexity- as specific and general. Specific environmental issues amount to 76 and are grouped

into 40 management projects. General environmental issues recorded total 1,426, out of which

1,353 are included in the probable or potential category. Exhibit 2 includes a classification by type

of environmental issue, both specific and general.

Distribution of environmental issues

Specific 5%

General 95%


In addition, the total provision as of 03/31/2012 for environmental issues included in the

relevant record is US$ 94 million (stated in US dollars at the average equivalent exchange rate of

the year under analysis). The following chart shows the allocation booked as provision:

Distribution of environmental issues booked as provision

Specific 36%

General 64%


65

PROVISIONS (in US$ million)

Initial

Inflows

Outflows

Net flow

Final

2007

82.3

41.5

22.4

19.1

101.3


The changes in amounts booked as provision shows that since 2007, when an amount of US$ 101

million was booked as provision, there was an annual increase until 2009 of US$ 117. As from

2010, the provision began to decrease up to US$ 94 million in Q1 2012. The net balance resulting

from decreases (disbursed amounts) and increases in the provision, is worth noting, as in the last

three years the balance is negative, i.e. the provision is not increased, not even to maintain

historical amounts.

2008 2009 2010 2011 2012

101.3 116.1

117.2

106.4

99.6

52.7 28.6

17.4

48

9.4

38 27.5

28.2

54.5

15.2

14.8 1.2 -10.8 -6.7 -5.8

116.1 117.2

106.4

99.6

93.8


From 2007 through 2010, there was significant systematic non -compliance in annual scheduled

disbursements, especially in period 2010, when 56% of expected amounts was not complied with.

Amounts booked as provision, scheduled and executed by YPF (in US$ million)

125

100

75

50

25

C CD C - I C C C

C rJ

•Rc:ked as prcvisicri as cf c1/c1 • Scheduled as of 03/31 Executel as of 12t31(for 2011, executed as of 1031i


66


Environmental management policy – Overall commitments assumed with application authorities

Situation in the province of Santa Cruz

In March 2011, the Environmental Action Plan (PAMA) was submitted to application authorities in

Santa Cruz, setting the following goals:

• Organizing the annual environmental management to be performed at the

Santa Cruz Business Unit, based on a long -term Strategic Environmental

Plan.

• Promoting the enhancement/modification of methods and treatments

implemented in environmental operations through the development of

new techniques, improvement of existing techniques and coordination with

research institutions.

• Creating a tool to provide application authorities with quick and specific

answers to their requirements, as a result of proactive management.

• Serving as a basis and supplement for the compliance with and management

of plans and programs required under Law No. 3117.

• Allowing for the execution of works in a continuous and planned manner,

anticipating and forecasting resource needs.

Progress made as of 12/31/2011 in the different aspects of the plan is detailed in the following

table (in thousands of Argentine pesos), showing 37% non -compliance in the total amount,

which is mainly related to environmental aspects (remediation, emergency pits, waste, water

resources, and environmental studies and audits), 69% of which were not complied with.

COMMITED AS OF REAL ACCUM. TECHNICAL

BREAKDOWN AMOUNT AS OF 12/31/2011

12/31/2011

SANITATION 39,549.63 28,965.37

EMERGENCY POOLS 13,120.00 6,972.59

WASTE 72,120.66 17,197.2

WATER RESOURCES 10,369.97 4,817.57

ENVIRONMENTAL STUDIES AND AUDITS 24,646.00 4,524.63

FACILITIES MAINTENANCE AND INTEGRITY 433,923.76 309,915.05

TOTAL 593,730.02 372,392.41

67


Environmental management policy – State of upstream fire prevention networks

As part of internal audits, a survey was made in 23 facilities of upstream business units, which

disclosed a series of deviations, especially in response times and in monitor failures, with

water pollution in certain cases. In addition, deficiencies were found in water provision, the

automatic switch -on of emergency pumps and facilities coverage. For the purpose of their analysis,

the failures observed were classified as follows:

• Water connection for another use / Insufficient water

• Monitor failures (lack, breakage, lack of reach, pollution)

• Problems with automatic switch -on of pumps

• Staff, personal protective equipment, personal protection items, labor security conditions

• Lack of brigade members

• Water provision delays

• Uncovered facilities

• Lack of foam traceability

• Failure/lack of hydrant hoses

The following graph shows the percentage allocation of failures according to audited facilities. This

shows a significant deviation as to an essential aspect for the protection of assets and personal

safety. It also represents a clear statutory non -compliance. Exhibit 3 includes photographs in this

regard.

68


Fire prevention network failures

30%

70%

60%

50%

40%

30%

10%

0% C

CD —I

V r CO

CD

P3 .

W 1% 0 CD-1

2. CD —I

wn,

CD

ba

fl

U -

a- —

CO

CO

—1 l

CD

CI —I -.

0.0

LI C

0

—I' 0)

—1

2. CD

0

C 0

0 —I

ou C —I CD

n Y

0

CL CD

B CD B C- CD -

ata

:E CD -

- 0

C

0. CD fu

C

C

CD

0.

cu-,

CD Ln

C

cr

-

CD

LM

cr

LM

- CD

0 —h

0.

CD-

C

69


Environmental management policy – Well abandonment

Until 2009, the well abandonment activity did not follow any defined methodology to determine

its progress, while the pace at which new wells were drilled exceeded that of well abandonment,

which increased the stock of wells to be abandoned. As from 2009, Repsol prepared a well

abandonment plan that contemplated 2 scenarios:

Scenario 1 “Declining Profile”, which implies: Abandonment of all wells whose decreasing

production finishes before the end of the concession (2027); it is also assumed that all new wells

drilled subsequently as from 2010 shall not be abandoned before the end of the concession.

Argentina: 16,162 wells (Southern area : 11,133 wells / Western area: 5,029 wells.)

Scenario 2 “Abandonment of 100% of wells”, which implies: Abandonment of all wells until the end

of the concession (2027); it is also assumed that all new wells drilled subsequently as from 2010

shall not be abandoned before the end of the concession. Argentina: 21,187 wells (Southern

area: 14,152 wells /Western area: 7,035 wells.)

The plan carried out at present shows at least a 50% deviation with respect to estimates, tending

to increase the deviation due to the use of resources in other activities. See graphs below:

Changes in number of

abandonment rigs

Number of abaiulonnient rigs

20

15

10

,I, I:: fiJaI situation


70


Changes in 2009 abandonment plan

Number of abandoned wells

ISCOO

IOWO

sow

j .J


71


Environmental management policy – Photographs of spills

IN

I.

72


73


LA

yr __ '

- - --- Nv

Pf

S.AA

74 74


-- - -_

l

75


- ..,

-.- :' •r.~•

- ...

- - IN

76


Ir

I ••';•:

.!

i...

- -

-

t

77


The “Discovery of Vaca Muerta”. The (Re)Sale of the “Crown Jewels”.

Repsol-YPF’s strategy for unconventional resources

The Vaca Muerta formation extends over an area of about 30,000 km 2, in which Repsol YPF holds

interests in about 12,000 km 2 (40% of the total area.) The first tests seemingly indicate that 77% of

its area contains oil and the rest wet gas and dry gas.

Repsol YPF has been working in a limited area of under 1,000 km 2, which is equal to only 8% of the

area held by the Company. The Company hired Ryder Scott to perform an external audit that

disclosed the following analysis of resources and reserves:

Vaca Muerta resources and reserves, February 2012, in MBBL, MBOE and TCV

Source: Ryder Scott - 1 bep = 5,615,000 cubic feet of gas

* Prospective resources: They include the oil and gas quantities that are potentially recoverable based on

an accumulation for which preliminary data are available; however, no discovery wells have been drilled

there yet.

** Contingent resources: They include the oil and gas quantities that are potentially recoverable based on

a previous exploration activity that includes discoveries. These resources cannot be deemed commercial

at the time of evaluation (i.e. they may be economically viable, but are subject to an exploitation permit,

the application of certain technologies, etc.).

Out of the 1,525 million barrels of oil equivalent —MBOE— (in an area of 1,100 km2 established by

YPF), only 33 MBOE were deemed proven reserves, which are equivalent to 2% of the contingent

resources and 0.16% of the prospective resources. In addition, YPF operated part of the field. As of

December 31, 2011, over 700,000 BOE (barrels of oil equivalent) from the Vaca Muerta formation

had been produced, which accounted for 2% of the proven reserves. This increase in shale oil

production was also minimal with respect to daily production, as the maximum amount reached

represented 0.5% of the domestic production. The following graph shows these changes.

78


Changes in shale oil production in Neuquén, 2010 -2011, in m3/day

ho a (fl

400.00

350.00

30000

250.00

200.00

150.00

100.00

50.00

0.00

o 0 0 0 0 0

C -- bO U

C - (110 Z a - LOL

.VPF.NaLl.La.513

•YPF.NaLAO.x-3

YPF.Na .LGUS.x-1

NYPF.NqLcu-1

UYFF.NBAni-2

• ROCN0,CASi-1

UPLU,Nq.Au.x-1

8YPF.Nq.LL1_x45

•YPF.Nq.LL1_*475

UYPFNq.LGus.x-2

•YPF.Nq.W.-530fl

•YPF.NqLLL-419

•YPF.NqLtLx-487

•YPF.NqS0iI.x.1

•YPF.NqPSG.x.1

•YPF.Nq.LLLXi-1

Source: Mendiberry H. Valdez A., Giusiano A., Reservorios no convencionales. Cálculo de recursos. La visión

desde la Provincia de Neuquén (Unconventional reservoirs. Calculation of resources. A vision from the

Province of Neuquén). Oil and Gas and Energy Department of the Government of the Province of Neuquén.

In a press release summit during February 2012, Repsol described that, for the purpose of this

exploitation, it relied on the cooperation of leading companies in shale oil development in the

United States, which decided to become associated with YPF in different areas for their

exploration due to the expectations generated by Vaca Muerta. In addition, it stated that

developing this project, including exploration, delineation and development start -up phases,

required over US$ 300 million. It also assessed that it would be required to carry out an investment

plan of about US$ 28,000 million (gross at 100%) in the next few years to perform almost

2,000 oil production wells, for which 60 drilling rigs would be required, apart from those

existing in the country.

79


The Company stated that this project would require international capital inflows into Argentina in

the next few years as a source of financing for the huge economic resources required and it

considered that this was an essential condition for a project of this magnitude. In this regard,

certain media publicized the Company’s search for alliances with oil companies in the United States,

Europe, Russia and China.

A brief history of Vaca Muerta

Below is a breakdown of the significant announcements made by YPF S.A. with respect to Vaca

Muerta:

In early 2010, the Government of the Province of Neuquén announced the existence of

unconventional gas in such province (equivalent to twice the quantity in Loma La Lata.) Almost

simultaneously with the provincial government, in late 2009 YPF submitted its 2010 -2014

Production and Exploration Development Program. Following confirmation of the basin potential,

YPF announced investments in the exploration of Vaca Muerta and the assessment of reserve

levels. The Company highlighted the increase in the basin value as follows:

“YPF’s strategy is being valued positively by international investors and has attracted increasing

interest in markets, which generated significant transactions involving YPF securities in Wall Street,

and in the current process to incorporate YPF into the Latibex index in the Madrid Stock

Exchange” 6 .

In late 2010, Repsol -YPF and the Brazilian mining company, Vale, announced investments for US$

5,000 million to develop unconventional gas in Neuquén, which would supply energy to the Río

Colorado Potassium Project in Malargüe, Mendoza. Repsol continued performing exploration

activities in the Vaca Muerta basin in 2011. Early that year, apart from the announcements

regarding shale gas potential, it reported the discovery of technically recoverable shale oil

resources equivalent to 150 million barrels of oil and identified potential tight gas resources in

Loma La Lata.

In late 2011, the Company confirmed a volume of recoverable resources of 927 million barrels of

oil equivalent in unconventional oil and gas, out of which 741 million barrels were high -quality

crude oil barrels (40 -45º API) and the remainder was associated gas, in a surface of 428 km 2 in

Loma La Lata northern region, Province of Neuquén. It also announced that it would begin

exploring another area in Vaca Muerta (502 km 2), the wells of which showed similar production

and quality levels. At the same time, Repsol gained concessions to operate unconventional

resources in the United States.

6 Repsol press release, 12 -07 -2010.

80


In early 2012, the Company entrusted Ryder Scott (an international company specialized in oil and

gas reserve and resource certification) to perform an external audit of its unconventional reserves

and contingent and prospective resources from the Vaca Muerta formation, located in certain

concession areas of the Neuquén basin. The study performed by Ryder Scott comprised a total

area of 8,071 km2, where YPF held a net acreage of 5,016 km 2 in the Neuquén basin (equivalent to

42% of the area granted under concession to the Company.)

In February 2012, Ryder Scott’s audit estimated, in a 1,100 -km2 area, 1,115 MBBL oil contingent

resources and 410 MBEP gas contingent resources, i.e. a total of 1.5 BBOE. With respect to YPF’s

share, these contingent resources would imply 883 MBBL of oil and 330 BBOE of gas, i.e. a total of

1.2 BBOE.

As to current exploration and production, in late January 2012, YPF had drilled 28 new wells and

had recompleted an existing well in Loma La Lata and Loma Campana blocks, thus advancing in its

plan for delineation of unconventional resources in the Vaca Muerta formation. At present, 20 of

these wells are producing through natural flow high quality crude oil. Based upon results, which

were deemed positive by Repsol in view of the number of resources and their high quality (even

exceeding those of shale resources in the United States, according to the study), the Company

reported the continuity of field exploration and production in 2012 and considered that it would

perform the activity on its own account in some cases and jointly with different partners in other

cases.

The facts described show that YPF’s strategy in Vaca Muerta was only an “announcement” and

did not reach the investment stage, since it only invested US$ 300 million to develop

shale oil in Vaca Muerta, which is scarce when compared with the US$ 1,000 million US dollars

that Repsol itself invested in unconventional fields in the United States 7. This delay in

actual investment is due to the fact that the Company bet on a convergence between the internal

price and the international price of hydrocarbons, while that it intended to obtain a favorable

pricing signal for its interests.

The first aspect that should be highlighted with respect to this alleged “discovery” by Repsol is

that, from the beginning of the exploration in Loma La Lata in the 1960s, the Vaca Muerta

formation was included in most drilling tests, which led to awareness of its oil and gas -generating

capacity, as well as the existence of oil and gas in such formation. In such basin, over 500

exploration wells were drilled up to Vaca Muerta formation. The Bajada del Palo.a -7 well is one

of the best -known precedents of oil production from VM, with over 25 years of continuous

production that has accumulate over 700 KBBL of oil.

7 See http://www.repsol.com/es_es/corporacion/prensa/notas -de -prensa/ultimas -notas/20122011 - repsol -

producira - hidrocarburos -no -convencionales -en -eeuu.aspx

81


In the 1970s, the U.S. Energy Department began a series of studies (Shale Gas Project) for

geological and geochemical characterization purposes, as well as engineering studies aimed

at developing stimulation treatments. In the 1980s, when shale economic production began,

the Gas Research Institute (GRI) evaluated gas potential to improve production in

Devonian and Carboniferous shale formations in the United States. These technical

advances explain why the development with horizontal wells, as well as the shale oil “boom”,

is relatively recent, novelty also accounts for the relatively recent application of hydraulic

fracturing massively to unconvential rocks, characterized by their low porosity and permeability.

As already mentioned, in the local sphere, YPF began the analysis of source rocks from the

unconventional perspective in 2007. Thus, in 2007 and 2008, geochemical and geological

information on the main source rocks of the Argentine producting basins were collected. The

data collection comprised information to determine mainly relevant ranges of organic

richness and maturity levels, as well as thickness, area continuity and depth. Those

parameters were useful to generate a ranking and define the unit with more shale gas

reservoir potential in Argentina.

Thus, the Vaca Muerta formation was defined as the unit with most potential and entailing

more interest in view of its geochemical characteristics, area distribution and depth.

Therefore, in 2009, Repsol focused on maturity conditions of the units to define targets in

YPF-operated blocks within the gas window, as such fluid was initially the main goal of the

project. With that clear goal, Repsol ellaborated three scenarios or blocks that had the

maturity required to make a shale gas project viable. There were two defined interest blocks:

Loma La Lata and Chihuido de la Sierra Negra.

Based on thermal maturity conditions in Vaca Muerta, b o t h f i e l d s thought to be

within the wet gas window. In both cases, there are production facilities due existing

production of oil and gas in those blocks. Still another block, Cerro Arena, was considered as

being in the dry gas window and, in principle, it had optimum conditions for shale gas

productivity. However, based upon project feasibility in the short term, Repsol considered

that the best option was Loma La Lata due to the availability of gas treatment facilities that

would favoured mainly evaluation, as well as a potential development as a result of proven

overpressure conditions for Quintuco – Vaca Muerta in that sphere.

Once Loma La Lata was selected to begin the Shale Gas Pilot Project, two pilot projects were

designed and focused on Shale Gas and Shale Oil, respectively, both of them with positive

results. Based on these results, the exploration campaign that continued was clearly

insufficient to realize the potential of the area, only 11 additional wells were drilled with the

purpose of delineating a 428 -Km2 area where a potential development would occur.

Investment commitments are yet to be fulfilled.

82

r -


1t

Location of Loma La Lata northin development aIa fcr th cIiscavry of Vaca Murta

Thus, the “explora on” ac vity con nued in the rest of the basin for the sole purpose of

evalua ng the produc of this , which led to the drilling and on of

12 expl on wells to date.


In late 2010, the project was evaluating the performance of those wells already drilled, changing

focus from natural gas to oil (in line with Repsol’s overall strategy described in Section 2), and

evaluating the wells to determine reservoir performance and production costs. To date, through

the intervention, it was possible to verify that there is no defined development block yet or a

typical operating model for unconventional resource development, as indicated in the

international background previously mentioned.

Taking into account the huge potential of the Vaca Muerta formation, what is the reason for such

a delay in its exploitation? The main reason, as shown at different points in this report, is Repsol’s

attempts to get rid of a company that went through a policy of disinvestment and depredation of

its resources, as the one described in previous sections. The Vaca Muerta delineation strategy

was only intended to be the starting point to sell YPF to foreign investors with the promise of

unconventional resource exploitation potential, which served to hide Repsol´s conventional

resource depredation policy.

As expected, Repsol has denied these allegations, claiming that exploration progress rates in

Vaca Muerta were normal and that it had no intention of divesting itself of the company. After

hard research tasks in this regard, the Comptrollership team was able to show the complete

falsehood of Repsol’s arguments. If the Group’s intention was not to sell YPF, t h e n it would be

interesting to understand how it justifies the existence of confidential reports aimed at disclosing

Vaca Muerta’s potential in road show activities in which Repsol used the delineation made in this

formation to offer a good future business to foreign investors. As part of the findings made by the

Comptrollership, the schedule (see below) of these types of meetings shows the existence of a

deliberate strategy directed by Repsol towards selling the company leveraged on the potential of

Vaca Muerta.

Meeting schedule for Vaca Muerta promotion and subsequent sale of YPF


As observed, the total number of 142 meetings held in only four months with Talisman,

Exxon, Chevron, Petrominerales, Statoil, Conoco, Vale, Andarko, Sowthwestern, Sinopec, Hess and

Shell confirms Repsol’s intention to divest a company that had been subject to its catastrophic

management for over ten years.

85


Main Conclusions

This report shows that Repsol Group actually used YPF to leverage and finance its expansion

strategy at a world scale, depredating Argentine hydrocarbon resources with a short -term vision

that prioritized remitting dividends to the company’s head office over the exploration and

exploitation activities consistent with the best practices of the oil and gas industry. Furthermore,

this strategy was deepened as from 2003 when Argentina started to walk the path of

reindustrialization and accelerated growth in which oil and gas was again an essential strategic

resource and its price a core element in the economy, as one of the country's driver of systemic

competitiveness. The dissociation of the evolution of local hydrocarbon prices from their

international parities caused, under Repsol’s management and within a context of increasing world

prices, the gradual abandonment of exploration and exploitation activities by YPF.

Repsol’s international strategy was reflected in YPF by a systematic disinvestment process in

Argentina with the explicit goal of "reducing its exposure to risk in this country”. However, due to

the convergence of an upward trend in international prices and the emergence of new

technologies, the exploitation of the so -called “unconventional resources” became profitable in the

“Vaca Muerta” field. In light of this context, instead of aiming at the improvement of production

performance, Repsol Group began “delineating” the Vaca Muerta formation in order to quantify

ist potential and to divest it in the future, either through a sale or subconcession. This new

strategy on the part of Repsol aggravated disinvestment in conventional resources since the

financial resources that entered Argentina went mostly into examining the unconventional

resources that they intended to place in third -party hands.

The information collected in this report shows that Repsol gave priority to a quick cash return over

investment, instead of maximizing the final recovery of assets and their value. This is confirmed by

the low investment in exploration, the delay in investments in secondary recovery as compared to

those in primary recovery and the lack of maintenance and investments in surface facilities. These

factors had an adverse impact on the oil and natural gas production profile and on reserve

volumes. At the same time, priority was given to reserve monetization in non -YPF assets located

outside Argentina (mainly imports of gas from Bolivia and LNG) to the detriment of the

development of domestic natural gas offer.

Against this backdrop, Repsol did not implement an appropriate environmental management plan,

as it systematically failed to comply with the commitments assumed before the application

authority. From the beginning of its management, the Group carried out a plan to strip the

Company of its international assets by taking possession of most of them and by depriving YPF of

the international positioning that it had gained under the previous management. In addition, the

amount of dividends earned by Repsol plus the value of international assets transferred

86


clearly exceed the value paid for YPF.

To sum up, Repsol’s actions gave priority to cash return, dismantling YPF’s asset portfolio in order

to gain a better position in the rest of the world. Along the way, it failed to apply industry good

practices and did not accompany Argentina’s economic growth. YPF’s acquisition by Repsol in 1999

involved missing a historical opportunity to consolidate the main domestic hydrocarbon

production company as a leading company around the world. The sale of its external strategic assets

and the continuous disinvestment process by Repsol led to a gradual market loss, as well as a to

decrease in production and reserves, clearly jeopardizing Argentina’s energy self -supply. In this

regard, declaring as a matter of public interest the exploitation, industrialization, transport and sale

of oil and gas, as well as regaining control over the main oil company of Argentina, through the

enactment of Law No. 26,741, i s t h e first step towards the recovery of energy self -supply and to

place YPF once again among the world’s leading companies.

87


Classification of Environmental Issues and Progress

SPECIFIC ENVIRONMENTAL ISSUES

TYPE OF SEI DEU DED YPF

Polluted pits/former pits 6 0 6

Soil and groundwater polluted with O&G or other substances 23 8 31

Historical build - up of waste/garbage dumps/waste dug or deposited directly in the ground 0 0 0

Historical waste build -up with potential soil and groundwater pollution 0 0 0

Altered vegetation/topography area 0 0 0

Polluted sediments in surface water courses, port areas, wetlands, lakes, estuaries

and sea environments 0 2 2

Gas leaks in abandoned wells 0 0 0

Seismic boosters 1 0 1

TOTAL 30 10 40

88


GENERAL ENVIRONMENTAL ISSUES

TYPE OF GEI

Polluted pits/former pits

Soil and groundwater polluted with O&G or other substances

Historical build-up of waste /garbage dumps/waste dug or deposited directly in the ground

Historical waste build-up with potential soil and groundwater pollution

Altered vegetation /topography area

Polluted sediments in surface water courses, port areas,

wetlands, lakes, estuaries and sea environments

Gas leaks in abandoned wells

TOTAL

DEU

DED

YPF

352

1

353

820

116

936

20

6

26

0

1

1

31

0

31

3

0

3

3

0

3

1.229

124

1353 1

89


Fire Prevention Network Pictures

:

-

90


higi

91


- 4

*

92


93

Documents

Case 1:13-cv-00842-SAS Document 27 Filed 06/06/13 Page 1 of …securities.stanford.edu/.../201366_r01c_13CV00842.pdf · 2013-06-20 · Case 1:13-cv-00842-SAS Document 27 Filed 06/06/13