Company Quick10K Filing
YPF
20-F 2019-12-31 Filed 2020-04-24
20-F 2018-12-31 Filed 2019-04-04
20-F 2017-12-31 Filed 2018-04-24
20-F 2016-12-31 Filed 2017-04-07
20-F 2015-12-31 Filed 2016-03-17
20-F 2014-12-31 Filed 2015-03-30
20-F 2013-12-31 Filed 2014-03-28
20-F 2012-12-31 Filed 2013-04-26
20-F 2011-12-31 Filed 2012-05-16
20-F 2010-12-31 Filed 2011-04-12
20-F 2009-12-31 Filed 2010-06-29

YPF 20F Annual Report

Part I
Item 1. Identity of Directors, Senior Managers and Advisers
Item 2. Offer Statistics and Expected Timetable
Item 3. Key Information
Item 4. Information on The Company
Item 4A. Unresolved Staff Comments.
Item 5. Operating and Financial Review and Prospects
Item 6. Directors, Senior Management and Employees
Item 7. Major Shareholders and Related Party Transactions
Item 8. Financial Information
Item 9. The Offer and Listing
Item 10. Additional Information
Item 11. Quantitative and Qualitative Disclosures About Market Risk
Item 12. Description of Securities Other Than Equity Securities
Part II
Item 13. Defaults, Dividend Arrearages and Delinquencies
Item 14. Material Modifications To The Rights of Security Holders and Use of Proceeds
Item 15. Controls and Procedures
Item 16.
Item 16A. Audit Committee Financial Expert
Item 16B. Code of Ethics
Item 16C. Principal Accountant Fees and Services
Item 16D. Exemptions From The Listing Standards for Audit Committees
Item 16E. Purchases of Equity Securities By The Issuer and Affiliated Purchasers
Item 16F. Change in Registrant's Certifying Accountant
Item 16G. Corporate Governance
Item 16H. Mine Safety Disclosure
Part III
Item 17. Financial Statements
Item 18. Financial Statements
Item 19. Exhibits
Note 10 Details The Fully Consolidated Controlled Subsidiaries. Furthermore, Note 28 Details The Main Jo, Proportionally Consolidated.
Note 10 Details The Investments in Associates and Joint Ventures.
Note 2.B.10 Describes The Main Characteristics and Accounting Treatment for Benefit Plans Implemented By The Group.
EX-2.D d872797dex2d.htm
EX-11.1 d872797dex111.htm
EX-12.1 d872797dex121.htm
EX-12.2 d872797dex122.htm
EX-13 d872797dex13.htm
EX-15.1 d872797dex151.htm
EX-15.2 d872797dex152.htm

YPF Earnings 2019-12-31

Balance SheetIncome StatementCash Flow

20-F 1 d872797d20f.htm FORM 20-F Form 20-F
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 20-F

 

 

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2019

 

Commission file number: 1-12102

 

 

 

YPF Sociedad Anónima

(Exact name of registrant as specified in its charter)

 

 

 

Republic of Argentina

(Jurisdiction of incorporation or organization)

Macacha Güemes 515

C1106BKK Ciudad Autónoma de Buenos Aires, Argentina

(Address of principal executive offices)

 

Diego M. Pando

Tel: (011-54-11) 5441-1276

Facsimile Number: (011-54-11) 5441-3726

Macacha Güemes 515

C1106BKK Ciudad Autónoma

de Buenos Aires, Argentina

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 

 

 

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

 

     
Title of Each Class Trading Symbol Name of Each Exchange on Which Registered
American Depositary Shares, each representing one Class D Share, par value 10 pesos per share YPF New York Stock Exchange*
     
Class D Shares N/A* New York Stock Exchange*
     
  YPFD Bolsas y Mercados Argentinos S.A.

 

* Listed not for trading but only in connection with the registration of American Depositary Shares.

 

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

 

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

 

The number of outstanding shares of each class of stock of YPF Sociedad Anónima as of December 31, 2019 was:

 

Class A Shares 3,764
Class B Shares 7,624
Class C Shares 40,422
Class D Shares 393,260,983
  393,312,793

 

 

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes      No  

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes      No  

 

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

 

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

 

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

 

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

 

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

     
U.S. GAAP   International Financial Reporting Standards as issued by the International Accounting Standards Board:   Other   

 

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

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)    Yes      No  

 

 

 

 

 


Table of Contents

 

TABLE OF CONTENTS

 

  Page
   
Conversion Table 4
   
References 4
   
Disclosure of Certain Information 4
   
Forward-Looking Statements 4
   
Oil and Gas Terms 5
   
PART I 7
   
ITEM 1.     Identity of Directors, Senior Managers and Advisers 7
   
ITEM 2.     Offer Statistics and Expected Timetable 7
   
ITEM 3.     Key Information 7
   
Selected Financial Data 7
   
Exchange Regulations 10
   
Risk Factors 20
   
ITEM 4.     Information on the Company 42
   
History and Development of YPF 42
   
The Argentine Market 46
   
Business Organization 47
   
Upstream Overview 48
   
Downstream 88
   
Gas and Power 98
   
Research and Development 109
   
Competition 110
   
Environmental Matters 110
   
Property, Plant and Equipment 117
   
Insurance 117
   
Legal and Regulatory Framework and Relationship with the Argentine Government 118
   
ITEM 4A.     Unresolved Staff Comments 166
   
ITEM 5.     Operating and Financial Review and Prospects 166
   
Overview 166
   
Presentation of Financial Information 167
   
Segment Reporting 167
   
Summarized Statement of Comprehensive Income 167
   
Factors Affecting Our Operations 167
   
Critical Accounting Policies 177

 

1

 

 

  Page
Off-Balance Sheet Arrangements 191
   
Research and Development, Patents and Licenses, etc. 191
   
ITEM 6.     Directors, Senior Management and Employees 191
   
Management of the Company 191
   
Board of Directors 192
   
Senior Management 197
   
The Audit Committee 199
   
Disclosure Committee 201
   
Compliance with New York Stock Exchange Listing Standards on Corporate Governance 203
   
Compensation of members of our Board of Directors 204
   
Supervisory Committee 205
   
Employee Matters 209
   
ITEM 7.     Major Shareholders and Related Party Transactions 211
   
Related Party Transactions 211
   
Argentine Law Concerning Related Party Transactions 212
   
ITEM 8.     Financial Information 212
   
Financial Statements 212
   
Legal Proceedings 212
   
Dividend Policy 213
   
Significant Changes 213
   
ITEM 9.     The Offer and Listing 213
   
Shares and ADSs 213
   
Argentine Securities Market 213
   
ITEM 10.     Additional Information 221
   
Memorandum and Articles of Association 222
   
Directors 224
   
Dividends 225
   
Amount Available for Distribution 226
   
Preemptive and Accretion Rights 227
   
Voting of the Underlying Class D Shares 228
   
Certain Provisions Relating to Acquisitions of Shares 229
   
Material Contracts 232
   
Exchange Regulations 232
   
Taxation 232
   
Argentine Tax Considerations 232
   
United States Federal Income Tax Considerations 234

 

 

2

 

   
Documents on Display 237
   
ITEM 11.     Quantitative and Qualitative Disclosures about Market Risk 237
   
ITEM 12.     Description of Securities Other than Equity Securities 239
   
PART II 239
   
ITEM 13.     Defaults, Dividend Arrearages and Delinquencies 240
   
ITEM 14.     Material Modifications to the Rights of Security Holders and Use of Proceeds 240
   
ITEM 15.     Controls and Procedures 240
   
ITEM 16. 241
   
ITEM 16A.     Audit Committee Financial Expert 241
   
ITEM 16B.     Code of Ethics 241
   
ITEM 16C.     Principal Accountant Fees and Services 242
   
ITEM 16D.     Exemptions from the Listing Standards for Audit Committees 243
   
ITEM 16E.     Purchases of Equity Securities by the Issuer and Affiliated Purchasers 244
   
ITEM 16F.     Change in Registrant’s Certifying Accountant 244
   
ITEM 16G.     Corporate Governance 244
   
PART III 244
   
ITEM 17.     Financial Statements 244
   
ITEM 18.     Financial Statements 245
   
ITEM 19.     Exhibits 245

 

3

 

 

Conversion Table

 

1 ton = 1 metric ton = 1,000 kilograms = 2,204 pounds

1 barrel = 42 U.S. gallons

1 ton of oil = approximately 7.3 barrels (assuming a specific gravity of 34 degrees API (American Petroleum Institute))

1 barrel of oil equivalent = 5,615 cubic feet of gas = 1 barrel of oil, condensate or natural gas liquids

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

1 kilometer = 0.63 miles 

1 million Btu = 252 termies

1 cubic meter of gas = 35.3147 cubic feet of gas

1 cubic meter of gas = 10 termies

1,000 acres = approximately 4 square kilometers

 

References

 

YPF Sociedad Anónima is a stock corporation organized under the laws of the Republic of Argentina (“Argentina”). As used in this annual report, “YPF,” “the Company,” “we,” “our” and “us” refer to YPF Sociedad Anónima and its controlled companies or, if the context requires, its predecessor companies. “YPF Sociedad Anónima” or “YPF S.A.” refers to YPF Sociedad Anónima only. “Repsol” refers to Repsol S.A., its affiliates and consolidated companies. We maintain our financial books and records and publish our financial statements in Argentine pesos. In this annual report, references to “pesos” or “Ps.” are to Argentine pesos, and references to “dollars,” “U.S. dollars” or “U.S.$” are to United States dollars.

 

Disclosure of Certain Information

 

In this annual report, references to “Audited Consolidated Financial Statements” are to YPF’s audited consolidated statement of financial position as of December 31, 2019, 2018 and 2017, YPF’s audited consolidated statements of comprehensive income for the years ended December 31, 2019, 2018 and 2017, YPF’s audited consolidated statements of cash flows for the years ended December 31, 2019, 2018 and 2017, YPF’s audited consolidated statements of changes in shareholders’ equity for the years ended December 31, 2019, 2018 and 2017 and notes 1 to 38.

 

Unless otherwise indicated, the information contained in this annual report reflects:

 

for the subsidiaries that were consolidated using the global integration method at the date or for the periods indicated, 100% of the assets, liabilities and results of operations of such subsidiaries without excluding minority interests, and

 

for those joint operations whose results were consolidated using the proportional integration method, a pro rata amount of the assets, liabilities and results of operations for such joint operations at the date or for the periods indicated.

 

For information regarding consolidation, see Note 2.a to the Audited Consolidated Financial Statements.

 

Certain monetary amounts and other figures included in this annual report have been subject to rounding adjustments. Any discrepancies in any tables between the totals and the sums of the amounts are due to rounding.

 

Forward-Looking Statements

 

This annual report, including any documents incorporated by reference, contains statements that we believe constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may include statements regarding the intent, belief or current expectations of us and our management, including statements with respect to trends affecting our financial condition, financial ratios, results of operations, business, strategy, geographic concentration, reserves, future hydrocarbon production volumes and the Company’s ability to satisfy our long-term sales commitments from future supplies available to the Company, our ability to pay dividends in the future and to service our outstanding debt, dates or periods in which production is scheduled or expected to come on-stream, as well as our plans with respect to capital expenditures, business, strategy, geographic concentration, cost savings, investments and dividends payout policies. These statements are not a guarantee of future performance and are subject to material risks, uncertainties, changes and other factors which may be beyond our control or may be difficult to predict. Accordingly, our future financial condition, prices, financial ratios, results of operations, business, strategy, geographic concentration, production volumes, reserves, capital expenditures, cost savings, WACC (weighted average cost of capital) investments and ability to meet our long-term sales commitments or pay dividends or service our outstanding debt could differ materially from those expressed or implied in any such forward-looking statements. Such factors include, but are not limited to, currency fluctuations, inflation, the domestic and international prices for crude oil and its derivatives, the ability to realize cost reductions and operating efficiencies without unduly

 

4

 

 

disrupting business operations, replacement of hydrocarbon reserves, environmental, regulatory and legal considerations, including the imposition of further government restrictions on the Company’s business, changes in our business strategy and operations, our ability to find partners or raise funding under our current control, the ability to maintain the Company’s concessions, and general economic and business conditions in Argentina, as well as those factors described in the filings made by YPF and its affiliates with the Securities and Exchange Commission, in particular, those described in “Item 3. Key Information—Risk Factors” and “Item 5. Operating and Financial Review and Prospects” YPF does not undertake to publicly update or revise these forward-looking statements even if experience or future changes make it clear that the projected results or condition expressed or implied therein will not be realized.

 

Oil and Gas Terms

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

“gas”: Natural gas.

 

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

 

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

 

5

 

 

Abbreviations:

 

“bbl” Barrels.
“bbl/d” Barrels per day.
“bcf” Billion cubic feet.
“bcf/d” Billion cubic feet per day.
“bcm” Billion cubic meters.
“bcm/d” Billion cubic meters per day.
“boe” Barrels of oil equivalent.
“boe/d” Barrels of oil equivalent per day.
“kboe/d” Thousand barrels of oil equivalent per day.
“cm” Cubic meter.
“cm/d” Cubic meters per day.
“dam3" Cubic decameters (thousand cubic meters).
“GWh” Gigawatt hours.
“HP” Horsepower.
“km” Kilometers.
“km2" Square kilometers.
“liquids” Crude oil, condensate and natural gas liquids.
“LNG” Liquefied natural gas.
“LPG” Liquefied petroleum gas.
“mbbl” Thousand barrels.
“mbbl/d” Thousand barrels per day.
“mcf” Thousand cubic feet.
“mcf/d” Thousand cubic feet per day.
“mcm” Thousand cubic meters.
“mcm/d” Thousand cubic meters per day.
“mboe” Thousand barrels of oil equivalent.
“mboe/d” Thousand barrels of oil equivalent per day.
“mm” Million.
“mmbbl” Million barrels.
“mmbbl/d” Million barrels per day.
“mmboe” Million barrels of oil equivalent.
“mmboe/d” Million barrels of oil equivalent per day.
“mmBtu” Million British thermal units.
“mmcf” Million cubic feet.
“mmcf/d” Million cubic feet per day.
“mmcm” Million cubic meters.
“mmcm/d” Million cubic meters per day.
“mtn” Thousand tons.
“MW” Megawatts.
“mts” Metres.
“NGL” Natural gas liquids.
“psi” Pound per square inch.

 

6

 

 

PART I

 

ITEM 1. Identity of Directors, Senior Managers and Advisers

 

Not applicable.

 

ITEM 2. Offer Statistics and Expected Timetable

 

Not applicable.

 

ITEM 3. Key Information

 

Selected Financial Data

 

The following tables present our selected financial data. This information should be read in conjunction with our Audited Consolidated Financial Statements, and the information under “Item 5. Operating and Financial Review and Prospects” included elsewhere in this annual report.

 

Our Audited Consolidated Financial Statements are prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).

 

In this annual report, except as otherwise specified, references to “$,” “U.S.$” and “dollars” are to U.S. dollars, and references to “Ps.” and “pesos” are to Argentine pesos.

 

Selected consolidated financial information contained in this annual report as of and for the years ended December 31, 2019, 2018 and 2017 has been derived from our Audited Consolidated Financial Statements included in this annual report. Selected consolidated financial information contained in this annual report as of December 31, 2016 and 2015 and for the years ended December 31, 2016 and 2015 have been derived from our audited consolidated financial statements as of and for the years ended December 31, 2016 and 2015 not included in this annual report.

 

    As of and for the year ended December 31,  
    (in millions of pesos, except for per share and per ADS data)  
    2019     2018     2017     2016     2015  
Consolidated Statement of Comprehensive Income Data (1):                              
Revenues (2)      678,595       435,820       252,813       210,100       156,136  
Costs     (575,608 )     (359,570 )     (211,812 )     (177,304 )     (119,537 )
Gross profit      102,987       76,250       41,001       32,796       36,599  
Administrative expenses      (24,701 )     (13,922 )     (8,736 )     (7,126 )     (5,586 )
Selling expenses      (49,898 )     (27,927 )     (17,954 )     (15,212 )     (11,099 )
Exploration expenses      (6,841 )     (5,466 )     (2,456 )     (3,155 )     (2,473 )
(Impairment) / Recovery of property, plant and equipment     (41,429 )     2,900       5,032       (34,943 )     (2,535 )
Other net operating results     (1,130 )     11,945       (814 )     3,394       1,682  
Operating (loss) / profit     (21,012 )     43,780       16,073       (24,246 )     16,588  
Income from equity interests in associates and joint ventures     7,968       4,839       1,428       588       318  
Net financial results     6,034       41,525       (8,798 )     (6,146 )     12,157  
Net (loss) / profit before income tax     (7,010 )     90,144       8,703       (29,804 )     29,063  
Income tax      (26,369 )     (51,538 )     3,969       1,425       (24,637 )
Net (loss) / profit for the year      (33,379 )     38,606       12,672       (28,379 )     4,426  
Total other comprehensive income for the year     221,367       172,600       21,917       27,414       43,758  
Total comprehensive income / (loss) for the year      187,988       211,206       34,589       (965 )     48,184  

 

7

 

 

    As of and for the year ended December 31,  
    (in millions of pesos, except for per share and per ADS data)  
    2019     2018     2017     2016     2015  
Earnings and dividends per share and per ADS                                        
Earnings per share and per ADS (3)      (86.85 )     98.43       31.43       (72.13 )     11.68  
Dividends per share and per ADS (in pesos)      5.85       3.05       1.82       2.26       1.28  
Dividends per share and per ADS (4) (in U.S. dollars)      0.14       0.08       0.10       0.15       0.14  
Consolidated Statement of Financial Position Data                                        
Cash and cash equivalents     66,100       46,028       28,738       10,757       15,387  
Working capital (5)      (5,451 )     29,446       19,564       4,760       (2,818 )
Total assets      1,573,289       994,016       505,718       421,139       363,453  
Total loans (6)      526,760       335,078       191,063       154,345       105,751  
Shareholders’ equity (7)      548,099       362,357       152,533       118,661       120,461  
Other Consolidated Financial Data                                        
Depreciation of property, plant and equipment and amortization of intangible assets      148,268       89,318       54,350       45,469       27,008  
Cash used in acquisition of property, plant and equipment and intangible assets     161,455       88,293       59,618       64,160       63,774  

 

(1) The consolidated financial statements reflect the effect of the application of the functional and reporting currency. See Note 2.b.1 to the Audited Consolidated Financial Statements.

 

(2) Revenues are net of payments on account of turnover taxes. Customs duties on hydrocarbon exports are disclosed in taxes, charges and contributions, as indicated in Note 25 to the Audited Consolidated Financial Statements. Royalties with respect to our production are accounted for as a cost of production and are not deducted in determining revenues. See Note 2.b.15 to the Audited Consolidated Financial Statements.

 

(3) Information has been calculated as detailed in Note 30 to the Audited Consolidated Financial Statements. Each ADS represents one Class D share.

 

(4) Amounts expressed in U.S. dollars are based on the exchange rate as of the date of the dividend payment.

 

(5) Working capital consists of consolidated total current assets minus consolidated total current liabilities as of December 31, 2019, 2018, 2017, 2016 and 2015.

 

(6) Total loans include non-current loans of Ps. 419,651 million, Ps. 270,252 million, Ps 151,727 million, Ps. 127,568 million, and Ps. 77,934 million as of December 31, 2019, 2018, 2017, 2016 and 2015, respectively, and current loans of Ps. 107,109 million, Ps 64,826 million, Ps. 39,336 million, Ps. 26,777 million, and Ps. 27,817 million as of December 31, 2019, 2018, 2017, 2016 and 2015, respectively. See Note 20 to the Audited Consolidated Financial Statements.

 

(7) Our subscribed share capital as of December 31, 2019 is represented by 393,312,793 shares of common stock and divided into four classes of shares, with a par value of Ps. 10 and one vote per share. These shares are fully subscribed, paid-in and authorized for stock exchange listing. See “Item 6. Directors, Senior Management and Employees—Compensation of members of our Board of Directors” “Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers” and Note 2.b.10.iii to the Audited Consolidated Financial Statements in relation to shares purchased by YPF and allocated to our employees as part of our employee compensation plans.

 

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

 

8

 

 

Exchange Rates

 

From April 1, 1991 until the end of 2001, the Convertibility Law (Law No. 23,928) established a fixed exchange rate which required the Central Bank to sell U.S. dollars at one peso per U.S. dollar. On January 6, 2002, the Argentine Congress enacted the Public Emergency and Foreign Exchange System Reform Law (Law No. 25,561, the “Public Emergency Law”, see “Item 4. Information on the Company —Legal and Regulatory Framework and Relationship with the Argentine Government— Public Emergency”), formally putting an end to the Convertibility Law regime and abandoning the U.S. dollar-peso parity. The Public Emergency Law, which had been periodically extended and expired on December 31, 2017, by Law No. 27,200, had granted the Argentine Executive Branch the power to set the exchange rate between the peso and foreign currencies and to issue regulations related to the foreign exchange market. Following a brief period during which the Argentine government established a temporary dual exchange rate system pursuant to the Public Emergency Law, the peso has been allowed to float freely against other currencies since February 2002, although the government has the power to intervene by buying and selling foreign currency on its own account, a practice in which it engages on a regular basis. However, on December 23, 2019, Law No. 27,541 was published, which again declared the public emergency until December 31, 2020 (see “Item 4 – Information on the Company – Legal and Regulatory Framework and Relationship with the Argentine Government – Public Emergency”). The annual rate of devaluation of the peso was approximately 59.0% from December 31, 2018 to December 31, 2019 based on the period-end exchange rates for U.S. dollars as of December 31, 2019 and 2018. See “—Risk Factors—Risks Relating to Argentina—Our business is largely dependent upon economic conditions in Argentina”.

 

By means of Decree No. 27/2018 dated January 11, 2018, the Free Exchange Market (Mercado Libre de Cambios - “MELI”) was created, as a replacement of the Free Single Exchange Market (Mercado Unico Libre de Cambios - “MULC”), for purposes of providing additional flexibility to the market, to enable competition and allow for the entry of new operators into the foreign exchange market, thus reducing systemic costs. Exchange operations will be conducted through the MELI by financial entities and other participants authorized by the Central Bank to conduct regular transactions or purchase and sale of foreign currency, gold coins or deliverable gold bars and travelers’ checks, and transfers and similar analogous foreign exchange operations. By means of Decree No. 609/2019 dated September 1, 2019 (the “Decree 609"), the Argentine Executive Branch established that, until December 31, 2019, the export value of goods and services was required to be repatriated to Argentina and converted to pesos by means of settlement in the foreign exchange market (the “FX Market”) in accordance with the conditions and terms set forth by the Central Bank. According to the provisions of Decree 609, the Central Bank by means of Communication “A” 6770, as amended and restated by Communication “A” 6844 and supplemental regulations related to the obligation to repatriate and convert the exchange value of export of goods and services (the “FX Regime”), defined in which cases access to the FX market to purchase foreign currency and precious metals as well as transfers abroad will be subject to prior approval by the Central Bank, taking into consideration the different situations of individuals and legal entities. See “—Exchange Regulations.”

 

On December 28, 2019, by means of Decree No. 91/2019 (“Decree 91") the Argentine Executive Branch amended Article 1 of Decree 609 (which established that, until December 31, 2019, the value of export of goods and services must be repatriated to Argentina and converted to in accordance with the terms and conditions set forth by the FX Regime), extending the obligation to repatriate and settle through the FX Market for an indefinite period of time.

 

Currently, and pursuant to the FX Regime, only importers and exporters who meet the requirements set forth by the FX Regime can access to the FX market, while individuals can buy up to U.S.$200 per month from entities licensed to conduct foreign exchange transactions and the Central Bank may intervene by selling or buying U.S. dollars in the FX market. See “—Exchange Regulations.”

 

The following table sets forth the annual low, high, average and period-end exchange rates for U.S. dollars for the periods indicated, expressed in nominal pesos per U.S. dollar, based on rates quoted by the Central Bank. The Federal Reserve Bank of New York does not report a noon buying rate for the Argentine peso.

 

      Low     High    

Average (1)

    Period End  
      (pesos per U.S. dollar)  
Year ended December 31,                                  
2015       8.73       13.76       9.39       13.01  
2016       13.07       16.04       14.78       15.85  
2017       15.17       18.83       16.76       18.77  
2018       18.42       40.90       29.32       37.81  
2019       37.04       60.00       49.23       59.90  
Month                                  
October 2019        57.70       60.00       58.53       59.73  
November 2019        59.54       59.88       59.74       59.86  
December 2019        59.82       59.96       59.88       59.90  

 

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      Low     High    

Average (1)

    Period End  
      (pesos per U.S. dollar)  
January 2020        59.82       60.33       60.01       60.33  
February 2020        60.43       62.21       61.35       62.21  
March 2020        62.25       64.47       63.12       64.47  
April 2020(2)       64.53       65.98       65.29       65.98  

 

Source: Central Bank

 

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

 

(2) Through April 20, 2020.

 

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

 

Exchange Regulations

 

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

 

On December 3, 2001, the Argentine government imposed a number of monetary and currency exchange control measures through Decree No. 1,570/01, which included restrictions on the free disposition of funds deposited with banks and tight restrictions on transferring funds abroad (including the transfer of funds to pay dividends) without the Central Bank’s prior authorization subject to specific exceptions for transfers related to foreign trade.

 

In June 2003, the Argentine government set restrictions on capital flows that came into Argentina, which mainly consisted of a prohibition against the transfer abroad of any funds until 180 days after their entry into the country.

 

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

 

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

 

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

 

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

 

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

 

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

 

Additionally, in order to improve the competitiveness of Argentine exports, make financing conditions more flexible and improve financial predictability, Decree No. 893, dated November 1, 2017, repealed the mandatory repatriation and conversion into pesos of foreign exchange currencies derived from exports in order to enable the exporter to collect export refunds. In accordance with the aforementioned decree, Communication “A” 6,363 of the Central Bank dated November 10, 2017 repealed the sections and other provisions related to the mandatory repatriation and conversion into pesos of foreign currency derived from exports.

 

Pursuant to Communication “A” 6,436, which became effective on January 20, 2018, the Central Bank repealed all foreign exchange regulations (other than those explicitly mentioned in the resolution), and substituted them, establishing that:

 

Any individual or entity may freely conduct operations through MELI.

 

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

 

Timing restrictions to operate in MELI were eliminated.

 

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

 

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

 

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

 

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

 

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However, on September 1, 2019, the Argentine Executive Branch enacted Decree No. 609 establishing that, until December 31, 2019, the proceeds of the export value of goods and services must had to be repatriated to Argentina and converted to pesos by means of settlement in the FX Market in accordance with the terms and conditions set forth by the Central Bank.

 

According to the provisions of Decree No. 609, the Central Bank by means of the FX Regime, defined in which cases the access to the FX Market for purchase of foreign currency and precious metals as well as or for purposes of transfers of foreign currency abroad will be subject to prior approval by the Central Bank, taking into consideration the different situation of individuals and legal entities.

 

On December 28, 2019, through Decree No. 91 the Argentine Executive Branch, amended Article 1 of Decree No.609 (which established that, until December 31, 2019, the value of export of goods and services must be repatriated to Argentina and converted to pesos by means of settlement in the FX Market to pesos in accordance with the terms and conditions set forth by the FX Regime), extending the obligation to repatriate and settle through the FX Market regime of Decree No. 609 for an indefinite period of time. Likewise, on December 30, 2019, the Central Bank by means of Communication “A” 6856, extended this obligation for an indefinite period. As of the date of this annual report, the main regulations relating to restrictions to access FX Market are the following.

 

Obligation to repatriate foreign currency obtained from exports of goods

 

Exports of goods validated on or after September 2, 2019

 

Payments in foreign currency for exports of goods in an amount equal to the invoiced amounts according to the sale conditions of such exports transaction must be repatriated and converted to pesos by means of conversion and settlement in the FX Market within a specific timeframe for the applicable goods or services in question.

 

Regardless of these maximum terms, the FX Regime further established that payments for exports must be repatriated and converted to pesos by means of settlement in the FX Market within 5 business days of the effective collection date.

 

Through Communication “A” 6882 of the BCRA, it was resolved that exporters who carried out operations with related counterparties (in which the importer is a company controlled by the Argentine exporter), may request their respective monitoring entities to extend the entry period up to 120 calendar days. This extension will apply in cases where exports of more than U.S.$ 50,000,000 have been registered and the goods correspond to the positions detailed in said standard (mainly related to the meat industry).

 

To determine if a transaction is considered a transaction between related parties, the rules established in section 1.2.2 of the “Large exposures to credit risk” regulation of the Central Bank will apply.

 

Any foreign currency amounts derived from insurance claims, to the extent that they cover the value of the exported goods, are subject to the obligation to repatriate and convert said amounts into pesos by means of settlement in the FX Market within the applicable term for the underlying export.

 

The exporter must appoint a financial entity to track each export transaction. The obligation of repatriation and settlement of foreign currency through the FX Market corresponding to a shipping permit will be considered satisfied when the entity designated for tracking purposes certifies that repatriation and settlement has taken place.

 

Exports consummated prior to September 2, 2019

 

Those export transactions pending collection prior to September 2, 2019, must be repatriated and converted to pesos by means of settlement in the FX Market to pesos within 5 business days of the date of collection or disbursement abroad or in Argentina.

 

Exporters who have received shipping permits during such period were subject to specific tracking procedures.

 

The repatriation and settlement through the FX Market to pesos of foreign currency received by Argentine residents was not required if all of the following conditions were verified:

 

the funds received were deposited in accounts opened in Argentine financial institutions;

the funds are repatriated within the specified periods set forth by the FX Regime;

the funds were applied to operations to which applicable law grants access to the FX Market, within the limits established for each concept involved; and

 

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the use of this mechanism was neutral for tax purposes.

 

Payments of imports and other purchases of goods abroad

 

Financial institutions may give access to the FX Market to make payments abroad for the payment of imports and other purchases of goods, to the extent that certain specific conditions are met. In addition, financial institutions may access the FX Market to pay for the liabilities incurred abroad in relation to guarantees and sureties granted for the import of goods, as well as the cancellation of cross-border credit lines applied to the financing of import of goods.

 

Obligation to repatriate foreign currency from exports of services

 

Payments received for the rendering of services must be repatriated and converted to pesos by means of settlement in the FX Market to pesos within a period of no more than 5 business days from the date of their receipt abroad or in Argentina.

 

The FX Regime sets forth the obligation to repatriate to Argentina collections for the export of services (such as services provided by an Argentine resident to a non-Argentine resident, encompassing, among others, freight, passenger services, other transportation services, tourism and travel related services, construction services, insurance, financial services, telecommunications services, information and computing services, intellectual property licenses, research and development, professional consulting services, management services, technical services related to commerce and other business services, audiovisual services, personal, cultural and recreational services (including, rights and awards of competitors in sports and/or sporting entities) and governmental services) and to convert such amounts to pesos by settlement in the FX Market.

 

Exceptions to the obligation to settle foreign currency derived from export of goods and services, the incurrence of foreign indebtedness and the sale of non-financial assets in the FX Market

 

The repatriation and settlement of foreign currency received by residents through the FX Market to pesos shall not be required in respect of export of goods and services, foreign indebtedness and the sale of non-financial assets, if all of the following conditions are satisfied:

 

the funds received are deposited in accounts opened in Argentine financial entities;

the funds are repatriated within the specified periods set forth by the FX Regime;

the funds were applied to operations to which applicable law grants access to the FX Market, within the limits established for each concept involved; and

the use of this mechanism was neutral for tax purposes.

 

Payments abroad made by financial institutions and other local issuers of credit cards

 

Financial institutions and other Argentine card issuers will require prior approval of the Central Bank to access the FX market to make payments abroad on or after November 1, 2019 in connection with the use of credit, debit or prepaid cards issued in Argentina, if such payments were originated, directly or indirectly, through the use of international payment systems, in the following transactions:

 

participation in games of chance and gambling-related activities;

the transfer of funds to accounts of payment service providers;

the transfer of funds to investment accounts opened with foreign investment managers;

the performance of foreign exchange operations; and

the purchase of cryptocurrencies.

 

Cancellation of commercial credit lines from abroad by financial institutions.

 

Financial institutions will have access to the FX market for the cancellation at maturity of commercial lines of credit granted by foreign financial institutions and applied to the financing of resident export or import operations. They may also access the FX market to pre-cancel said lines of credit to the extent that the financing granted by the local entity has been pre-canceled by the debtor.

 

Obligation to send daily information on exchange sales for up to a daily amount equal to or greater than the equivalent of U.S.$ 2 million

 

The FX Regime requires entities authorized to conduct foreign exchange operations to submit to the BCRA, at the end of each business

 

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day and with 2 business days’ prior notice, information on sales of foreign currency to be performed at the request of customers or operations of the entity for its own portfolio that implies access to the FX Market in a daily amount equal to or greater than the equivalent of U.S.$ 2 million, for each of the 3 business days covered in the applicable reporting period.

 

For this purpose, until the BCRA implements a specific information regime, the financial entities must provide the following information to the BCRA: (i) reporting entity; (ii) tax ID (CUIT) and name of the client; and (iii) date when the transaction will take place, concept code and equivalent amount in dollars.

 

In this sense, the clients of the authorized entities must provide them with such information with sufficient time to allow those entities to comply with their reporting obligations and, to the extent that the remaining requirements in force by FX Regime are simultaneously satisfied, enable them to carry out the applicable exchange transactions.

 

The FX Regime also provides that on the day the foreign exchange transactions will be carried out; the client may choose to perform the foreign exchange transaction which was timely reported through any authorized entity. To this end, the intervening entity must have a record from the reporting entity that such exchange operation has been duly informed.

 

Creation of external assets or relating to derivatives transactions

 

Legal entities, local governments, mutual funds, trusts and other universalities incorporated in Argentina will require prior approval of the Central Bank to create external assets or relating to derivatives transactions (such as the payment of premiums, the creation of guarantees and the payment of futures, forwards, options and other derivatives, except for interest rate hedging contracts related to liabilities incurred abroad, which have been informed and validated in the Foreign Assets and Liabilities Regime, to the extent that said contracts do not hedge risks greater than the liabilities duly registered by the debtor). These restrictions do not apply to entities authorized to operate in the FX Market, given that such entities are subject to specific Central Bank regulations relating to their holding of foreign currency.

 

The settlement of futures traded on markets organized in Argentina, forwards, options, and any other type of derivatives entered into in Argentina must be made in pesos as from September 14, 2019.

 

Additionally, individuals must obtain previous approval from the Central Bank for derivative transactions (such as the payment of premiums, creation of guarantees and settlement that correspond to future transactions, forwards, options and other derivatives), if they involve a payment in foreign currency.

 

Access to the FX Market for payment of premiums, creation of guarantees and settlements in connection with interest rate hedging contracts for declared and validated obligations of non-residents shall be granted if the risks hedged do not exceed the external liabilities actually recorded by the debtor, provided, however, that such debtor must appoint a financial entity who will be in charge of tracking the relevant transaction and the filing of a sworn statement committing to the settlement of any unspent or excess funds in the FX Market within the following 5 business.

 

Creation of external assets by Argentine residents

 

Argentine residents must obtain prior approval from the Central Bank for the creation of external assets, the remittance of family aid and the entering into derivative transactions, in case the aggregate amount of any such transactions exceeds the equivalent of U.S.$ 200 per month in the aggregate across all entities licensed to operate in foreign exchange transactions.

 

Access to the FX Market for non-residents

 

Prior approval from the Central Bank is required for non-residents to access the FX Market in order to purchase amounts greater than the equivalent of U.S.$ 100 per month in the aggregate across all entities licensed to operate in foreign exchange transactions, except for:

 

transactions made by international organizations and institutions that operate as official export credit agencies;

 

transactions made by diplomatic and consular representations as well as diplomatic personnel accredited in Argentina for transfers made in the exercise of their functions;

 

transactions made by Argentine representations agencies of courts, authorities, offices, special missions, commissions or multilateral bodies established by treaties or international agreements, to which Argentina is a party, to the extent that the

 

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transfers are made in the exercise of their functions; and

 

transfers abroad on behalf of individuals who are beneficiaries of retirement and /or pension benefits paid by the National Social Security Administration (Administración Nacional de la Seguridad Social, the “ANSES”), up to the amount paid by the ANSES for the respective calendar month and to the extent that such transfer be made to the bank account located and owned by the beneficiary of such retirement and/or pension in his country of registered residence.

 

New local public debt issuances denominated in foreign currency

 

New local public debt issuances denominated in foreign currency, whose principal and interest payments are payable in Argentina in foreign currency, will have access to the FX Market upon maturity of principal and on each interest payment date, as long as they were subscribed in foreign currency and the proceeds of the issuance were fully settled for pesos in the FX Market. In respect of financial institutions, this requirement shall be deemed to have been satisfied if such funds are registered into their respective General Exchange Position (Posición General de Cambios).

 

Obligation to repatriate new foreign financial debts and settle through the FX Market to pesos

 

New foreign financial debts disbursed on or after September 1, 2019, must be repatriated and converted to pesos by means of settlement in the FX Market. Proof of repatriation and conversion will be required to access the FX Market for repayment of principal and interests on such debts.

 

The proof of repatriation and conversion will not be required if the following conditions are verified concurrently:

 

the funds received are deposited in accounts opened in Argentine financial entities;

the funds are repatriated within the specified periods set forth by the FX Regime;

the funds were applied to operations to which applicable law grants access to the FX Market, within the limits established for each concept involved; and

the use of this mechanism was neutral for tax purposes.

 

Repayment of foreign currency debt between residents

 

Access to the FX Market for the repayment of debts and other foreign currency obligations between residents, incurred on or after September 1, 2019, is banned.

 

Access to the FX Market is granted, on the maturity date of the applicable transaction, in respect of transactions between residents which are denominated in foreign currency, as long as they have been recorded in an official registry or have been entered into by way of public deed on or prior to August 30, 2019.

 

The restriction to access to the FX Market does not apply to clients of local financial institutions in respect of financial debts granted in foreign currency (including payments in foreign currency incurred by means of credit cards).

 

However, residents who must service foreign financial debts and/or securities issued under local legislation may carry out purchases of foreign currency in the FX Market prior to the deadline admitted by the FX Regime, under the following conditions:

 

the acquired foreign exchange amounts must be deposited in foreign-currency denominated accounts owned by the residents and opened in local financial institutions;

the access to the FX Market must be carried out no earlier than 5 business days prior to the terms allowed by the FX Regime;

the access to the FX Market must be for a daily amount not exceeding 20% of the total amount that the residents must cancel at maturity of such foreign financial debt; and

the intervening financial institution must verify that the foreign financial debt, which will be serviced with these funds, complies with the regulations set forth by the FX Regime.

 

Foreign currency that is not used for the payment of principal and interest must be converted to pesos by means of settlement in the FX Market to pesos within 5 business days of the applicable payment.

 

In addition, financial entities will be able to give access to the FX Market to residents who have foreign financial indebtedness or to

 

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Argentine trusts in order to secure the payment of principal and interests and/or to purchase foreign currency to provide guarantees for up to the amounts payable of such indebtedness, under the following conditions:

 

in case of payments of commercial debts for imports of goods and/or services with foreign financial institutions or official export credit agencies or foreign financial indebtedness with unrelated creditors, which foresee the crediting of funds in guarantee accounts of future services and whose access to the local FX Market has been granted by law;

the acquired funds be deposited in accounts opened in Argentine financial institutions pursuant the conditions provided in the contracts. The creation of guarantees on accounts opened abroad will only be admitted if it is the only and exclusive option provided in financial indebtedness entered into and effective prior to August 31, 2019;

the guarantees in foreign currency, which can be used for the payment of services, do not exceed the amounts to be paid in the next payment of principal or interest date;

the access to the local FX Market is made for a daily amount not exceeding 20% of the amounts to be paid in the next payment of principal or interest date; and

the intervening financial institution must verify that the foreign financial debt complies with the regulations set forth by the FX Regime.

 

Foreign currency that is not used for the payment of principal and interest must be converted to pesos by means of settlement in the FX Market to pesos within 5 business days of the applicable payment.

 

Distribution of profits and dividends

 

The FX Regime establishes that residents access the FX Market to exchange foreign currency and to transfer it abroad to make payments of profits and dividends to non-resident shareholders, without the prior approval of the Central Bank to the extent that the following conditions are met:

 

Profits and dividends correspond to closed and audited financial statements.

The total amount of profits and dividends paid to non-resident shareholders must not exceed the amount in local currency which corresponds to the distribution determined by the shareholders’ meeting. The financial entity must receive an affidavit signed by the legal representative or a duly authorized attorney-in-fact of the resident with a certification in this sense.

The total amount of transfers of profits and dividends for which the resident accesses the FX Market on or after January 17, 2020, must not exceed 30% of the value of the new direct foreign investment contributions in resident companies entered and liquidated through the FX Market prior to such date. For this purpose, the financial institution must have a certification issued by the entity that carried out the liquidation that it has not issued certifications for the purposes set forth in this point for an amount greater than 30% of the amount settled.

Access occurs within a period of not less than 30 calendar days from the settlement of the last contribution that is computed for the purposes of the requirement set forth in the immediately preceding condition.

The resident must present documentation evidencing capitalization of such contribution or, absent such documentation, proof of the commencement of the registration process before the Public Registry of Commerce of the final capitalization decision of the capital contributions computed according to the corresponding legal requirements, and present the documentation of the final capitalization of the contribution within 365 calendar days from the beginning of the procedure.

The entity must verify that the client has complied, if applicable, with the statement of the last overdue presentation of the “Survey of external assets and liabilities” for the operations involved.

 

Any cases which do not satisfy the preceding conditions will require prior approval of the BCRA to access the FX Market for the foreign exchange of foreign currency for the distribution of profits and dividends.

 

Pre-payment of financial debt

 

The FX Regime sets forth that prior approval from the Central Bank will be required for access to the FX Market for pre-payment of foreign financial debt with an anticipation greater than 3 business days prior to the maturity (in respect of principal payments) or the applicable interest payment date.

 

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Prior approval of the Central Bank is not required for access to the FX Market if each of the following conditions are satisfied:

 

the pre-payment is carried out with funds coming from new financial debt disbursed on the applicable pre-payment date;

the average life of the new financial debt is greater than the remaining average life of the financial debt being prepaid;

the first amortization date of the new financial debt is not earlier than the next amortization date of the financial debt being prepaid;

the principal amount of the new financial debt to be paid on the first amortization date is not greater than the principal amount to be paid on the next amortization date of the financial debt being prepaid.

 

Additionally, the underlying transaction must have been reported in the most-recently filed survey of external assets and liabilities.

 

It will be possible to access to the FX Market for pre-payments of financial debt if a new issuance of securities is made, for refinancing debts which had been granted access to the FX Market by virtue of the FX Regime if such issuance of securities lead to an increase of the average life of the financial debt pre-paid.

 

Payment of financing from financial institutions granted in foreign currency for clients from non-financial private sector

 

Foreign currency denominated financings granted by financial institutions to clients from the non-financial private sector must be converted to pesos at the time of its disbursement.

 

Pre-payment of debt for goods imports

 

Prior approval from the Central Bank will be required to access the FX Market for pre-payment of debt relating to the import of goods and services.

 

This requirement is applicable for access to the FX Market to make payments of matured or amounts which are not yet due for imports of goods with related companies domiciled abroad when it exceeds the equivalent of U.S.$2 million per month per resident customer. All indebtedness outstanding on or prior to August 31, 2019, which matured prior to such date and those that did not have a stipulated expiration date, will be considered “matured debts” and “debts for imports of goods.”

 

In the case of pre-payments of imports, the respective supporting documentation must be submitted and evidence of entry of goods must be demonstrated within 180 calendar days of the access to the FX Market and the recipient of the funds must be the foreign supplier.

 

Payment of services with related companies abroad

 

Prior approval from the Central Bank will be required to access the FX Market for the payment of services with foreign related companies, except for card issuers regarding transfers related to tourism and/or travel.

 

However, a previous approval from the Central Bank will not be necessary to perform the payment of premiums from reinsurance from abroad. In these cases, the transfer abroad will be made on behalf of the foreign beneficiary admitted by the National Insurance Superintendence.

 

Access to the FX Market for trusts created by residents who issue debt securities in order to attend services of capital and interests

 

The entities will grant access to the local FX Market to trusts created by Argentine residents that issue debt instruments in order to pay the amounts of principal and interest owed under their liabilities, if they verify that the issuer has had access to perform the payment.

 

Obligation to repatriate and settle foreign currency through the FX Market to pesos received from disposal of non-financial assets

 

The collection by residents of amounts in foreign currency from the sale of non-financial assets must be repatriated and converted to pesos by means of settlement in the FX Market within 5 calendar days from the date of perception of such funds, either in the country or abroad, or from its income in bank accounts from abroad.

 

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The FX Regime established that non-financial assets encompassed those transactions in which a transfer of economic property rights involved, for example, fishing rights, mining rights, rights over the space, transfer of athletes, patents, author rights, concessions, leasings, trademarks, logos and internet domains.

 

The obligation to enter and settle in the local exchange market the amounts received in Argentina or abroad for the disposal of non-produced non-financial assets only covers those cases in which the counterparty is a non-resident.

 

Exchange, arbitrage and securities transactions

 

Exchange and arbitration transactions may be carried out with customers without prior approval from the Central Bank to the extent that, if implemented as individual transactions going through pesos, they may be conducted without such approval in accordance with the rules of the FX Regime.

 

Entities licensed to operate in foreign exchange transactions will not be able to purchase securities in the secondary market and settle them through the FX Market into foreign currency, nor will they be able to use holdings of their General Exchange Position (Posición General de Cambios) for payments to local suppliers.

 

Transfer of foreign currency from local bank accounts in foreign currency to bank accounts abroad will be performed without restrictions and the exchange and arbitrages that involves the income of foreign currency from unreached operations by the obligation to repatriate in the FX Market will be done without restrictions.

 

The provisions of the Central Bank regarding the applicable dispositions to exchange and arbitration also apply to local securities custodian for funds received in foreign currency for payment of principal and income of foreign currency securities paid in the country, except in the case of funds received in foreign currency for the principal and income services of National Treasury Securities (Bonos del Tesoro Nacional), which are retransferred abroad as part of the payment process at the request of the foreign clearinghouses.

 

Application of the Foreign Exchange Market Criminal Regime

 

The FX Regime states that transactions that do not comply with the exchange regulations set forth by the FX Regime will be subject to the Argentine Criminal Foreign Exchange Regime (Regimen Penal Cambiario).

 

For more information regarding current foreign exchange restrictions and control regulations, you should seek advice from your legal advisors and read the applicable rules mentioned herein, as well as their amendments and complementary regulations, which are available at the website: http://www.infoleg.gob.ar/, or the Central Bank’s website: www.bcra.gob.ar, as applicable. Information contained on these websites is not part of, and shall not be deemed to be incorporated into, this annual report. See also “Item 3. Key Information --Risk Factors --Risks Relating to Argentina --We may be exposed to fluctuations in foreign exchange rates” and see “Item 4. Information on the Company - Legal and Regulatory Framework and Relationship with the Argentine Government - Public Emergency” which includes information regarding the Social Solidarity Law (as defined below) within the framework of the Public Emergency.

 

BCRA reporting regimes

 

In accordance with the provisions of the new exchange regulations, in certain cases it is established as a requirement for access to the FX market, the demonstration by the resident of compliance with the regime of “Survey of External Assets and Liabilities” that was established by the BCRA through Communication “A” 6401, which was later modified by Communication “A” 6795. This Regime is implemented in five integrated sections (“Shares and equity interests “, “Non-negotiable debt instruments”, “Negotiable debt instruments”, “Financial derivatives” and “Land, structures and real estate”). According to the External Assets Survey Regime, reporting obligations are established according to four sample levels as provided below, whose participants will be determined each calendar year based on (i) the sum of the flows of external assets and liabilities during the previous calendar year; and (ii) the balance of holdings of external assets and liabilities at the end of the previous calendar year.

 

1) Any entity or individual for which the sum of the flows of external assets and liabilities during the previous calendar year, or the balance of external assets and liabilities at the end of that calendar year reaches or exceeds the equivalent of U.S.$ 50 million.

 

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    The declarants of this group will present a quarterly advance for each of the quarters of the year and an annual declaration (which may complement, ratify and/or rectify the quarterly advances made);

 

2) Any entity or individual for which the sum of the flows of external assets and liabilities during the previous calendar year, or the balance of external assets and liabilities at the end of that calendar year falls between the equivalent of U.S.$ 10 million and U.S.$ 50 million. This group of persons will only present an annual declaration;

 

3) Any entity or individual for which the sum of the flows of external assets and liabilities during the previous calendar year, or the balance of external assets and liabilities at the end of that calendar year is between the equivalent of U.S.$ 1 million and U.S.$ 10 million. The members of this group must also make a single declaration per year, but a simplified version of the form will be made available to them;

 

4) Any entity or individual that is not included in any of items (1), (2) or (3) above, but had debt with non-residents at the end of the years 2018 or 2019, must make declarations for those years in the simplified format.

 

Likewise, the regulations provide that from the data corresponding to the first quarter of 2020, the declaration of the Survey of External Assets and Liabilities is given by the following guidelines:

 

a. All entities and individuals with external liabilities at the end of any calendar quarter, or who have canceled such liabilities during such quarter, must declare the Survey of External Assets and Liabilities;

 

b. Those filers for whom the balance of external assets and liabilities at the end of each year reaches or exceeds the equivalent of U.S.$ 50 million, must make an annual presentation (which will complement, ratify and/or rectify the quarterly presentations made), which may also be optionally presented by any entity or individual. With respect to the deadlines to file the declarations, the maximum terms to present and validate the declarations will be (i) 45 calendar days from the closing of the reference calendar quarter, for the quarterly returns; and (ii) 180 calendar days from the end of the reference calendar year, for annual filings.

 

The expiration of the annual declarations corresponding to the year 2018 for the subjects included in section 2.d of the Communication, operated on November 14, 2019.

 

Likewise, the expiration of the annual declarations corresponding to the year 2019 for the subjects included in sections 2.b, 2.c and 2.d, of the Communication will operate in June 2020.

 

The loading and validation of the data corresponding to this Regime must be done through an electronic form to be downloaded from the AFIP website.

 

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Risk Factors

 

The risks and uncertainties described below are those known by us as of the date of this report. However, such risks and uncertainties may not be the only ones that we could face. Additional risks and uncertainties that are unknown to us or that we currently think are immaterial also may impair our business operations.

 

Risks Relating to Argentina

 

The Argentine Republic owns 51% of the shares of the Company.

 

The Argentine Republic owns 51% of the shares of the Company (see “Item 4. Information on the Company—Legal and Regulatory Framework and Relationship with the Argentine Government—The Expropriation Law”), and consequently, the federal government is able to determine all matters requiring approval by a majority of shareholders, including the election of a majority of directors. We cannot assure you that the decisions taken by our controlling shareholder or its interests would not differ from your interests as a shareholder, including the pricing policy of all our main products, and thus affect our operational decisions (see “—Risks Relating to Our Business—Our domestic operations are subject to extensive regulation,” and “—Risks Relating to Our Business—Limitations on local pricing in Argentina may adversely affect our results of operations”). In addition, according to the Argentine Constitution, presidential elections take place every four years. Accordingly, changes in government or its policies may occur from time to time. We cannot assure you if and when any such changes may occur, nor can we estimate the impact they may have on our business.

 

Our business is largely dependent upon economic conditions in Argentina.

 

Most of our operations, properties and customers are located in Argentina, and, as a result, our business is to a large extent dependent upon economic conditions prevailing in Argentina. The changes in economic, political and regulatory conditions in Argentina and measures taken by the Argentine government have had and are expected to continue to have a significant impact on us. You should make your own assessment about Argentina and prevailing conditions in the country before taking an investment decision in us.

 

The Argentine economy has experienced significant volatility in past decades, including numerous periods of low or negative growth and high and variable levels of inflation and currency devaluation. No assurances can be given that the Argentine economy will grow or as to when the country will emerge from recession, especially in light of recent events such as the COVID-19 pandemic, which will likely have adverse consequences which cannot be estimated at this time (see “—Risks Relating to Our Business— An outbreak of disease or similar public health threat, such as COVID-19 (coronavirus), could adversely affect our business, financial condition and results of operations”). If economic conditions in Argentina were to slow down, or contract, if inflation were to accelerate further, or if the Argentine government’s measures to attract or retain foreign investment and international financing in the future to incentivize domestic economy activity are unsuccessful, such developments could adversely affect Argentina’s economic growth and in turn affect our financial health and results of operations.

 

Argentina has confronted and continues to confront inflationary pressures. According to inflation data published by the National Statistics Institute (Instituto Nacional de Estadística y Censos) (“INDEC”), in 2019 the consumer price index (“CPI”) and the wholesale price index (“WPI”) increased by 53.8% and 58.5%, respectively. The three-year cumulative inflation rate has exceeded 100% causing Argentina to be considered a hyperinflationary economy. In January, February and March of 2020, the CPI increased by 2.3%, 2.0% and 3.3%, respectively, while the WPI increased by 1.5%, 1.1% and 1.0% in January, February and March, respectively.

 

Additionally, during 2019 certain macroeconomic variables also suffered and continue to face considerable pressure during 2020, which in turn affected the development of the domestic economy. Among other variables, Argentina had increasing interest rates (where the BADLAR averaged 48.9% during 2019), the Argentine peso suffered a 58% devaluation during the December 2018-December 2019 period, preliminary GDP (gross domestic product) growth rate during 2019 decreased by 2.2%, and Argentina’s country risk climbed to 1,743.78 points on December 31, 2019 from 817.27 on December 29, 2018. As of April 20, 2020 Argentina’s country risk amounts to 3,428.60 points.

 

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

 

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

 

stability and competitiveness of the Argentine peso against foreign currencies;

 

competitiveness and efficiency of domestic industries and services;

 

levels of consumer consumption;

 

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foreign and domestic investment and financing;

 

adverse external economic shocks;

 

epidemic or pandemic diseases;

 

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

 

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

 

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

 

the level of unemployment, which affects consumption;

 

political instability; and

 

interest and inflation rates.

 

The Argentine economy is also sensitive to local political developments. On December 10, 2019, a new administration took office and has since been facing singular challenges in macroeconomic matters, such as those relating to the attempt to reduce the inflation rate, reach commercial and fiscal surplus, increase the country’s foreign currency reserves, preserve the value of the Peso, improve the competitiveness of the Argentine industry sector, ensure financial stability, and the outbreak of COVID-19, among others. It is difficult to predict the impact that the measures which the new government adopted or will adopt (including any measures related to the energy sector). This uncertainty could additionally lead to further volatility of Argentine stock market prices including, in particular, companies in the energy sector, like ours, given the degree of state regulation and intervention in this industry. Additionally, we cannot guarantee that the current policies and programs that apply to the oil and gas sector will continue in the future. See “—Risks Relating to Our Business—Limitations on local pricing in Argentina may adversely affect our results of operations”, “—Risks Relating to Our Business—We are exposed to the effects of fluctuations in the prices of oil, gas and refined products” and “—Risks Relating to Our Business— An outbreak of disease or similar public health threat, such as COVID-19 (coronavirus), could adversely affect our business, financial condition and results of operations.”

 

Law No. 27,541, denominated “Law of Social Solidarity and Productive Reactivation in the Framework of Public Emergency” was published in the Official Gazette on December 23, 2019. Pursuant to such law the Argentine government declared a public emergency in terms of economic, financial, fiscal, administrative, pensions, tariffs, energy, health and social matters. Additionally, it also provided for the creation of a five year tax denominated “Tax for an Inclusive and Solidary Argentina (PAIS)”, which corresponds to a 30% surplus charge on the purchase of foreign currency (which also applies to the monthly amounts which can be purchased pursuant to Communication “A” 6815 of the BCRA) regardless of the use of such currency, such as savings, the payment of offshore services, or international travel and transportation. Those measures were taken in order to create the conditions to ensure fiscal and public debt sustainability, promote productive recovery and strengthen the social redistributive nature (see “Item 3. Key Information—Exchange Regulations” and “Item 4 – Information on the Company – Legal and Regulatory Framework and Relationship with the Argentine Government – Public Emergency”). It is difficult to predict the impact that this law or any future measures which the Argentine government may adopt will have on the Argentine economy as a whole and, particularly in our result of operations and financial condition.

 

If the measures adopted by the current administration fail to correct Argentina’s structural inflationary imbalances, the current inflation rate may continue or increase and have an adverse effect on Argentina’s economy and, indirectly, on our business, financial condition and results of operations. Inflation can also lead to an increase in Argentina’s debt and have an adverse effect on Argentina’s ability to service its debt, mainly in the medium and long term when most inflation-indexed debt matures. In addition, weaker fiscal results could have a material adverse effect on the Government’s ability to access long term financing, which, in turn, could adversely affect Argentina’s economy and financial condition and, indirectly, our business, financial condition and results of operations..

 

The current government administration faces the big challenge of achieving a successful renegotiation of Argentina’s external debt with both the IMF and private holders of public debt in order to avoid a potential sovereign default. Argentina’s (and consequently Argentine companies’) access to the international capital markets in the future could be materially affected by the results of these negotiations. For more information, see “— The evolution of the Argentine economy is largely dependent on a successful restructuring of the public debt, including that held by the IMF” and “Item 5. Operating and Financial Review and Prospects—Factors Affecting Our Operations—Macroeconomic conditions.”

 

Argentina’s economy is also vulnerable to adverse developments affecting its principal trading partners. A deterioration of economic conditions in Brazil, Argentina’s main trading partner, and a deterioration of the economies of Argentina’s other major trading partners, such as China or the United States, could have a material adverse impact on Argentina’s balance of trade and adversely affect Argentina’s

 

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economic growth and, consequently, may also adversely affect our financial health and results of operations. Furthermore, a significant devaluation of the currencies of our trading partners or trade competitors may adversely affect the competitiveness of Argentina and consequently adversely affect Argentina’s economic and our financial health and results of operations.

 

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

 

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

 

The evolution of the Argentine economy is largely dependent on a successful restructuring of the public debt, including that held by the IMF.

 

During 2018, the IMF approved a three-year stand-by agreement for Argentina for an amount exceeding of U.S.$ 50 billion. Between 2018 and 2019, the IMF disbursed approximately U.S.$ 44.1 billion. As of the date of this annual report, the Argentine Government has initiated negotiations with the IMF in order to renegotiate the maturities of the agreement, originally planned for the years 2021, 2022 and 2023. We cannot assure what the result of such negotiations will be, nor the impact that they may have on the Argentine economy, on us or on our financial condition and results of operations.

 

During the second half of 2019, the international market began to show signs of doubts as to whether Argentina’s debt would continue to be sustainable. For this reason, country risk indicators reached high levels, which in turn caused a significant decrease in the price of Argentine sovereign bonds. As a consequence, on August 29, 2019, by means of Decree No. 596/2019, the Argentine government announced its intention to conduct a reprofiling in respect of certain of its debt, consisting of (i) the extension of the maturity of short-term bonds subject to Argentine law, only applicable to entities, who would be fully repaid in three installments (15% on the original maturity date, 25% on the three-month anniversary of the original maturity date and the remaining 60% on the six-month anniversary of the original maturity date). Individuals who purchased such securities prior to July 31, 2019 were not affected by such extension, and received full payment on the original maturity date; (ii) delivery of a bill to the Argentine Congress to extend the maturities of other Argentine law governed bonds without the application of any haircuts in principal or interest; (iii) the proposal to extend the maturity term in foreign bonds; and (iv) the beginning of discussions with the IMF in order to extend the original maturity of its loans, to avoid the risk of default for 2020 to 2023.

 

However, on December 20, 2019, the emergency decree (“DNU”) No. 49/2019 was published in the Official Gazette, which extended the maturity dates of short-term bonds denominated in U.S. dollars and subject to Argentine law until August 31, 2020, only valid for entities which acquired such securities prior to July 31, 2019.

 

Regarding the national public debt, and in accordance with the BCRA Monetary Policy Report for the month of February 2020, the Argentine Government is committed to restoring the sustainability of the public debt and for that reason the so-called “Law of Restoration of the Sustainability of External Public Debt”, dated February 5, 2020, was approved by the Argentine Congress, authorizing the Argentine Executive Branch to carry out the liability management transactions, debt exchanges and general restructurings of Argentine sovereign debt securities subject to foreign law, in order to modify their interest and principal amortization schedules. This law also authorized the Ministry of Economy to issue new public securities for purposes of such reprofiling.

 

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On February 11, 2020, Decree No. 141/2020 that postponed payment of the amortization of the “Argentine Dual Currency Bonds” through September 30, 2020 was published in the Official Gazette. However, this decree does not affect individuals who, as of December 20, 2019, held such securities in a principal amount of less than U.S.$ 20,000. By means of Resolution No. 11/2020 issued by the Secretary of Finance and the Secretary of Treasury, the principal amortization of the Argentine Dual Currency Bonds shall be calculated at the applicable exchange rate at such date, as defined by the Resolution No. 7 dated July 11, 2018 issued by the Secretariat of Finance and the Secretariat of Treasury.

 

On March 10, 2020, Decree No. 250/2020 was published in the Official Gazette, which set forth that any liability management transactions to be conducted pursuant to debt exchanges or other means of restructuring of the public securities of the Argentine Republic would be limited to a principal amount of U.S.$ 68,842 million, as this was the principal amount issued under foreign law and outstanding as of February 12, 2020. Further, on March 16, 2020, the Ministry of Economy issued Resolution No. 130/2020, enabling the Argentine republic to file with the Securities and Exchange Commission a registration statement for securities in an amount not to exceed the principal amount cap.

 

On April 6, 2020, Decree No. 346/2020 was published in the Official Gazette, which deferred payments of interest services and principal repayments of the national public debt instrumented by U.S. dollar-denominated securities issued under the law of the Argentine Republic until December 31, 2020. However, such Decree exempts from deferral, among others, the “Natural Gas Program Bonds” issued by Resolution No. 21/2019 of the Ministry of Finance (see “Item 4. Information on the Company—Legal and Regulatory Framework and Relationship with the Argentine Government— MINEM Resolution No. 97/2018”). Additionally, the validity of Decree No. 668/2019 was extended until December 31, 2020, including the Sustainability Guarantee Fund (“Fondo de Garantía de Sustentabilidad”).

 

On April 14, 2020, by virtue of Decree No. 250/2020 and Resolution No. 130/2020, the Argentine Republic submitted the registration for the offer of public securities for a maximum amount of nominal value of U.S.$ 51,653 million (or its equivalent in other currencies).

On April 16, 2020, the Argentine Government announced its offer to holders of public debt, based on the following points: (i) postponement of interest and capital payments for three years; (ii) payment reduction of U.S.$ 3.6 billion of capital and U.S.$ 37.9 billion of interests, which represents a decrease of 5.4% and 62%, respectively, and (iii) an interest rate of 0.5% beginning in 2023, which shall grow year by year to sustainable levels, being 2.33% the average interest rate of the proposal.

On April 21, 2020, through the issuance of Decree No. 391/2020, the Argentine Government formalized the invitation for the restructuring of certain bonds denominated in U.S. dollars and Euros, which are governed by foreign law, consisting of an exchange offer for new bonds for maximum aggregate amounts up to U.S.$ 44.5 billion and 17.6 billion euros (the “Invitation”). In addition, on April 22, 2020 the Argentine Government, through the Ministry of Economy published the prospectus supplement dated April 21, 2020 (the “Prospectus Supplement”) containing the terms and conditions of the Invitation to submit orders to exchange the eligible bonds described in the Prospectus Supplement (the “Eligible Bonds”). Such Invitation will expire at 5:00 p.m. (New York City time) on May 8, 2020, unless extended or earlier terminated by Argentina.

 

On April 22, 2020, Argentina failed to make interest payments under its 2021 Global Bond, 2026 Global Bond and 2046 Global Bond governed by foreign law in an aggregate amount of U.S.$ 503 million; consequently, Argentina now has a 30-day grace period to make such coupon payments in order to prevent an event of default under the applicable indentures.

 

As of the date of issuance of this annual report, we cannot assure the degree of adherence of the holders of public debt to the offer presented by the Argentine Government, nor the impact of such restructuring on the Argentine economy case that Argentina does not reach or if reached such an agreement, the debt relief obtained as a result of the sovereign debt restructuring does not suffice for Argentina to regain the sustainability of its debt, which may affect our financial condition and results of operations. In addition, we cannot assure whether the Argentine government will succeed in its negotiations with both the IMF and private holders of public debt, all of which could affect its ability to implement reforms and public policies in order to boost economic growth, nor the impact that the result of this renegotiation will have on Argentina’s ability to access to the international capital markets (and indirectly on our ability to access such markets), on the Argentine economy, or on our economic and financial condition, or our ability to extend our debt or other conditions that could affect our results of operations or businesses.

  

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

 

According to a Morgan Stanley Capital International (“MSCI”) release, Argentina is considered an “emerging market”. Investing in emerging markets generally carries risks. These risks include political, social and economic instability that may affect Argentina’s economic results which can stem from many factors, including the following:

 

high interest rates;

 

abrupt changes in currency values;

 

high levels of inflation;

 

exchange and capital controls;

 

wage and price controls;

 

regulations to import equipment and other necessities relevant for operations;

 

changes in governmental economic or tax policies; and

 

political and social tensions.

 

In particular, we continue to actively manage our schedule of work, contracting, procurement and supply-chain activities to effectively manage costs. However, price levels for capital and exploratory costs and operating expenses associated with the production of crude oil and natural gas can be subject to external factors beyond our control including, among other things, the general level of inflation, commodity prices and prices charged by the industry’s material and service providers, which can be affected by the volatility of the industry’s own supply and demand for such materials and services. In the past, we and the oil and gas industry generally experienced an increase in certain costs that exceeded the general trend of inflation.

 

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

 

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

 

A lack of a solid and transparent institutional framework for contracts with the Argentine government and its agencies and corruption allegations have affected and continue to affect Argentina. Argentina ranked 66 of 180 in the Transparency International’s 2019 Corruption Perceptions Index and 119 of 190 in the World Bank’s Doing Business 2019 report.

 

As of the date of this annual report, there are various ongoing investigations into allegations of money laundering and corruption being conducted by the Office of the Argentine Federal Prosecutor, including the largest such investigation, known as Los Cuadernos de las Coimas (the “Notebooks Investigation”) which have negatively impacted the Argentine economy and political environment. Depending on the results of these investigations and how long it takes to finalize them, companies involved in the Notebooks Investigation may be subject to, among other consequences, a decrease in their credit ratings, having claims filed against them by investors in their equity and debt securities, and may further experience restrictions in their access to financing through the capital markets, all of which will likely decrease their income. Additionally, as the criminal cases against the companies involved in the Notebooks Investigation move forward,

 

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they may be restricted from rendering services or may face new restrictions due to their customers’ internal policies and procedures. These adverse effects could restrict these companies’ ability to conduct their operating activities and to fulfill their financial obligations. Consequently, the number of suppliers available for our operations may be reduced which could in turn have an adverse effect on our commercial activities and results of operations.

 

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

 

We cannot give any assurance that the implementation of these measures by the Argentine government will be successful in stopping institutional deterioration and corruption, or on the effects that the Notebooks Investigations may have in the Argentine economy.

 

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

 

Financial and securities markets in Argentina, and also the Argentine economy, are influenced by the effects of a global or regional financial crisis and the market conditions in other markets worldwide. Global economy instability such as uncertainty about global trade policies, geopolitical tensions between the United States and Iran, idiosyncratic and social tensions like the ones that happened in Chile, Ecuador and France during 2019, or the recent impact in the global markets related to the oil price war among main producers, Russia and Saudi Arabia, and a pandemic disease such as the coronavirus, could impact the Argentine economy and jeopardize Argentina’s ability to emerge from its current recession. See “—Risks Relating to Our Business—We are exposed to the effects of fluctuations in the prices of oil, gas and refined products” and “—Risks Relating to Our Business— An outbreak of disease or similar public health threat, such as COVID-19 (coronavirus), could adversely affect our business, financial condition and results of operations.” Although economic conditions vary from country to country, investors’ reactions to events occurring in one country sometimes demonstrate a “contagion” effect in which an entire region or class of investment is disfavored by international investors.

 

Consequently, there can be no assurance that the Argentine financial system and securities markets will not continue to be adversely affected by events in developed countries’ economies or events in other emerging markets, which could in turn, adversely affect the Argentine economy and, indirectly, our business, financial condition and results of operations, and the market value of our ADSs.

 

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

 

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

 

However, on September 4, 2018, Decree No. 793/2018 was published, establishing an export duty of 12% on the export for consumption of all merchandise included in tariff positions of the Common Mercosur Nomenclature through December 31, 2020. This export duty may not exceed 4 pesos per U.S. dollar of the taxable value or the official FOB price, as applicable. For merchandise which does not constitute primary sector products, the duty may not exceed 3 pesos per U.S. dollar of the taxable value or the official FOB price, as applicable. Thereafter, pursuant to Decree No. 37/2019 (published in the Official Gazette on December 14, 2019) the aforementioned cap was eliminated and Law No. 27,541 (published in the Official Gazette on December 23, 2019) established a rate of 8%. As of the date of this annual report, the government authorities have not issued regulations on this matter, and the General Directorate of Customs continues to determine export duties in accordance with the rates that were in force prior to the effectiveness of Law No. 27,541. See “Item 4. Information on the Company—Legal and Regulatory Framework and Relationship with the Argentine Government—Market Regulation.”

 

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

 

We may be exposed to fluctuations in foreign exchange rates.

 

Our results of operations are exposed to currency fluctuations, and any devaluation of the peso against the U.S. dollar and other hard currencies may adversely affect our business and results of operations, see “—Risks relating to Our Business —Limitations on local pricing in Argentina may adversely affect our results of operations.” The value of the peso has fluctuated significantly in the past, when the Argentine peso declined year over year approximately 31%, 52%, 22%, 18% and 101% against the U.S. dollar in 2014, 2015, 2016,

 

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2017 and 2018, respectively. As of December 31, 2019, the value of the Argentine Peso amounted to Ps. 59.90 per U.S.$1.00 which represented a year-over-year depreciation of approximately 58%. As of April 20, 2020, the peso was valued at Ps. 65.98 per U.S.$1.00, an increase of approximately 10% compared to December 31, 2019. See “Item 5. Operating and Financial Review and Prospects—Factors Affecting Our Operations—Macroeconomic conditions” for additional information. The main effects of the devaluation of the Argentine peso on our net profit are related to (i) deferred income tax related mainly to fixed assets, which we expect would have a negative effect; (ii) current income tax; (iii) increased depreciation and amortization resulting from the remeasurement in pesos of our fixed and intangible assets; (iv) exchange rate differences as a result of our exposure to the peso, which we expect would have a positive effect due to the fact that our functional currency is the U.S. dollar and (v) higher revenues because domestic prices in Argentina for our main products are principally based on international prices quoted in U.S. dollars (see “—Risks relating to Our Business—We are exposed to the effects of fluctuations in the prices of oil, gas and refined products” and “Item 5. Operating and Financial Review and Prospects—Factors Affecting Our Operations—Macroeconomic conditions”). In addition, regarding our financial position the majority of our debt is denominated in currencies other than the peso; consequently, a devaluation of the peso against such currencies will increase the amount of pesos we need to cope with in the terms of loans.

 

We are unable to predict whether, and to what extent, the value of the peso may further depreciate or appreciate against the U.S. dollar and how any such fluctuations could affect our business.

 

Variations in interest rates and exchange rate on our current and/or future financing arrangements may result in significant increases in our borrowing costs.

 

Under our financing arrangements, we are permitted to borrow funds to finance the purchase of assets, incur capital expenditures, repay other obligations and finance working capital. As of December 31, 2019, approximately 17% of our total debt is sensitive to changes in interest rates, mainly those prevailing in the domestic market. See “Item 11. Quantitative and Qualitative Disclosures about Market Risk—Interest rate exposure.” Consequently, variations in interest rates could result in significant changes in the amount required to cover our debt service obligations and in our interest expense, thus affecting our results and financial condition. Furthermore, the Company usually refinances its debt at maturity, as such, an increase in market interest rates as of such dates could result in an increase in our interest expense for the future. In addition, interest and principal amounts payable pursuant to debt obligations denominated in or indexed to U.S. dollars are subject to variations in the Argentine peso/U.S. dollar exchange rate that could result in a significant increase in peso terms in the amount of the interest and principal payments in respect of such debt obligations.

 

In addition, on July 27, 2017, the Financial Conduct Authority (the “FCA”) announced its intention to phase out LIBOR rates by the end of 2021. As of December 31, 2019, approximately 11% of our total debt accrue interest based on LIBOR rates plus a spread. It is unclear if at that time LIBOR will cease to exist or if new methods of calculating LIBOR will be established such that it continues to exist after 2021. If the method for calculation of LIBOR changes, if LIBOR is no longer available or if lenders have increased costs due to changes in LIBOR, we may be adversely affected by potential increases in interest rates on any borrowings. Further, we may need to renegotiate our credit agreements that utilize LIBOR as a factor in determining the interest rate to replace LIBOR with the new standard that is established. It is not possible to predict the effect that the FCS rules, any changes in the methods to determine LIBOR or any replacement therefor, or any other reforms to LIBOR that may be enacted in the United Kingdom, the European Union or elsewhere. Any such developments may cause LIBOR to perform differently than in the past or cease to exist, which could adversely affect our cost of financing.

 

We could be subject to exchange and capital controls.

 

In the past, Argentina has imposed, and has recently re-imposed, exchange controls and transfer restrictions substantially limiting the ability of companies to retain foreign currency or make payments abroad. Beginning in 2011, additional foreign exchange controls have been imposed that restrict or limit purchases of foreign currency and transfers of foreign currency abroad. Since 2011, oil and gas companies (including YPF), among other entities, were required to repatriate 100% of their foreign currency export receivables.

 

In December 2015, the new administration eliminated certain exchange controls imposed by the previous administration, such as (i) the requirement that foreign currency be deposited and exchanged in Argentina in respect of finance transactions outside Argentina, and (ii) the requirement that 30% of funds in U.S. dollars held in Argentina be frozen pursuant to Decree No. 616/05. Additionally, in May 2017, through BCRA Communication “A” 6244, the BCRA derogated the regulations relating to restrictions on exchange rate transactions, settlement of foreign exchange transactions, and the provisions of Decree No. 616/05, except for those regulations relating to information regimes, surveys or similar informational matters relating to foreign exchange transactions.

 

Pursuant to Decree 609/2019 dated September 1, 2019, the BCRA issued Communication “A” 6770 and amendments by means of which adjustments to the regulations were established.

 

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The impact that the current and any new exchange regulations may have on the Argentine economy or on our operations is uncertain. In addition, we cannot assure you that the exchange regulations will be released or replaced. For more information on exchange restrictions see “Item 3. Key Information—Exchange Regulations.”

 

We cannot assure you that future regulatory changes related to exchange and capital controls will not adversely affect our financial condition or results of operations, our ability to meet obligations denominated in foreign currency or our ability to execute financing and capital expenditure plans.

 

Our access to international capital markets and the market price of our shares are influenced by the perception of risk in Argentina and other emerging economies.

 

According to an MSCI release, Argentina is considered an “emerging market” since May 2019. Economic and market conditions in Argentina and in other emerging market countries, especially those in Latin America, influence the market for securities issued by Argentine companies. Volatility in securities markets in Latin America and in other emerging market, as well as the increase in interest rates in the United States and other developed countries, may have a negative impact on the trading value of our securities and on our ability and the terms on which we are able to access international capital markets. Moreover, regulatory and policy developments in Argentina that occurred in recent years, including the enactment of the Expropriation Law, as well as the litigation of the Argentine government with Holdout Bondholders have led to considerable volatility in the market price of our shares and ADSs. Likewise, the increase in country risk resulting from doubts regarding the sustainability of Argentina’s debt, and the fall in the price of Argentine bonds and shares, and the first measures of the elected government, including renegotiation of the public debt with IMF and private bond holders, could affect our ability to access international capital markets. See “—Our business is largely dependent upon economic conditions in Argentina,” “—The evolution of the Argentine economy is largely dependent on a successful restructuring of the public debt, including that held by the IMF” and “Item 5. Operating and Financial Review and Prospects—Factors Affecting Our Operations—Macroeconomic conditions.” We cannot assure that the perception of risk in Argentina and other emerging markets may not have a material adverse effect on our ability to raise capital, including our ability to refinance our debt at maturity, which would negatively affect our investment plans and consequently our financial condition and results of operations, and also have a negative impact on the trading values of our debt or equity securities. We can give no assurance as to potential adverse impact of the factors discussed above on our financial condition and/or results of operations. See “Item 4. Information on the Company—History and Development of YPF.”

 

Risks Relating to our Business

 

An outbreak of disease or similar public health threat, such as COVID-19 (coronavirus), could adversely affect our business, financial condition and results of operations. 

 

Our operations are subject to risks related to outbreaks of infectious diseases. For example, the recent outbreak of COVID-19 (coronavirus), a virus causing potentially deadly respiratory tract infections, has already and will continue to negatively cause further volatility in commodity markets as well as in the financial markets (see “—We are exposed to the effects of fluctuations in the prices of oil, gas and refined products”) and decreased demand for our products regionally as well as globally and otherwise impact our operations and the operations for our customers, suppliers and other stakeholders. The measures which the Argentine Government adopted and may adopt in the future to protect the general population and fight the disease will likely also adversely affect demand for our products and services. So far, these measures include general restriction in economic activity (with some exceptions), price controls, the prohibition of dismissals without fair cause as well as dismissals and suspensions for reasons of lack or reduction of activity and force majeure for a period of 60 days, general restriction on displacement during certain periods in Argentina, general travel restrictions, suspension of visas, nation-wide lockdowns, closing of public and private institutions, suspension of sporting events, restrictions to the operation of museums and tourist attractions and extension of holidays, among many others, all of which will likely adversely affect demand for diesel and gasoline. Furthermore, the general suspension of activities in the economy could also affect the financial conditions of certain of our clients, thus negatively affecting their capacity to pay their account balances with us and consequently affecting our financial condition. Additionally, due to the Argentine Government’s orders to close Argentine borders and the steep decline in demand for flights, demand for jet fuel has also been (and will likely continue to be) subject to a significant decrease. This reduction in demand for our products could lead us to reduce the processing levels of crude oil in our refineries, thus affecting our operating margins. Any prolonged restrictive measures put in place in order to control an outbreak of a contagious disease or other adverse public health development in any of our targeted markets may have a material and adverse effect on our business operations. The ultimate severity of the Coronavirus outbreak is uncertain at this time and therefore we cannot predict the impact it may have on the world, the Argentine economy, the financial markets, and consequently in our financial condition, our results of operations, production, sales, margins and cash flow from operations, our access to debt markets, covenants compliance, asset impairments, among others. See “Item

 

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5. Operating and Financial Review and Prospects—Factors Affecting Our Operations—Macroeconomic conditions—COVID-19 outbreak.”

 

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

 

Most of our revenue in Argentina is derived from sales of refined products (mainly gasoline and diesel) and, to a lesser extent, natural gas. International prices for oil and oil products are volatile and, since the intention of liberalization of the domestic market at the end of 2017, the prices of our oil products, are strongly influenced by conditions and expectations of world supply and demand and geopolitical tensions, among other factors. Despite our expectation of substantially maintaining a constant relation between our internal prices and those of international markets over time, without considering short-term fluctuations , due to other factors that are also considered in our pricing policy (including, but not limited to, abrupt changes in the exchange rate, or in international prices or potential legal or regulatory limitations that affect the ability of the market to face abrupt changes in the prices of our products) the intended liberalization could not be fully realized during 2018 and 2019. Accordingly, we cannot guarantee that the intended liberalization of oil and fuel prices in the domestic market may finally operate in the future due to various factors such as, domestic demand, macroeconomic and political conditions prevailing in Argentina or potential new regulatory or legal limitations. Volatility and uncertainty in international prices for crude oil and oil products will most likely continue.

 

The international price of crude oil has fluctuated significantly in the past and may continue to do so in the future. After a long decrease in crude oil prices that began in 2014, at the end of 2016 a group known as OPEC+ was formed, which brought the member countries of that organization together with other producers, including Russia, in order to coordinate production cuts that would allow prices to be recovered. The strategy worked and was extended until March 5, 2020, when a proposal for new cuts, based on the increase in Arab production, to meet the challenges posed by COVID-19 (coronavirus) was rejected by Moscow, see “ -- An outbreak of disease or similar public health threat, such as COVID-19 (coronavirus), could adversely affect our business, financial condition and results of operations.” As a result of these actions, the international price of a barrel of Brent fluctuated from 51.3 U.S.$/bbl on March 5, 2020, to 35.3 U.S.$/bbl on March 9, 2020. As of April 13, 2020, despite some recent agreements between major producers to temporarily cut production, the price remains at 20.2 U.S.$/bbl. As a result, the different players in the Argentine oil and gas industry have been proposing to set minimum local crude oil prices, regardless of international prices, with the purpose of protecting the local E&P industry. In that respect, according to certain recent newspaper reports, the Government is potentially working to put in place regulations regarding such minimum prices and certain other matters relating to the oil and gas industry. If these regulations were to enter into effect and the local price of the crude oil is set at values above those that were considered to set the price for our products (mainly gasoline and diesel), or if a new price-freezing period is established for our downstream products, such regulations will have a negative effect on our result of operations, financial conditions and cash flow, see “Item 5. Operating and Financial Review and Prospects --Factors Affecting Our Operations -- Macroeconomic conditions.”

 

If international crude oil prices remain at current levels or continue to drop for an extended period of time (or if prices for certain products do not match cost increases) and such scenario is reflected in the domestic price of oil, which is beyond our control, this could negatively affect the economic viability of our drilling projects and also our ability to comply with our concessions and exploration permits investment commitments (see Argentine oil and gas production concessions and exploration permits are subject to certain conditions and may be cancelled or not renewed”). These reductions could lead to changes to our development plans, investment reduction, lack of approval of investment projects by our partners in the JVs, which could lead to the loss of proved developed reserves and proved undeveloped reserves and could also adversely affect our ability to improve our hydrocarbon recovery rates, find new reserves, develop unconventional resources and carry out certain of our other capital expenditure plans. In turn, these changes in conditions could have an adverse effect on our financial condition and results of operations. In addition, if these current international prices are reflected in the domestic prices of our refined products, our ability to generate cash and our results of operations could be adversely affected. 

With respect to our pricing policy of fuels see “—Limitations on local pricing in Argentina may adversely affect our results of operations.”

 

In terms of investments, we budget capital expenditures related to exploration, development, refining and distribution activities by considering, among other things, current and expected local and international market prices for our hydrocarbon products.

 

Furthermore, we may be required to further write down the carrying value of our properties if estimated oil and gas prices decline or if we have substantial downward adjustments to our estimated reserves, increases in our operating costs, increases in the discount rate, among others. See additionally “Item 5. Operating and Financial Review and Prospects—Critical Accounting Policies” for information regarding our sensitivity analysis related to impairment. In addition, if a reduction in our capital expenditures materializes, including the capital expenditures of our domestic competitors, it would likely have a negative impact on the number of active drilling rigs, workovers and pulling equipment in Argentina, alongside related services, thus affecting the number of active workers in the industry. We are unable to predict whether, and to what extent, the potential consequences of such measures could affect our business, have an impact on our production and consequently affect our financial condition and results of operations.

 

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Our domestic operations are subject to extensive regulation.

 

The Argentine oil and gas industry is subject to government regulation and control. As a result, our business is to a large extent dependent upon regulatory and political conditions prevailing in Argentina and our results of operations may be adversely affected by regulatory and political changes in Argentina. (see “Limitations on local pricing in Argentina may adversely affect our results of operations” and “We are exposed to the effects of fluctuations in the prices of oil, gas and refined products”). Although we expect to substantially maintain a constant relation between our internal prices and those of international markets over time, without considering short-term fluctuations, we may face risks and challenges relating to government regulation and control of the energy sector, including those set forth below and elsewhere in these risk factors:

 

limitations on our ability to increase local prices or to reflect the effects of higher domestic taxes, increases in production costs or increases in international prices of crude oil and other hydrocarbon fuels and exchange rate fluctuations on our domestic prices. See “—Limitations on local pricing in Argentina may adversely affect our results of operations;"

 

government actions may also affect the prices of crude oil, natural gas, oil products and chemicals, such as, for example, if a government were to ban diesel automobiles from entering a city or provide tax deductions for the purchase of renewable automobiles;

 

new export duties, similar taxes or regulations on imports;

 

limitations on hydrocarbon import or export volumes, driven mainly by the requirement to satisfy domestic demand;

 

in connection with the Argentine government’s policy to provide absolute priority to domestic demand, regulatory orders to supply natural gas and other hydrocarbon products to the domestic retail market in excess of previously contracted amounts, or at prices lower than those related to import parity or those we may obtain if regulated margins were not being imposed or suggested. See “Item 4. Information on the Company—Legal and Regulatory Framework and Relationship with the Argentine Government—Market Regulation—Natural gas;"

 

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

 

legislation and regulatory initiatives relating to hydraulic stimulation and other drilling activities for unconventional oil and gas hydrocarbons, which could increase our cost of doing business or cause delays and adversely affect our operations;

 

restrictions on imports of products, including those related to the authorization of transfer of funds for foreign payments, which could affect our ability to meet our delivery commitments or growth plans, as the case may be;

 

the implementation or imposition of stricter quality requirements for petroleum products in Argentina; and

 

restrictions for dismissal for a period of time or compensation greater than that established by the employment contract law, which could increase our cost of doing business.

 

In past years, the Argentine government has made certain changes in regulations and policies governing the energy sector to give absolute priority to domestic supply at stable prices in order to sustain economic recovery. As a result of the above-mentioned changes, for example, on days during which a gas shortage occurs (mainly in winter), 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 and could be interrupted for priority to be given to residential consumers. The Expropriation Law has declared achieving self-sufficiency in the supply of hydrocarbons as well as in the exploitation, industrialization, transportation and sale of hydrocarbons, a national public interest and a priority for Argentina. In addition, its stated goal is to guarantee socially equitable economic development, the creation of jobs, the increase of the competitiveness of various economic sectors and the equitable and sustainable growth of the Argentine provinces and regions. See “Item 4. Information on the Company—Legal and Regulatory Framework and

 

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

 

We cannot assure you that changes in applicable laws and regulations, or adverse judicial or administrative interpretations of such laws and regulations, will not adversely affect our results of operations. See “Item 4. Information on the Company—Legal and Regulatory Framework and Relationship with the Argentine Government.”

 

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

 

Due to regulatory, economic and government policy factors, our domestic gasoline, diesel, natural gas and other fuel prices may differ substantially from prevailing international and regional market prices for such products, and our ability to increase prices in connection with international price increases or domestic cost increases, including those resulting from the peso devaluation, may limited from time to time. During 2017 we entered into a convergence process towards international prices that finally occurred in October 2017, when prices were liberalized, see “Item 5. Operating and Financial Review and Prospects—Factors Affecting Our Operations—Macroeconomic conditions.”

 

Our pricing policy for fuels contemplates several factors such as international crude oil prices and, refining spreads, processing and distribution costs, biofuel prices, exchange rates, local demand and supply, competition, inventories, withholding tax on exports, local taxation, and domestic margins for our products, among others. Despite our expectation of substantially maintaining a constant relation between our internal prices and those of international markets over time, without considering short-term fluctuations, we cannot assure you that other factors that are also considered in our pricing policy (including, but not limited to, abrupt changes in the exchange rate, or in international prices or potential legal or regulatory limitations that affect the ability of the market to face abrupt changes in the prices of our products), will not have an adverse impact on our ability to do so in the short term. See “—We are exposed to the effects of fluctuations in the prices of oil, gas and refined products” and “Item 5. Operating and Financial Review and Prospects—Factors Affecting Our Operations—Macroeconomic conditions.”

 

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

 

Regarding natural gas markets, revenues we obtain as a result of selling natural gas in Argentina are subject to government regulations and could be negatively affected, particularly considering the evolution of gas prices for residential consumers, which in turn are still subject to subsidies, and the evolution of sale price to electric generation plants, see “Item 4. Information on the Company --Gas and Power --Delivery Commitments.” In addition, since 2018 our revenues have been affected by the oversupply in the natural gas market during the periods between September and April (the “Off-Peak Period”). This situation, in addition to CAMMESA’s bidding processes, which promoted a strong competition in the power generation plants demand, had a sensitive effect on the demand for the remaining segments, generating a lower quantity of firm commitments and/or contracts for shorter terms. Most sales agreements on a firm basis during 2019 were renewed at lower prices due to the aggressive competition.

 

The prices and volumes that we are able to obtain for our hydrocarbon products affect the viability of investments in new exploration, development and refining and, as a result, the timing and amount of our projected capital expenditures for such purposes. We budget capital expenditures by taking into account, among other things, market prices for our hydrocarbon products. For additional information on domestic pricing for our products, see “Item 4. Information on the Company—Legal and Regulatory Framework and Relationship with the Argentine Government—Market Regulation.”

 

A significant percentage of our cash flow from operations is derived from counterparties that are governmental entities.

 

In the normal course of business and considering that we are the primary oil and gas company in Argentina, our portfolio of clients and suppliers includes both private sector and governmental entities. All material transactions and balances with related parties as of December 31, 2019 are set forth in Note 35 to the Audited Consolidated Financial Statements, including, among others, accounts receivables with SGE (related to the Natural Gas Stimulus Programs), Ministry of Transport (related to compensation for providing gas oil to public transport at a differential price) and Aerolíneas Argentinas (related to the provision of jet fuel).

 

As of December 31, 2019, the accounts receivable balance corresponding to the Natural Gas Additional Injection Stimulus Program reflects 18 installments of accrued and not yet due payments, in accordance with Resolution No. 97/2018, representing Ps. 26.2 billion. As of the date of this annual report, we have received 3 more installments of Ps. 4.7 billion under such Resolution. See “Item 4.

 

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Information on the Company—Legal and Regulatory Framework and Relationship with the Argentine Government— MINEM Resolution No. 97/2018.”

 

As of December 31, 2019, the accounts receivable corresponding to the Stimulus Program for Investments in Developments of Natural Gas Production from Unconventional Reservoirs for accrued and unpaid periods amounted to Ps. 3.4 billion.

 

Additionally, because of the variation in the exchange rate in 2018, natural gas producers and distributors began a process of renegotiation of the specific agreements signed pursuant to the Terms and Conditions for the Provision of Natural Gas to Gas Distributors through Networks (the “Terms and Conditions”) (see “Item 4. Information on the Company—Gas and Power—Delivery commitments—Natural gas supply contracts)”, where prices were denominated in dollars. The renegotiation process included two main aspects: i) payments of the debts arising from the differences between the exchange rate paid by the distributors and the exchange rate which had been originally agreed (for the period between April and September 2018), and ii) the applicable price for gas during the period between October and December 2018. On November 16, 2018, through Decree No. 1053/18 the Argentine Government assumed on an exceptional basis, the payment of the daily differences which accrued monthly between the price of gas purchased by the distributors and the valid tariffs during the period between April 1, 2018, and March 31, 2019, exclusively arising from exchange rate variations and corresponding to the natural gas volumes delivered in that same period. The conditions are as follows:

 

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

 

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

 

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

 

As of December 31, 2019, the accounts receivable balance corresponding to the payments of the daily differences reflects 29 installments, in accordance with Resolution No. 1053/2018, representing Ps. 7.6 billion. As of December 31, 2019, two installments were not paid according to the original schedule. As of the date of this annual report, we have not received additional payments related to Resolution No. 1053/2018. See “Item 4. Information on the Company—Legal and Regulatory Framework and Relationship with the Argentine Government—Tariff renegotiation.”

 

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

 

We are subject to direct and indirect import and export restrictions, which have affected our results of operations and caused us to declare force majeure under certain of our export contracts.

 

The Argentine Hydrocarbons Law No. 17,319, allows for hydrocarbon exports as long as they are not required for the domestic market and are sold at reasonable prices. In the case of natural gas, Law No. 24,076 and related regulations require that the needs of the domestic market be taken into account when authorizing long-term natural gas exports.

 

In the past the Argentine authorities have adopted a number of measures that have resulted in restrictions on exports of natural gas from Argentina. Due to the foregoing, we have been obliged to sell a part of our natural gas production previously destined for the export market in the local Argentine market and have not been able to meet our contractual gas export commitments in whole or, in some cases, in part, leading to disputes with our export clients and forcing us to declare force majeure under our export sales agreements. We believe that the measures mentioned above constitute force majeure events, although no assurance can be given that this position will prevail.

 

See “Item 4. Information on the Company—Gas and Power—Delivery commitments—Natural gas supply contracts,” “Item 4. Information on the Company—Gas and Power—The Argentine natural gas market,” and “Item 8. Financial Information—Legal Proceedings.”

 

Crude oil exports, as well as the export of most of our hydrocarbon products, currently requires prior registration from the SGE pursuant to the regime established under S.E. Resolution No. 241-E/17, as amended. Oil companies seeking to export crude oil, LNG LPG or diesel must first complete the registration process stated in the above mentioned resolution .

 

In addition, on March 21, 2017, Decree No. 192/2017 was published in the Official Gazette of the Republic of Argentina (the “Official Gazette”), which created the “Oil and its Byproducts Import Operations Registry” (the “Registry”) and set forth that the MINEM (through

 

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

 

On August 22, 2018, the former Ministry of Energy and Mining issued Resolution No.104/2018, later modified by Resolutions No. 9/2018 and No. 417/2019 of the SGE, which established a procedure to obtain authorizations to export natural gas.

 

As of the date of this annual report, imports of natural gas and LNG are not restricted. Likewise, Disposition N° 3/2020 of the Under Secretariat of Policy and Commercial Management of the Ministry of Productive Development added certain goods under the Non- Automatic Importation Licenses regime, including but not limited to crude oil, gasoline, diesel and certain petrochemical products .

 

For more information, see “Item 4. Information on the Company— Legal and Regulatory Framework and Relationship with the Argentine Government—Natural gas export administration and domestic supply priorities,” “Item 4. Information on the Company— Legal and Regulatory Framework and Relationship with the Argentine Government— Market Regulation” and “Item 4. Information on the Company— Legal and Regulatory Framework and Relationship with the Argentine Government—Automatic and Non-Automatic Import Licenses.”

 

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

 

Our reserves and production are likely to decline.

 

Most of our existing oil and gas producing fields in Argentina are mature and, as a result, our reserves and production are likely to decline as reserves are depleted. Our production decreased in 2019 by 3.0% compared to 2018 and our reserves replacement ratio (increases in reserves in the year, net divided by the production of the year) was 96% in 2019 (136% corresponds to liquids and 53% corresponds to gas), compared to 178% in 2018 (262% corresponds to liquids and 93% corresponds to gas).

 

We face certain challenges in order to replace our proved reserves with other categories of hydrocarbons. However, the continuous comprehensive technical review of our oil and gas fields allows us to identify opportunities to rejuvenate mature fields and optimize new field developments in Argentine basins with the aim of achieving results similar to those achieved by mature fields in other regions of the world (which have achieved substantially higher recovery factors with the application of new technology). Additionally, we have been completing the renewal or extension of most of our concessions, allowing us to develop certain strategic projects related to water-flooding, enhanced oil recovery and unconventional resources, which represent an important opportunity not only for us but also for Argentina. We expect that unconventional development will require higher investment in future years, principally in connection with the Vaca Muerta formation. These investments are expected to yield economies of scale, de-risk undeveloped acreage and to significantly increase recovery rates from this resource play. Other resource plays, unconventional prospects, exist in Argentina and have positioned the country amongst the most attractive in terms of worldwide unconventional resource potential. Nevertheless, the financial viability of these investments and reserve recovery efforts will generally depend on the prevailing economic and regulatory conditions in Argentina, as well as the market prices of hydrocarbon products, and are also subject to material risks inherent to the oil and gas industry. See “—Our business plan includes future drilling activities for unconventional oil and gas reserves, such as shale oil and gas extraction, and if we are unable to successfully acquire and use the necessary new technologies and other support as well as obtain financing and venture partners, our business may be adversely affected.”

 

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Our oil and natural gas reserves are estimates.

 

Our oil and gas proved reserves are estimated using geological and engineering data to determine with reasonable certainty whether the crude oil or natural gas in known reservoirs is recoverable under existing economic and operating conditions. The accuracy of proved reserve estimates depends on a number of factors, assumptions and variables, some of which are beyond our control. Factors susceptible to our control include drilling, testing and production after the date of the estimates, which may require substantial revisions to reserves estimates; the quality of available geological, technical and economic data used by us and our interpretation thereof; the production performance of our reservoirs and our recovery rates, both of which depend in significant part on available technologies as well as our ability to implement such technologies and the relevant know-how; the selection of third parties with which we enter into business; and the accuracy of our estimates of initial hydrocarbons in place, which may prove to be incorrect or require substantial revisions. Factors mainly beyond our control include changes in prevailing oil and natural gas prices, which could have an effect on the quantities of our proved reserves (since the estimates of reserves are calculated under existing economic conditions when such estimates are made); changes in the prevailing tax rules, other government regulations and contractual conditions after the date estimates are made (which could make reserves no longer economically viable to exploit); and certain actions of third parties, including the operators of fields in which we have an interest.

 

Information on net proved reserves as of December 31, 2019, 2018 and 2017 was calculated in accordance with SEC rules and FASB’s ASC 932, as amended. Accordingly, crude oil prices used to determine reserves were calculated each month, for crude oils of different quality produced by us.

 

As previously discussed, we had come from domestic prices for crude oil higher than international benchmark prices, however during 2017 we entered into a convergence process towards international prices that finally occurred in October 2017, when prices were liberalized. See “Item 5. Operating and Financial Review and Prospects—Factors Affecting Our Operations—Macroeconomic conditions.” Despite our expectation of substantially maintaining a constant relation between our internal prices and those of international markets over time, without considering short-term fluctuations, we cannot assure you that other factors that are also considered in our pricing policy (including, but not limited to, abrupt changes in the exchange rate, or in international prices or potential legal or regulatory limitations that affect the ability of the market to face abrupt changes in the prices of our products), will not have an adverse impact on our ability to do so in the short term. As a result, for calculations of our net proved reserves as of December 31, 2019, the Company considered the realized prices for crude oil in the domestic market taking into account the effect of export taxes as in effect as of each of the corresponding years (until 2021, in accordance with Decree No. 847/2019). For the years beyond the mentioned periods, the Company considered the unweighted average price of the first-day-of-the-month for each month within the twelve-month period ended December 31, 2019, which refers to the Brent prices adjusted by each different quality produced by the Company. In connection with natural gas prices used for estimation of reserves, since there are no benchmark markets for natural gas prices available in Argentina, the Company considered the realized prices in the domestic market according to the SEC and FASB’s ASC 932 rules.

 

The international price of crude oil has fluctuated significantly in the past. If these prices decrease significantly in the future or if domestic prices are set lower than in internationals markets, our future calculations of estimated proved reserves would be based on lower prices. This could result in a removal of non-economic reserves from our proved reserves in future periods. Assuming all other factors remain constant, if commodity reference prices for crude oil and natural gas used in our year-end reserve estimates were decreased by 10% each one, our total proved reserves as of December 31, 2019 would decrease by approximately 4% and less than 1%, respectively. Furthermore, assuming all other factors remain constant, if costs used in our year-end reserve estimates were increased by 10% for crude oil and natural gas, our total proved reserves as of December 31, 2019 would decrease by approximately 4%. However, if we combine the 3 mentioned effects, our total proved reserves as of December 31, 2019 would decrease by approximately 9%. Furthermore, if commodity reference prices used in our year-end reserve estimates were decreased for crude oil to match a price of approximately 30 U.S.$/bbl for Brent equivalent quality, according to the current price environment, our proved developed reserves as of December 31, 2019 would decrease by approximately 35%. Regarding our proved undeveloped reserves, in case of this substantial variation in oil price, they should be subject of re-evaluation of projects, as a new long-term curve may be consolidated, also because of the impact of the current COVID-19 outbreak. See “—We are exposed to the effects of fluctuations in the prices of oil, gas and refined products” and “-An outbreak of disease or similar public health threat, such as COVID-19 (coronavirus), could adversely affect our business, financial condition and results of operations”. In addition, as a result of the prices used to calculate the present value of future net revenues from our proved reserves, in accordance with SEC rules, which are similar to the calculation of proved reserves described above, the present value of future net revenues from our proved reserves will not necessarily be the same as the current market value of our estimated crude oil and natural gas reserves.

 

As a result of the foregoing, measures of reserves are not precise and are subject to revision. Any downward revision in our estimated quantities of proved reserves could adversely impact our financial results by leading to increased depreciation, depletion and amortization charges or impairment, which could reduce earnings and shareholders’ equity.

 

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

 

Oil and gas exploration and production activities are subject to particular economic and industry-specific operational risks, some of which are beyond our control, such as production, equipment and transportation risks, as well as natural hazards and other uncertainties, including those relating to the physical characteristics of onshore and offshore oil or natural gas fields. Our operations may be curtailed, delayed or cancelled due to bad weather conditions, mechanical difficulties, shortages or delays in the delivery of equipment, compliance with governmental requirements (including those related to the COVID-19 or other similar diseases), fire, explosions, blow-outs, pipe failure, abnormally pressured formations, and environmental hazards, such as oil spills, gas leaks, ruptures or discharges of toxic gases. In addition, we operate in politically sensitive areas where the native population has interests that from time to time may conflict with our production or development objectives. If these risks materialize, we may suffer substantial operational losses and disruptions to our operations and harm to our reputation. Additionally, if any operational incident occurs that affects local communities and ethnic communities in nearby areas, we will need to incur in additional costs and expenses in order to return affected areas to normality and to compensate for any damages we may cause. These additional costs may have a negative impact on the profitability of the projects we may decide to undertake. Drilling may be unprofitable, not only with respect to dry wells, but also with respect to wells that are productive but do not produce sufficient revenues to return a profit after drilling, operating and other costs are taken into account.

 

Furthermore, historically our results have been subject to seasonal fluctuations of demand during the year, in the case of natural gas, particularly as a result of increased demand during the colder winter months. In addition, since 2018 our revenues have been affected, by the oversupply in the natural gas market during the Off-Peak Period. This situation, in addition to CAMMESA’s bidding processes, which promoted a strong competition in the power generation plants demand, had a sensitive effect on the demand for the remaining segments, generating a lower quantity of firm commitments and/or contracts for shorter terms. Most sales agreements on a firm basis during 2019 were renewed at lower prices due to the aggressive competition.

 

See “Item 5. Operating and Financial Review and Prospects—Factors Affecting Our Operations—Seasonality” and “Item 4. Information on the Company—Legal and Regulatory Framework and Relationship with the Argentine Government—Market Regulation—Natural Gas—Tariffs.”

 

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

 

Our acquisition of exploratory or productive acreage and crude oil and natural gas reserves is subject to heavy competition.

 

We face intense competition in bidding for crude oil and natural gas production areas, especially those areas with the most attractive crude oil and natural gas reserves or prospects. As a result, the conditions under which we would be able to access new exploratory or productive areas could be adversely affected.

 

Our business plan includes future drilling activities for unconventional oil and gas reserves, such as shale oil and gas extraction, and if we are unable to successfully acquire and use the necessary new technologies and other support as well as obtain financing and venture partners, our business may be adversely affected.

 

Our ability to execute and carry out our business plan depends upon our ability to obtain financing at a reasonable cost and on reasonable terms. We have identified drilling locations and prospects for future drilling opportunities of unconventional oil and gas reserves, such as the shale oil and gas in the Vaca Muerta formation. These drilling locations and prospects represent a part of our future drilling plans. Our ability to drill and develop these locations depends on a number of factors, including seasonal conditions, regulatory approvals, issuance of permits and licenses by governmental agencies, negotiation of agreements with third parties, commodity prices, project approvals and funding by joint-venture partners, costs, access to and availability of equipment, services and personnel and drilling results. In addition, the drilling and exploitation of unconventional oil and gas reserves depends on our ability to acquire the necessary technology and hire personnel and other support needed for extraction or obtain financing and venture partners to develop such activities. Furthermore, in order to implement our business plan, including the development of our oil and natural gas exploration activities and the development of refining capacity sufficient to process increasing production volumes, we will need to raise significant amounts of debt capital in the financial and capital markets. We cannot guarantee that we will be able to obtain the necessary financing or obtain financing in the international or local financial markets at reasonable cost and on reasonable terms to implement our new business plan or that we would be able to successfully develop our oil and natural gas reserves and resources (mainly those related to our unconventional oil and gas business plan), see “—Uncertainty and illiquidity in credit and capital markets can impair our ability to obtain credit and financing on acceptable terms.” Because of these uncertainties, we cannot give any assurance as to the timing of these activities or that they will

 

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ultimately result in the realization of proved reserves or meet our expectations for success, which could adversely affect our production levels, financial condition and results of operations.

 

We may not have sufficient insurance to cover all the operating hazards to which we are subject.

 

As discussed under “—Oil and gas activities are subject to significant economic, social, environmental and operational risks and to seasonal fluctuation of demand” and “—We may incur significant costs and liabilities related to environmental, health and safety matters,” our exploration and production operations are subject to extensive economic, operational, regulatory and legal risks. We maintain insurance covering us against certain risks inherent in the oil and gas industry in line with industry practice, including loss of or damage to property and equipment, control-of well incidents, loss of production or income incidents, removal of debris, sudden and accidental seepage pollution, contamination and clean up and third-party liability claims, including personal injury and loss of life, among other business risks. However, our insurance coverage is subject to deductibles and limits that in certain cases may be materially exceeded by our liabilities. In addition, certain of our insurance policies contain exclusions that could leave us with limited coverage in certain events. See “Item 4. Information on the Company—Insurance” and “—An outbreak of disease or similar public health threat, such as COVID-19 (coronavirus), could adversely affect our business, financial condition and results of operations.” In addition, we may not be able to maintain adequate insurance at rates or on terms that we consider reasonable or acceptable or be able to obtain insurance against certain risks that materialize in the future. If we experience an incident against which we are not insured, or the costs of which materially exceed our coverage, it could have a material adverse effect on our business, financial condition and results of operations.

 

Argentine oil and gas production concessions and exploration permits are subject to certain conditions and may be cancelled or not renewed.

 

As modified by Law No. 27,007, the Hydrocarbons Law provides for oil and gas concessions to remain in effect for 25 years as from the date of their award, 35 years for unconventional concessions and 30 years for offshore concessions. It further provides that concession terms may be extended for periods of up to 10 years each. The authority to extend the terms of current and new permits, concessions and contracts has been vested in the governments of the provinces in which the relevant area is located (and the federal government in respect of offshore areas beyond 12 nautical miles). In order to be eligible for an extension of a concession, under the modifications of Law No. 27,007, concessionaires must (i) have complied with their obligations, (ii) be producing hydrocarbons in the concession under consideration and (iii) submit an investment plan for the development of such areas as requested by the competent authorities up to a year prior to the termination of each term of the concession.

 

Our extension of concessions includes, among others, certain level of investment and activity commitment in certain periods. Non-compliance with the obligations and standards set out under the Hydrocarbons Law or agreements with the competent authorities, as applicable, may also result in the imposition of fines and in the case of material breaches, following the expiration of applicable cure periods, the revocation of the concession or permit. We cannot assure you that in the future, as a result of relevant different conditions prevailing in the domestic and/or international oil and gas market at different times, may derive in a non-compliance with certain commitments with provinces, thus resulting in the imposition of fines or expiration of certain concessions or permits.

 

In addition, we cannot provide assurances that any of our concessions will be extended as a result of the consideration by the relevant authorities of the investment plans we would submit in the future for the development of the areas as of the date of requesting the extension periods for our relevant areas, or other requirements will not be imposed on us in order to obtain extensions as of the date of expiration. Additional royalty payments of 3%, up to a maximum of 18%, are provided for in extensions under Law No. 27,007. The termination of, or failure to obtain the extension of, a concession or permit, or its revocation, could have a material adverse effect on our business and results of operations.

 

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

 

Operations in the oil and gas industry in which we participate, including those related to our mining and use of sand for purposes of our oil and gas operations, are subject to a wide range of environmental, health and safety laws and regulations in the countries in which we operate. These laws and regulations have a substantial impact on our operations and those of our subsidiaries and could result in material adverse effects on our financial position and results of operation. See “Item 4. Information on the Company—Insurance.” A number of events related to environmental, health and safety matters, including changes in applicable laws and regulations, adverse judicial or administrative interpretations of such laws and regulations, changes in enforcement policy, the occurrence of new litigation or development of pending litigation, and the development of information concerning these matters, could result in new or increased liabilities, capital expenditures, reserves, losses and other impacts that could have a material adverse effect on our financial condition and results of operations. For instance, during 2019, we had a well control incident in one exploratory gas well under production in the Loma La Lata field. After deploying our contingency plan, we managed to control the well and secure the location (see “Item 4. Upstream overview—Exploration & Production Activity in Argentina—Centro Region—Loma La Lata—Sierra Barrosa Block.”) In addition, the Company’s sand mining

 

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operations and hydraulic stimulation may result in silica-related health issues and litigation that could have a material adverse effect on the Company in the future. See “Item 8. Financial Information—Legal Proceedings” and “Item 4. Information on the Company—Legal and Regulatory Framework and Relationship with the Argentine Government—Argentine Environmental Regulations.”

 

Environmental, health and safety regulation and jurisprudence in Argentina is developing at a rapid pace and no assurance can be provided that such developments will not increase our cost of doing business and liabilities, including with respect to drilling and exploitation of our unconventional oil and gas reserves. In addition, due to concern over the risk of climate change, a number of countries have adopted, or are considering the adoption of, new regulatory requirements to reduce greenhouse gas emissions, such as carbon taxes, increased efficiency standards or the adoption of cap and trade regimes. Argentina recently issued new rules which began to phase-in more stringent regulations to lower the amount of sulfur contained in diesel and gasoline fuels that will result in an increase in our investments and relative costs for such production in 2020 and following years, thus potentially affecting our results of operations depending on the future prices of fuels. During 2019, the Argentine Congress passed Law No. 27,520 - Minimal Standards on Global Climate Change Adaptation and Mitigation - focused on “implementing policies, strategies, actions, programs and projects that can prevent, mitigate or minimize the damages or impacts associated with climate change, but explore and take advantage of new opportunities for climate events as well.” Furthermore, if additional requirements were adopted in Argentina, these requirements could make our products more expensive as well as increase our compliance costs, such as for monitoring or reducing emissions, and may also shift hydrocarbon demand toward relatively lower-carbon sources such as renewable energies.

 

The risks associated with climate change could also make it difficult for us to access capital due to public image issues with investors; changes in the consumer profile, with reduced consumption of fossil fuels; and energy transitions in the world economy towards a lower carbon matrix with the insertion of substitute products for fossil fuels and the increasing use of electricity for urban mobility. These factors may have a negative impact on the demand for our products and services and may jeopardize or even impair the implementation and operation of our businesses, adversely impacting our operating and financial results and limiting our growth opportunities.

 

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

 

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

 

As discussed in Note 31 to the Audited Consolidated Financial Statements, on June 17, 2016, Maxus Energy Corporation, Tierra Solutions Inc., Maxus International Energy Company, Maxus (US) Exploration Company and Gateway Coal Company (collectively, the “Maxus Entities”), subsidiaries of YPF Holdings, Inc., filed for reorganization proceedings in Wilmington, Delaware under Chapter 11 of the U.S. Bankruptcy Code. In conjunction with those proceedings, the Maxus Entities entered into an agreement with YPF along with its subsidiaries YPF Holdings Inc., CLH Holdings Inc., YPF International S.A. and YPF Services USA Corp (collectively, the “YPF Entities”) to settle any and all claims held by Maxus against the YPF Entities, including any alter ego claims, all of which claims the YPF Entities believe are without merit, and to release the YPF entities of any and all claims held by the Maxus Entities (the “Agreement”).

 

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

 

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

 

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

 

On May 22, 2017, the Bankruptcy Court of the District of Delaware issued an order confirming the Alternative Plan submitted by the Creditors’ Committee and the Maxus Entities. The effective date of the Alternative Plan was July 14, 2017, as the conditions set forth in

 

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Article XII.B of the Alternative Plan were met. On July 14, 2017, the Maxus Energy Corporation Liquidating Trust (the “Liquidating Trust”) was created.

 

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

 

On October 19, 2018, the Company, together with the other companies of the group that are part of the Claim, filed a motion requesting dismissal of the Claim (“Motion to Dismiss”). On January 22, 2019, the hearing regarding the Motion to Dismiss was held in the Bankruptcy Court.

On February 15, 2019, the Bankruptcy Court ordered the dismissal of the Motions to Dismiss, which the Company, together with the other companies of the group that are part of the Claim, appealed on March 1, 2019.

 

On September 12, 2019, the District Court denied the appeal to the rejection of the Motion to Dismiss filed on October 19, 2018 by YPF together with the other companies of the group that are part of the Claim.

On March 23, 2020, the Bankruptcy Court of the District of Delaware denied the motion to withdraw the reference previously filed by Repsol and its affiliates that are part of the Claim, as well as the one filed by YPF together with the other companies of the group that are part of the Claim.

 

On March 30, 2020, each party filed a letter to the Bankruptcy Court explaining outstanding issues related to the discovery process, and on April 10, 2020, the parties filed their answers to the letters filed on March 30, 2020.

 

For further information regarding the procedural details of this case see Note 31.a.3) of the Audited Consolidated Financial Statements.

 

Depending on the final outcome of these proceedings, and in particular the alter ego claims, our financial condition and results of operation could be materially and adversely affected. See “Item 8. Financial Information—Legal Proceedings” and “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources— Covenants in our indebtedness”.

 

We face risks relating to certain legal proceedings.

 

As described under “Item 8. Financial Information—Legal Proceedings,” we are party to a number of labor, commercial, civil, tax, criminal, environmental and administrative proceedings that, either alone or in combination with other proceedings, could, if resolved in whole or in part adversely to us, result in the imposition of material costs, fines, judgments or other losses. While we believe that we have provisioned such risks appropriately based on the opinions and advice of our external legal advisors and in accordance with applicable accounting rules, certain loss contingencies, particularly those relating to environmental matters, are subject to change as new information develops and it is possible that losses resulting from such risks, if proceedings are decided in whole or in part adversely to us, could significantly exceed any accruals we have provided.

 

In addition, we may be subject to liabilities related to labor, commercial, civil, tax, criminal or environmental contingencies undisclosed to us when we acquire new businesses, in which case our business, financial condition and results of operation may be materially and adversely affected. See additionally “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources— Covenants in our indebtedness”.

 

Our business depends to a significant extent on our production and refining facilities and logistics network.

 

Our oil and natural gas field facilities, refineries and logistics network are our principal production facilities and distribution network on which a significant portion of our revenues depends. Although we insure our properties on terms we consider prudent and have adopted and maintain safety measures, any significant damage, accident or other production stoppage at our facilities or network could materially and adversely affect our production capabilities, financial condition and results of operations.

 

For instance, on April 2, 2013, our facilities in the La Plata refinery were hit by a severe and unprecedented storm, recording over 400 mm of rainfall. The rainfall set a new record for the area and disrupted refinery systems, causing a fire that affected the Coke A and Topping C units in the refinery. This incident temporarily affected the crude processing capacity of the refinery, which had to be stopped entirely during certain days.

 

In addition, on March 21, 2014, a fire occurred at the Cerro Divisadero crude oil treatment plant, located 20 kilometers from the town of Bardas Blancas in the province of Mendoza. The Cerro Divisadero plant, which has six tanks, four of which are for processing and two are for dispatch of treated crude oil, concentrates the production of ten fields in the Malargüe area. This constitutes a daily production of approximately 9,200 barrels of oil as of the date of the incident. The new oil treatment plant was put into production in December 2016.

 

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We could be subject to organized labor action.

 

Our operations have been affected by organized work disruptions and stoppages in the past and we cannot assure you that we will not experience them in the future, which could adversely affect our business and revenues, especially in the context of activity reduction. Labor demands are commonplace in Argentina’s energy sector and unionized workers have blocked access to and damaged our plants in the recent past. Our operations were affected occasionally by labor strikes in recent years. See “—We are exposed to the effects of fluctuations in the prices of oil, gas and refined products,” “—An outbreak of disease or similar public health threat, such as COVID-19 (coronavirus), could adversely affect our business, financial condition and results of operations” and “Item 5. Operating and Financial Review and Prospects—Factors Affecting Our Operations—Macroeconomic conditions.”

 

Our performance is largely dependent on recruiting and retaining key personnel

 

Our current and future performance, the successful implementation of our strategy and the operation of our business are dependent upon the contributions of our senior management and our highly skilled team of engineers and other employees. Our ability to continue to rely on these key individuals is dependent on our success attracting, training, motivating and retaining key management and commercial and technical personnel with the necessary skills and experience. There is no assurance that we will be successful in retaining and attracting key personnel and the replacement of any key personnel who were to leave could be difficult and time consuming.

 

The Expropriation Law provides that the National Executive Office, by itself or through an appointed public entity, shall exercise all the political rights associated with the shares subject to expropriation until the transfer of political and economic rights to the provinces that compose the National Organization of Hydrocarbon Producing States is completed. Consequently, the Argentine government has the majority of votes which allows it to appoint the majority of members of our board of directors at the General Shareholder’s meeting. See “—Risks Relating to Argentina—The Argentine Republic owns 51% of the shares of the Company” and “—Risks Relating to Argentina—Our business is largely dependent upon economic conditions in Argentina.” The loss of the experience and services of key personnel or the inability to recruit suitable replacements or additional staff could have a material adverse effect on our business, financial condition and our results of operations.

 

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

 

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

 

Although we are continuously expanding our security policy to the industrial systems and the cloud environment, reinforcing the defenses in case of denial of service and increasing the monitoring of suspicious activities, our technologies, systems, networks, and those of our business partners have been and may continue to be the target of cyber-attacks or information security breaches, which could lead to disruptions in critical systems (for example, SCADAs, DCS Systems), unauthorized release of confidential or protected information, corruption of data or other disruptions of our business operations. In addition, certain cyber incidents, such as surveillance, may remain undetected for an extended period.

 

As cybersecurity threats continue to evolve in the oil and gas industry, we may be required to expend additional resources to continue to modify or enhance our protective measures, as well as to investigate or remediate any cybersecurity or information technology infrastructure vulnerabilities as needed.

 

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

 

During 2019, we have been the target of many attempted attacks and were exposed to malware infections like other companies in the industry, which did not result in a significant loss or a negative impact in our operations. There can be no assurance that the Company will not incur such losses in the future. The Company’s risk and exposure to these matters cannot be fully calculated nor mitigated because of, among other things, the evolving nature of these threats.

 

 

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

 

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

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

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

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

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

 

In addition, as the COVID-19 outbreak progresses and alters the functioning of our socioeconomic systems and digital vulnerabilities, the efforts of our company to protect sensitive information, employees and serve customers during the COVID-19 pandemic have also increased our exposure to cyberthreats, mainly due to large-scale adoption of work-from-home technologies, heightened activity on customer-facing networks and greater use of online services. Furthermore, working from home has opened multiple vectors for cyberattack. Weak enforcement of risk-mitigating behaviors (the “human firewall”) and different stressors may compel employees to bypass controls for the sake of getting things done. See “— An outbreak of disease or similar public health threat, such as COVID-19 (coronavirus), could adversely affect our business, financial condition and results of operations.”

 

Our derivative risk management activities could result in financial losses.

 

We may enter into derivative financial instruments such us foreign exchange hedge, commodity hedge (oil and grains) among others, to mitigate market risk. Although we only would execute non speculative trades, we might be exposed to adverse fluctuations in the price of the assets underlying the derivative contracts or our counterparties might fail in their obligations, which could result in financial losses and affect the results of our operations. For detailed information regarding our outstanding derivatives as of December 31, 2019, see Note 2.b.17 to the Audited Consolidated Financial Statements.

 

Our actual production could differ materially from our forecasts.

 

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

 

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

 

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

 

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

 

We are subject to anticorruption, anti-bribery, anti-money laundering and other national and international regulations. We are required to comply with the regulations of Argentina and various jurisdictions where we conduct operations. Among other regulations, a law on

 

 

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corporate criminal liability is applicable in Argentina (see Item 9. The Offer and Listing - Law No. 27,401 on Corporate Criminal Liability). Although we have developed a comprehensive Compliance Program and we have internal policies and procedures designed to ensure compliance with applicable anti-fraud, anti-bribery and anti-corruption laws and sanctions regulations, potential violations of anti-corruption laws could be identified on occasion as part of our compliance and internal control processes. In case such issues arise, we plan to attempt to act promptly to learn relevant facts, conduct appropriate due diligence, and take any appropriate remedial action to address the risk. Given the size of our operations and the complexity of the production chain, there can be no assurance that our internal policies and procedures will be sufficient to prevent or detect all inappropriate practices, fraud or violations of law by our employees, directors, officers, partners, agents and service providers or that such persons will not take actions in violation of our policies and procedures (or otherwise in violation of the relevant anti-corruption laws and sanctions regulations) for which we or they may be ultimately held responsible. Violations of anti-bribery and anti-corruption laws and sanctions regulations could have a material adverse effect on our business, reputation, results of operations and financial condition. In addition, we may be subject to one or more enforcement actions, investigations and proceedings by authorities for alleged infringements of these laws. These proceedings may result in penalties, fines, sanctions or other forms of liability and could have a material adverse effect on our reputation, business, financial condition and results of operations.

 

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

 

Under the terms of our credit agreements and indentures, if we fail to comply with the covenants set forth thereunder or if we fail to cure any breach thereof during a specified period of time, we will be in default of our obligations, which in turn would limit our capacity of borrowing. To the extent we default on any of our obligations or upon the occurrence of other events of default, we would expect to actively pursue formal waivers from the corresponding counterparties to these agreements, in order to avoid the acceleration of any amounts owed thereunder. However, if the corresponding waivers are not timely obtained, in accordance with the terms of our credit and indentures certain creditors may declare the principal and accrued interest on amounts owed to them as due and immediately payable, resulting in acceleration of other outstanding debt due to cross default provisions, which in turn could have a material adverse effect on our business, financial condition and results of operations. See additionally Note 4 - Liquidity risk management - of our Consolidated Financial Statements and “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources— Covenants in our indebtedness.”

 

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

 

Uncertainty and illiquidity in credit and capital markets can impair our ability to obtain credit and financing or obtain them on acceptable terms.

 

Our ability to obtain credit and funds depends in large measure on capital markets and liquidity factors that we do not control, including those related to the cost of financing. Our ability to access credit and capital markets at acceptable terms may be restricted at a time when we would like, or need, to access those markets, which could have an impact on our operations and/or financial condition.

 

As a result of many factors including international and local market conditions, Argentina’s ability to renegotiate or repay its debts and its consequences on the rest of the economy and us, exchange and capital controls, credit ratings agencies’ actions, among others, there can be no assurance we will be able to refinance our existing indebtedness in accordance with our plans or repay it at maturity. See “— Risks Relating to Argentina— The evolution of the Argentine economy is largely dependent on a successful restructuring of the public debt, including that held by the IMF.—If we fail to comply with the covenants set forth in our credit agreements and indentures or upon the occurrence of a change of control, we may be required to repay our debt,”, “—Risks Relating to Argentina—We could be subject to exchange and capital controls” and “—Risks Relating to Our Business— An outbreak of disease or similar public health threat, such as COVID-19 (coronavirus), could adversely affect our business, financial condition and results of operations.”

 

Risks Relating to Our Class D Shares and ADSs

 

The market price for our shares and ADSs may be subject to significant volatility

 

The market price of our ordinary shares and ADSs may fluctuate significantly due to a number of factors, including, among others, our actual or anticipated results of operations and financial condition; speculation over the impact of the Argentine government as our

 

 

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controlling shareholder on our business and operations, the behavior of international markets, variations in international crude oil prices, pandemic diseases, such as COVID-19, investor perceptions of investments relating to Argentina and political and regulatory developments affecting our industry or the Company. In addition, see “—Risks Relating to Argentina—Our business is largely dependent upon economic conditions in Argentina.” Factors such as the mentioned above, have led to considerable volatility in the market price of our shares and ADSs. For example, the price of our ADSs has varied from U.S.$54.58 on January 5, 2011 to U.S.$ 9.57 on November 16, 2012. The price hit a high closing price of U.S.$ 36.99 on July 1, 2014, but subsequently fell to U.S.$ 12.83 on January 20, 2016. During 2017 the price of our ADSs reached a maximum of U.S.$ 26.16 but, mainly due to the Argentine economic conditions, decreased to a minimum value of U.S.$ 12.31 on December 24, 2018. During 2019 the price of our ADSs reached a maximum of U.S.$ 18.50 but, as of  April 20, 2020, our ADSs had a price of U.S.$ 3.77, much influenced by the current situation of the international markets and the pandemic disease, COVID-19 (see “—Risks Relating to our Business—We are exposed to the effects of fluctuations in the prices of oil, gas and refined products”, “—Risks Relating to Our Business— An outbreak of disease or similar public health threat, such as COVID-19 (coronavirus), could adversely affect our business, financial condition and results of operations.”) and “Item 9. The Offer and Listing. We cannot assure you that concerns about factors that could affect the market price of our ordinary shares as previously mentioned may have a material adverse effect on the trading values of our securities.

 

Additionally, if the bid price of our ordinary shares and ADSs were to close below the required minimum 30-day average of U.S.$1.00 per share, we may receive a deficiency notice from the NYSE regarding our failure to comply with this requirement. To the extent that we are unable to timely resolve such listing deficiency, there is a risk that our ordinary shares and ADSs may be delisted from the NYSE, which would adversely impact liquidity of our ordinary shares and ADSs and potentially result in even lower bid prices for them. In addition, if the NYSE approves the delisting of our ordinary shares and ADSs, BYMA may approve the delisting of our shares listed in such stock market.

 

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

 

Under our by-laws, the approval of the Argentine government, the sole holder of our Class A shares, is required to undertake certain strategic transactions, including (i) a merger; (ii) acquisition of shares by a third party representing more than 50% of the company’s capital; (iii) the transfer to third parties of all the exploitation rights granted to YPF pursuant to the Hydrocarbons Law, applicable regulations thereunder or the Privatization Law, if such transfer would result in the total suspension of the Company’s exploration and production activities; (iv) the voluntary dissolution of the Company, and (v) the transfer of the legal or fiscal domicile of the Company to a country other than Argentina. This approval would also be necessary in connection with an acquisition that would result in the purchaser holding 15% or more of our capital stock, or 20% or more of the outstanding Class D shares.

 

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

 

In addition, our by-laws also provide that in order to carry out an acquisition that results in the purchaser holding 15% or more of our capital stock or 20% or more of the outstanding Class D shares, such purchaser would be required to make a public tender offer for all of our outstanding shares and convertible securities, which could discourage certain investors from acquiring significant stakes in our capital stock. Such public tender offer shall not be needed for the subsequent acquisitions of an Offeror (as such term is defined in Item 10. Additional Information-Certain Provisions Relating to Acquisition of Shares), who already owns, or controls shares that represent 15% or more of the outstanding capital stock or 20% or more of the outstanding Class D shares, as long as such Offeror does not own or control, previously or as a consequence of these acquisitions, shares that represent more than 50% of the capital stock. For any subsequent acquisition made by an Offeror already owning or controlling more than 50% of the capital stock of the Company prior to such acquisition it is neither required to obtain the approval of the Class A shares, nor to make a public tender offer. See “Item 10. Additional Information— Certain Provisions Relating to Acquisitions of Shares.”

 

Restrictions on the movement of capital out of Argentina may impair your ability to receive dividends and distributions on, and the proceeds of any sale of, the Class D shares underlying the ADSs.

 

The government is empowered, for reasons of public emergency, as defined in Article 1 of Law No. 25,561, to establish the system that will determine the exchange rate between the peso and foreign currency and to impose exchange regulations. The transfer of funds abroad in order to pay dividends to non-resident shareholders currently does not require Argentine Central Bank approval, provided that certain conditions are met in accordance with regulation issued by the Argentine Central Bank. Otherwise, such approval shall be required. Further restrictions on the movement of capital to and from Argentina may be imposed and impair or prevent the conversion of dividends, distributions, or the proceeds from any sale of Class D shares, as the case may be, from pesos into U.S. dollars and the remittance of the U.S. dollars abroad.

 

 

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Under the terms of our deposit agreement with the depositary for the ADSs, the depositary will convert any cash dividend or other cash distribution we pay in pesos on the shares underlying the ADSs into U.S. dollars, if it can do so on a reasonable basis and can transfer the U.S. dollars to the United States, pursuant to the aforementioned regulations. If this conversion is not possible for any reason, including regulations of the type described in the preceding paragraph, the deposit agreement allows the depositary to distribute the foreign currency only to those ADR holders to whom it is possible to do so. If the exchange rate fluctuates significantly during a time when the depositary cannot convert the foreign currency, you may lose some or all of the value of the dividend distribution.

 

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

 

On April 28, 2017, our shareholders approved a dividend of Ps. 716 million (Ps.1.82 per share or ADS), which was paid during December 2017. On April 27, 2018, our shareholders approved a dividend of Ps. 1,200 million (Ps.3.05 per share or ADS), which was authorized and paid during December 2018. On April 26, 2019, an allocation of Ps. 4,800 million to a reserve for future dividends was authorized empowering the Board of Directors, up to the date of the next General Ordinary Shareholders Meeting that will consider the Financial Statements closed as of December 31, 2019. Dividends of Ps. 5.8478 per share or ADS was authorized and paid in July 11th, 2019. On March 5, 2020, our Board of Directors proposed the creation of a reserve for dividend of Ps. 3,700 million. Our next shareholder’s meeting, to be held on April 30, 2020, will consider this proposal. Notwithstanding the foregoing, our ability to pay, maintain or increase dividends is based on many factors, including our net income, capital expenditures required under our investment plans, future debt service payments, working capital needs, legal or contractual restrictions, and general economic and financial conditions. A change in any of these factors could affect our ability to pay, maintain or increase dividends, and the exact amount of any dividend paid may vary from year to year. In addition, the current COVID-19 outbreak and oil price environment are likely to result in a loss that would prevent the payment of dividends in 2020. See “—Risks Relating to Our Business— An outbreak of disease or similar public health threat, such as COVID-19 (coronavirus), could adversely affect our business, financial condition and results of operations” and “—Risks Relating to our Business—We are exposed to the effects of fluctuations in the prices of oil, gas and refined products.”

 

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

 

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

 

Under Argentine law, shareholder rights may be different from other jurisdictions.

 

Our corporate affairs are governed by our by-laws and by Argentine corporate law, which differ from the legal principles that would apply if we were incorporated in a jurisdiction in the United States or in other jurisdictions outside Argentina. In addition, rules governing the Argentine securities markets are different and may be subject to different enforcement in Argentina than in other jurisdictions.

 

Actual or anticipated sales of a substantial number of Class D shares could decrease the market prices of our Class D shares and the ADSs.

 

Sales of a substantial number of Class D shares or ADSs by any present or future relevant shareholder could decrease the trading price of our Class D shares and the ADSs.

 

You may be unable to exercise preemptive, accretion or other rights with respect to the Class D shares underlying your ADSs.

 

Holders of ADSs may not be able to exercise the preemptive or accretion rights relating to the shares underlying the ADSs (see “Item 10. Additional Information—Preemptive and Accretion Rights”) unless a registration statement under the U.S. Securities Act of 1933 (the “Securities Act”) is effective with respect to those rights or an exemption from the registration requirements of the Securities Act is available. We are not obligated to file a registration statement with respect to the shares relating to these preemptive rights, and we cannot assure you that we will file any such registration statement. Unless we file a registration statement or an exemption from registration is

 

 

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

 

In addition, under the Argentine General Corporations Law, foreign companies that own shares in an Argentine corporation are required to register with the National Corporations Registry (under the purview of the Ministry of Justice and Human Rights) in order to exercise certain shareholder rights, including voting rights. If you own our Class D shares directly (rather than in the form of ADSs) and you are a non-Argentine company and you fail to register with the respective National Corporations Registry, your ability to exercise your rights as a holder of our Class D shares may be limited. Currently, pursuant to Capital Markets Law No. 26,831 and to General Resolution No. 789 of the CNV, issued on March 29, 2019, both applicable to the Company, foreign companies that are shareholders of YPF may participate and vote in the shareholders’ meetings through duly authorized attorneys in fact.

 

You may be unable to exercise voting rights with respect to the Class D shares underlying your ADSs at our shareholders’ meetings.

 

The depositary will be treated by us for all purposes as a shareholder with respect to the shares underlying ADSs. A holder of ADRs representing the ADSs being held by the depositary will not have direct shareholder rights and may exercise voting rights with respect to the Class D shares represented by the ADSs only in accordance with the deposit agreement relating to the ADSs. There are no provisions under Argentine law or under our by-laws that limit the exercise by ADS holders of their voting rights through the depositary with respect to the underlying Class D shares. However, there are practical limitations on the ability of ADS holders to exercise their voting rights due to the additional procedural steps involved in communicating with these holders. For example, holders of our shares will receive notice of shareholders’ meetings through publication of a notice in an official gazette in Argentina, in an Argentine newspaper of general circulation, and in the bulletin of the Buenos Aires Stock Exchange, and will be able to exercise their voting rights by either attending the meeting in person or voting by proxy. ADS holders, by comparison, will not receive notice directly from us. Instead, in accordance with the deposit agreement, we will provide the notice to the depositary. If we ask it to do so, the depositary will mail to holders of ADSs the notice of the meeting and a statement as to the manner in which instructions may be given by holders. To exercise their voting rights, ADS holders must then instruct the depositary on how to vote with regards to the Class D shares represented by their ADSs. Due to these procedural steps involving the depositary, the process for exercising voting rights may take longer for ADS holders than for holders of Class D shares. If no such instructions are received, the depositary shall vote the Class D shares represented by ADSs in accordance with the recommendations of the Board of Directors made to all holders of shares.

 

Shareholders outside of Argentina may face additional investment risk from currency exchange rate fluctuations in connection with their holding of our Class D shares or the ADSs.

 

We are an Argentine company and any future payments of dividends on our Class D shares will be denominated in pesos. The peso has historically and recently fluctuated significantly against many major world currencies, including the U.S. dollar. A devaluation of the peso would likely adversely affect the U.S. dollar or other currency equivalent of any dividends paid on our Class D shares and could result in a decline in the value of our Class D shares and the ADSs as measured in U.S. dollars. See “—Risks Relating to Argentina—We may be exposed to fluctuations in foreign exchange rates.”

 

ITEM 4.         Information on the Company

 

History and Development of YPF

 

Overview

 

YPF is a corporation (sociedad anónima), incorporated under the laws of Argentina for a limited term. Our address is Macacha Güemes

 

515, C1106BKK Ciudad Autónoma de Buenos Aires, Argentina and our telephone number is (011-54-11) 5441-2000. Our legal name is

 

YPF Sociedad Anónima and we conduct our business under the commercial name “YPF.”

 

The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. All of the SEC filings made electronically by YPF are available to the public on the SEC website at www.sec.gov (commission file number 1-12102). The YPF’s website address is www.ypf.com. The information contained on, or that can be accessed through, the Company’s website is not part of, and is not incorporated into, this annual report.

 

We are Argentina’s leading energy company, operating a fully integrated oil and gas chain with leading market positions across the domestic upstream, downstream and gas and power segments. Our upstream operations consist of the exploration, development and production of crude oil, natural gas and LPG. Our downstream operations include the refining, marketing, transportation and distribution of oil and a wide range of petroleum products, petroleum derivatives, petrochemicals, LPG and bio-fuels. Additionally, we are active in

 

 

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the gas separation and natural gas distribution sectors both directly and through our investments in several affiliated companies and in power generation through YPF Energía Eléctrica S.A. (“YPF EE”), a company that we jointly control with GE EFS Power Investments B.V. (“GE”), a subsidiary of EFS Global Energy B.V. (both corporations indirectly controlled by GE Energy Financial Services, Inc.) (see “—Gas and Power—YPF in Power Generation.”). In 2019, we had consolidated revenues of Ps. 678,595 million and a consolidated net loss of Ps. 33,379 million.

 

Beginning in the 1920s and until 1990, both the upstream and downstream segments of the Argentine oil and gas industry were effectively monopolies of the Argentine government. During this period, we and our predecessors were owned by the state, which controlled the exploration and production of oil and natural gas, as well as the refining of crude oil and marketing of refined petroleum products. In August 1989, Argentina enacted laws aimed at the deregulation of the economy and the privatization of Argentina’s state-owned companies, including us. Following the enactment of these laws, a series of presidential decrees were promulgated, which required, among other things, us to sell majority interests in our production rights to certain major producing areas and to undertake an internal management and operational restructuring program.

 

In November 1992, the Argentine government enacted the Privatization Law (Law No. 24,145), which established the procedures for our privatization. In accordance with the Privatization Law, in July 1993, we completed a worldwide offering of 160 million Class D shares that had previously been owned by the Argentine government. As a result of that offering and other transactions, the Argentine government’s ownership interest in our capital stock was reduced from 100% to approximately 20% by the end of 1993.

 

In January 1999, Repsol YPF acquired 52,914,700 Class A shares (14.99% of our shares) which were converted to Class D shares. Additionally, on April 30, 1999, Repsol YPF announced a tender offer to purchase all outstanding Class A, B, C and D shares (the “Offer”). Pursuant to the Offer, in June 1999, Repsol YPF acquired an additional 82.47% of our outstanding capital stock. Repsol YPF acquired additional stakes in us from minority shareholders and other transactions in 1999 and 2000.

 

Repsol YPF owned approximately 99% of our capital stock from 2000 until 2008, when Petersen Energía (“PEISA”) acquired 15% of our capital stock, from Repsol YPF. On May 3, 2011, PEISA exercised an option to acquire, from Repsol YPF, shares or ADSs representing 10.0% of our capital stock and on May 4, 2011, Repsol YPF acknowledged and accepted such exercise. See “—Legal and Regulatory Framework and Relationship with the Argentine Government—The Expropriation Law” and “Item 7. Major Shareholders and Related Party Transactions,” for a detail of our current major shareholders.

 

On May 3, 2012, the Argentine Congress passed the Expropriation Law. Among other matters, the Expropriation Law provided for the expropriation of 51% of the share capital of YPF represented by an identical stake of Class D shares owned, directly or indirectly, by Repsol YPF and its controlled or controlling entities. The shares subject to expropriation, which have been declared of public interest, will be assigned as follows: 51% to the Argentine Republic and 49% to the governments of the provinces that compose the National Organization of Hydrocarbon Producing States. See “Item 3. Key Information—Risk Factors—Risks Relating to Argentina—The Argentine Republic owns 51% of the shares of the Company.” As of the date of this annual report, the transfer of the shares subject expropriation between the Argentine Executive Branch and the provinces that compose the National Organization of Hydrocarbon Producing States was still pending. According to Article 8 of the Expropriation Law, the distribution of the shares among the provinces that accept their transfer must be conducted in an equitable manner, considering their respective levels of hydrocarbon production and proved reserves. To ensure compliance with its objectives, the Expropriation Law provides that the Argentine Executive Branch, by itself or through an appointed public entity, shall exercise all the political rights associated with the shares subject to expropriation until the transfer of political and economic rights to the provinces that compose the National Organization of Hydrocarbon Producing States is completed. In addition, in accordance with Article 9 of the Expropriation Law, each of the Argentine provinces to which shares subject to expropriation are allocated must enter into a shareholder’s agreement with the federal government that will provide for the unified exercise of its rights as a shareholder. See "—Legal and Regulatory Framework and Relationship with the Argentine Government—The Expropriation Law,” “Item 7. Major Shareholders and Related Party Transactions.” See “Item 3. Key Information—Risk Factors—Risks Relating to Our Business—We face risks relating to certain legal proceedings.”

 

In addition, on February 25, 2014, the Republic of Argentina and Repsol reached an agreement (the “Repsol Agreement”) in relation to compensation for the expropriation of 200,589,525 of YPF’s Class D shares pursuant to the Expropriation Law under the Repsol Agreement. Repsol accepted U.S.$5.0 billion in sovereign bonds from the Republic of Argentina and withdrew judicial and arbitral claims it had filed, including claims against YPF, and waived additional claims. YPF and Repsol also executed a separate agreement (the “Repsol Arrangement”) on February 27, 2014, pursuant to which YPF and Repsol each withdrew, subject to certain exclusions, all present and future actions and/or claims based on causes occurring prior to the date of execution of Repsol Arrangement arising from the expropriation of the YPF shares owned by Repsol pursuant to the Expropriation Law, including the intervention and temporary possession for public purposes of YPF’s shares. YPF and Repsol agreed to withdraw reciprocal actions and claims with respect to third parties and/or pursued by them and to grant a series of mutual indemnities, which at the time were subject to certain conditions precedent. The Repsol Arrangement entered into force the day after Repsol notified YPF that the Repsol Agreement had entered into force. The Repsol Agreement was ratified on March 28, 2014 at a Repsol general shareholders’ meeting and approved by the Argentine Congress by Law No. 26,932 enacted by Decree No. 600/2014. On May 8, 2014, YPF was notified of the entry into force of the Repsol Agreement. As of

 

 

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that date, the expropriation pursuant to the Expropriation Law was concluded, and as a result the Republic of Argentina is definitively the owner of 51% of the capital stock of each of YPF and YPF GAS S.A.

 

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

 

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

 

Extract the maximum value from conventional fields

Develop and achieve efficient costs in shale operations

Partner with leading companies worldwide

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

Maintain a financial management discipline of the corporate portfolio

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

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

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

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

 

The investment plan related to our growth needs to be accompanied by an appropriate financial plan, whereby we intend to reinvest earnings, search for strategic partners and raise debt financing at levels we consider prudent for companies in our industry. Consequently, the financial viability of these investments and hydrocarbon recovery efforts will generally depend, among other factors, on the prevailing economic and regulatory conditions in Argentina, the ability to obtain financing in satisfactory amounts at competitive costs, as well as the market prices of hydrocarbon products. See “Item 3. Key Information—Risk Factors—Risks Relating to Argentina” and “Item 5. Factors Affecting Our Operations” for additional information regarding 2019 activity.

 

Notwithstanding the foregoing, the current outbreak of COVID-19 and the situation of the price of oil, among others, will be key issues to determine the duration and depth of the economic crisis in the Argentina and in the worldwide and the impact on our strategy, financial situation and results of our operations. See “Item 5. Operating and Financial Review and Prospects—Factors Affecting Our Operations— Macroeconomic conditions—Hydrocarbon Market”, “Item 5. Operating and Financial Review and Prospects—Factors Affecting Our Operations—Macroeconomic conditions—COVID-19 outbreak” and “Item 3. Risk Factors—Risks Relating to Our Business—We are exposed to the effects of fluctuations in the prices of oil, gas and refined products.”

 

Upstream Operations

 

As of December 31, 2019, we held interests in 127 oil and gas fields in Argentina. According to the Ministry of Energy and Mining, in 2019 these assets accounted for approximately 44.5% of the country’s total production of crude oil, excluding LNG, and approximately 33.9% of its total natural gas production, including LNG.

 

We had proved reserves, as estimated as of December 31, 2019, of approximately 673 mmbbl of oil, including condensates and LNG, and approximately 2,241 bcf of gas, representing aggregate reserves of approximately 1,073 mmboe as of such date, compared to approximately 638 mmbbl of oil, including condensates and LNG, and approximately 2,481 bcf of gas, representing aggregate reserves of approximately 1,080 mmboe as of December 31, 2018.

 

During 2019, we produced approximately 83 mmbbl of oil (approximately 226 mbbl/d), condensates of approximately 14 mmbbl of LNG (approximately 38 mbbl/d), and approximately 512 bcf of gas (approximately 1,403 mmcf/d), representing a total production of approximately 188 mmboe (approximately 514 mboe/d), compared to approximately 83 mmbbl of oil (approximately 227 mbbl/d), condensates of approximately 14 mmbbl of LNG (approximately 39 mbbl/d), and approximately 542 bcf of gas (approximately 1,484 mmcf/d), representing a total production of approximately 193 mmboe (approximately 530 mboe/d) in 2018.

 

Downstream Operations

 

We are Argentina’s leading refiner with operations conducted at three wholly-owned refineries with combined annual refining capacity of approximately 116 mmbbl (319.5 mbbl/d). See “—Downstream—Refining division.” We also own a 50% equity interest in Refinería del Norte, S.A. (“Refinor”), an entity jointly controlled with and operated by Pampa Energía S.A., which has a refining capacity of 26.1 mbbl/d.

 

 

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Our retail distribution network for automotive petroleum products as of December 31, 2019 consisted of 1,620 YPF-branded service stations, of which we own 112 directly and through our 100%-owned subsidiary Operadora de Estaciones de Servicios S.A. (“OPESSA”), and we estimate that as of December 31, 2019, we held approximately 34.9% of all gasoline service stations in Argentina.

 

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

 

Gas and Power Operations

 

We are the largest producer of natural gas in Argentina with total natural gas sales of 13,328 mmcm in 2019, accounting for 27.76% of the market (market share calculated through December 2019, as provided by ENARGAS).

  

We participate directly and through YPF EE (a company that we jointly control with GE) in sixteen power generation plants, with an aggregate installed capacity of 2,614 MW. During 2019, YPF acquired a power generation plant denominated Ensenada Barragán, with an installed capacity of 560 MW and which is co-controlled with Pampa Energía S.A. YPF EE and Pampa Energía S.A. will each act as operators for four-year terms, with Pampa Energía S. A. acting as operator during the initial term.

  

We are the operator of UTE Escobar (a joint venture formed by YPF and IEASA), which operates a LNG Regasification Terminal (“LNG Escobar”). Additionally, we operate Tango FLNG, a natural gas liquefaction floating facility, that began its operations on September 2019, in Bahia Blanca. See “—Gas and Power—Argentine natural gas supplies.”

 

We also distribute natural gas through our subsidiary Metrogas, a natural gas distribution company in the capital region and southern suburbs of Buenos Aires, and one of the main distributors in Argentina. During 2019, Metrogas distributed approximately 7,599.6 mmcm (or 267.96 bcf) of natural gas to 2.19 million customers. See “—Gas and Power—Natural Gas Distribution.”

 

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

 

The map below illustrates the location of our productive basins, refineries, storage facilities and crude oil and multi-product pipeline networks as of December 31, 2019.

 

 

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For a description of our principal capital expenditures and divestitures, see “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Capital investments, expenditures and divestitures.”

 

The Argentine Market

 

Argentina is the first largest producer of natural gas and the fifth largest producer of crude oil and condensate in Central and South America, based on 2018 production, according to the 2019 edition of the BP Statistical Review of World Energy, published in June 2019.

 

In response to the economic crisis of 2001 and 2002, the Argentine government, pursuant to the Public Emergency Law, established export taxes on certain hydrocarbon products. In subsequent years, in order to satisfy growing domestic demand and abate inflationary pressures, this policy was supplemented by constraints on domestic prices, temporary export restrictions and subsidies on imports of

 

  

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natural gas and diesel. As a result, until 2008, local prices for oil and natural gas products had remained significantly below those prevalent in neighboring countries and international commodity exchanges.

 

In 2012, Argentina’s GDP experienced a slowdown, with GDP increasing 1.9% on an annual basis compared to the preceding year according to the methodology of calculation prevailing until March 2014. On March 27, 2014, the Argentine government announced a new method of calculating GDP using 2004 as the base reference year (as opposed to 1993, which was the base reference year under the prior method of calculating GDP). However, on January 7, 2016 through Decree No. 55/2016, the new leadership of INDEC issued a report declaring a “national statistical emergency.” INDEC stated that since 2006 its administration has been irregular and due to that they revised the published data from 2005 to 2015. As a result of this revision, the GDP growth rate for 2013 and 2014 was revised from 2.9% to 2.4% and from 0.5% to a decline rate of 2.5%, respectively. As of the date of this annual report, Argentina’s provisional GDP growth rate for 2017, the preliminary GDP growth rate for 2018 and the preliminary GDP growth rate for 2019 published by INDEC were positive 2.7%, negative 2.5% and negative 2.2%, respectively.

 

Driven by economic expansion and stable domestic prices, energy demand has increased significantly during last years, outpacing energy supply (which, in the case of oil, declined). As a result of a high number of power outages caused by the consumption increase, the Ministry of Energy requested that the Argentine Executive Branch declare a National Electric System Emergency through December 31, 2017. This decree instructed the Minister of Energy to develop and propose measures and to ensure adequate power supplies. Additionally, the Ministry of Energy and Mining established new seasonal reference prices for power and energy in the Wholesale Electricity Market (“MEM”). Likewise, the first article of Law No. 27,541 published on December 21, 2019, declared, among others, an energy emergency until December 31, 2020. In addition, the National Executive Power is authorized to maintain the electricity and natural gas rates and to initiate a renegotiation process of the current integral tariff revision or to initiate an extraordinary revision, for a maximum term of up to one hundred and eighty days after Law No. 27,541 entered into effect, in order to reduce the impact of real tariffs on households, businesses and industries for the year 2020. See “– Legal and Regulatory Framework and Relationship with the Argentine Government – Public Emergency,” “—Legal and Regulatory Framework and Relationship with the Argentine Government—Market Regulation—Electricity” and “– Gas and Power – Metrogas tariff issues.”

 

Demand for diesel in Argentina exceeds domestic production. In 2003, Argentina’s net exports of diesel amounted to approximately 1,349 mcm, while in 2019 its net imports of diesel amounted to approximately 2,101 mcm, according to preliminary information provided by the SE. Significant investments in the energy sector are being carried out, and additional investments are expected to be required in order to support continued economic growth, as the industry is currently operating near full capacity.

 

In addition, prior to the decline in international oil prices, the import prices of refined products have been in general substantially higher than the average domestic sales prices of such products, rendering the import and resale of such products less profitable. As a result, from time to time in the past, service stations experienced temporary shortages and are required to suspend or curtail diesel sales.

 

For more information with regard to our pricing policy for fuels, the current COVID-19 outbreak and oil price environment, see “Item 5. Operating and Financial Review and Prospects—Factors Affecting Our Operations—Macroeconomic conditions—Hydrocarbon Market” and “Item 5. Operating and Financial Review and Prospects—Factors Affecting Our Operations—Macroeconomic conditions—COVID-19 outbreak.”

 

Business Organization

 

As of December 31, 2019, we conducted our business according to the following organization:

 

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

 

Downstream segment, which consists of our “Refining and Marketing”, “Chemicals” and “Logistics” divisions;

 

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

 

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

 

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

 

 

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

 

The following table sets forth revenues and operating profit in millions of pesos for each of our business segments for the years ended December 31, 2019, 2018 and 2017:

 

 

    For the year ended December 31,  
    2019     2018     2017  
Revenues (1)                  
Upstream                  
Revenues from sales     2,046       3,108       739  
Revenue from intersegment sales (2)     286,585       207,480       115,955  
Total Upstream     288,631       210,588       116,694  
                         
Gas and Power                        
Revenues from sales     131,055       91,176       56,805  
Revenue from intersegment sales     8,697       7,862       4,075  
Total Gas and Power     139,752       99,038       60,880  
                         
Downstream                        
Revenues from sales     531,724       338,042       195,321  
Revenue from intersegment sales     3,447       1,688       988  
Total Downstream     535,171       339,730       196,309  
                         
Central Administration and Others                        
Revenue from sales     19,743       8,363       2,534  
Revenue from intersegment sales     27,502       13,186       7,133  
Total Central Administration and Others     47,245       21,549       9,667  
                         
Less inter-segment sales and fees     (332,204 )     (235,085 )     (130,737 )
Total Revenues     678,595       435,820       252,813  
                         
Operating (loss) / profit Upstream     (49,194 )     22,483       3,877  
Gas and Power     2,944       16,786       3,259  
Downstream     40,653       7,818       15,813  
Central Administration and Others     (15,866 )     (6,055 )     (4,400 )
Consolidation adjustments     451       2,748       (2,476 )
Total Operating (loss) / profit     (21,012 )     43,780       16,073  

  

(1) Revenues are net of payment of turnover tax. Customs duties on hydrocarbon exports are disclosed in “Taxes, charges and contributions,” as indicated in Note 25 to the Audited Consolidated Financial Statements. Royalties with respect to our production are accounted for as a cost of production and are not deducted in determining revenues. See Note 2.b.15 to the Audited Consolidated Financial Statements.

 

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

 

Upstream overview

 

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

 

Smoothing the decline rate in conventional fields is based on reservoir management improvement, accelerated implementation of

 

 

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improved oil recovery (IOR) and enhanced oil recovery (EOR) and the deployment of technology to optimize operations in real time while reducing downtime. We plan to continue to de-risk projects based on recent preliminary successful results in tertiary recovery.

 

During recent years, we have been working in mature areas that present profitable opportunities to increase the recovery factor by employing techniques including infill wells, extension of secondary recovery, optimization of existing waterflood projects, and tertiary recovery testing.

 

We are focused on identifying new opportunities in both infill potential and improved sweep efficiency in our mature fields. These efforts are guided by subsurface modeling conducted by in-house multidisciplinary teams. Furthermore, we place a strong emphasis on surveillance and conformance activities to improve current mature water injection projects. Tertiary recovery is being pursued with polymer and surfactant water-flooding in mature reservoirs in the Golfo de San Jorge, Cuyana and Neuquina basins.

 

Continuous technical reviews of our oil and gas fields allow us to identify opportunities to rejuvenate mature fields and optimize new field developments in Argentine basins in order to achieve similar recovery factors that mature fields have already reached in other regions of the world, with the application of new technologies.

 

Furthermore, we continue actively managing our portfolio, including divestment of non-core matured assets.

 

Staying the Path of Unconventional Resources

 

In line with the production growth objective driven by unconventional projects during 2019, we reaffirmed our commitment to the objective of growing our production and reserves through the development of unconventional resources, which we began in 2013. More than 800 wells were drilled with Vaca Muerta shale as the target, mostly in Loma Campana field in association with Chevron, continuing the massive development that began in 2013. The remaining wells were targeted to continue the development phase in the El Orejano block in association with Dow Chemical, the Narambuena project in association with Chevron, La Amarga Chica field in association with Petronas, Bandurria Sur in association with SPM Argentina S.A., and from January 2020 with Shell Compañía Argentina de Petróleo S.A. and Equinor Argentina AS (see Note 33 to our Audited Consolidated Financial Statements - Agreement for the development of the Bandurria Sur Area), Bajada de Añelo pilot in association with Shell, Bajo del Toro pilot in association with Equinor and Rincon del Mangrullo, Aguada de la Arena and La Ribera pilots where YPF holds 100% of the working interest in those blocks. The purpose of these projects is to determine the potential of Vaca Muerta as a shale oil/gas reservoir.

 

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

 

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

 

Nevertheless, the financial viability of these investments and resource recovery efforts will depend on the prevailing economic and regulatory conditions, as well as the market prices of hydrocarbons in Argentina. See “Item 3. Key Information—Risk Factors.” and “Item 5. Operating and Financial Review and Prospects—Factors Affecting Our Operations” for additional information regarding 2020 activity.

 

During 2019, well productivity exceeded our expectations as a consequence of the drawdown policy adjustment that, having migrated to designs with a greater horizontal width, allowed to improve production peaks reached by these larger wells. The standard horizontal width reached 2,500 mts and only a few wells were below this width. The technical limit was continued to be challenged and the largest well in the basin was drilled reaching a horizontal width of 3,890 m (7,190 m deep). This kind of design is being evaluated to evolve to wells of a standard horizontal width that exceeds 3,000 m. During 2020 several wells are planned to be drilled with a larger diameter design than the ones currently in place, which will allow to reach these widths.

 

In order to guarantee the self-supply of sand for YPF and facing a scenario of growing demand (800 mtn in 2019 vs 370 mtn in 2018), we have carried out investments to improve and expand existing production capacities (New Classification Plant and Drying Furnace), and acquire new transport capacities (expansion of railway terminals) to supply the production and comply with the new Product Mix (Geology I&D plan). In 2020, we plan to begin operations of a quarry in Entre Ríos, with associated facilities.

 

Since 2017, we commenced testing of dissolvable plugs, chemical and mechanical diverters, frac sleeves, and different types of

 

 

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stimulation fluids, in connection with the completion of our shale gas/oil wells, seeking improved operational efficiency and well performance. We are continuing to study the data from these tests, analyzing the results of productivity in the medium term. Many of these activities were carried out, and continue to be supported by Y-TEC.

 

In the hydraulic stimulation field work continues to challenge the productivity of wells. Since 2018, designs with greater intensity of support agent and water have been tested. Due to good results obtained and the implementation of a new standard design of high-density, concentrations of sand raised above 2,500 lb/ft. At the same time, we are reviewing the designs of the pilots in order to make them more efficient.

 

Pilots with sleeves have also been executed during the last two years as a development alternative for areas of certain geological characteristics. The results are promising, and the sleeves are already a viable alternative.

 

On April 2019, the Loma Campana - Lago Pellegrini Pipeline was put into production with an extension of 88 km, a diameter of 18" and a total gross investment of U.S.$57 million. This oil pipeline will allow the increment of the evacuation of fluid by 157 kbbl/d.

 

The acquisition of 3D seismic was executed in the exploration block of Cerro Las Minas. 3D simulation acquisitions were also executed in La Ribera.

 

Finally, YPF added two new blocks to its Vaca Muerta portfolio, which represents an additional area of 233.15 km2 (57,612 acres) in a shale oil window. First, Integración Energética Argentina S.A. (“IEASA”), awarded Aguada del Chañar block (57.4 km2) to YPF S.A. This area is near La Amarga Chica and its non conventional hydrocarbon concession lasts until 2054. Second, we obtained the Non- Conventional concession for 35 years by the province of Neuquén of the Loma Amarilla Sur block (175.75 km2) that is located at the North East of the San Roque area where there are already wells in Vaca Muerta production.

 

Main properties

 

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

 

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

 

In 2019, 2018 and 2017, we finalized agreements related to the acquisition and development of properties that are part of our core business. In connection with those agreements, see Notes 3 and 33.b to the Audited Consolidated Financial Statements.

 

In addition, in connection with the extension of concessions, see Note 33.a to the Audited Consolidated Financial Statements.

 

The following table sets forth information regarding our developed and undeveloped acreage by geographic area as of December 31, 2019:

 

      Developed(1)     Undeveloped(2)  
      Gross(3)     Net(4)     Gross(3)     Net(4)  
      (thousands of acres)  
Argentina       1,240       933       22,609       17,316  
Rest of South America(5)       2       2       575       353  
Total       1,242       935       23,184       17,669  

 

(1) Developed acreage is spaced or assignable to productive wells.

 

(2) Undeveloped acreage encompasses those leased acres on which wells have not been drilled or completed to a point that would permit the production of economic quantities of oil or gas regardless of whether such acreage contains proved reserves.

 

(3) A “gross acre” is an acre in which we own a working interest.

 

(4) “Net” acreage equals gross acreage after deducting third-party interests.

 

(5) Relates to Colombia, Chile and Bolivia. In the case of Colombia, YPF and its partners notified the Colombian National Hydrocarbons Agency (“ANH”) of the decision to relinquish the COR 12 and COR 33 blocks. In Bolivia, YPF’s net undeveloped surface acreage totaled 147,000 acres. In Chile, YPF’s net undeveloped and developed surface acreage totaled 33,021 acres and 1,769 acres, respectively.

 

According to Law No. 27,007 that amended the Hydrocarbons Law, all national offshore permits and offshore hydrocarbon production concessions that did not have association agreements with ENARSA as of the date of the new law (October 2014) were reverted and transferred to the SGE. Permits and concessions granted prior to Law No. 25,943 were exempt from this provision. In September 2015,

 

 

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the Argentine Executive Branch and YPF began negotiating the conversion of association agreements signed with ENARSA. On December 29, 2017 YPF submitted a note to the Ministry of Energy confirming its willingness to negotiate the conversion of association agreement related to the Area identified as “ENARSA 1”. In the same note, YPF communicated its decision not to convert the association agreements related to the Areas “ENARSA 2” and “ENARSA 3. On October 19, 2018 YPF officially filed another note to the SGE to negotiate the conversion of the association agreement related to the area identified as “ENARSA 1”. On April 11, 2019 the area “ENARSA 1” was officially converted into “CAN-100”. In August 2019, a partnership agreement was signed by YPF and Equinor Argentina AS, whereby Equinor Argentina AS would operate the area holding a 50% working interest. On April 3, 2020, the MINEM formalized the Agreement and the closing of the operation happened on April 16, 2020. In addition, the areas “ENARSA 2” and “ENARSA 3” were formally relinquished on April 11, 2019. With the exception of the above, none of our exploration permits are regulated by Law No. 27,007. See “—Legal and Regulatory Framework and Relationship with the Argentine Government—Law No. 27,007 (amendment of the Hydrocarbons Law)—Exploration and Production.”

 

As of December 31, 2019, we only have 3 exploration permits associated with the original terms of the Hydrocarbons Law, which expire in 2020 and represent 1,107 km2, or 2% of our 44,833 km2 of net exploratory undeveloped acreage as of December 31, 2019. However, as a result of the expiration in 2020 of the first or second exploration terms of certain of our exploration permits (according to the terms of the Hydrocarbons Law, as amended by Law No. 27,007), we will have the right to continue exploring the entire area for the second basic term as long as we comply with all of our obligations under the applicable permit. At the expiration of the second basic term, we will be required to surrender all of the remaining acreage, unless we request an extension term, in which case such extension will be limited to 50% of the remaining acreage. On the other hand, if we discover commercially exploitable quantities of oil or gas, we have the right to obtain an exclusive concession for the production and development of such oil and gas. See “—Legal and Regulatory Framework and Relationship with the Argentine Government—Law No. 27,007 (amendment of the Hydrocarbons Law)—Exploration and Production.”

 

The exploratory undeveloped acreage which matures, under the first or second exploration terms, in 2020 and in the period 2021-2022 is 8,420 km2, or 19%, and 10,865 km2, or 24%, respectively, of our 44,833 km2 of net exploratory undeveloped acreage as of December 31, 2019.

 

The extension of the acreage that we would be required to relinquish will depend our determination regarding to our satisfaction of our obligations in respect of those areas which where we consider it is in our best interest, while we may determine not to comply with such obligations in respect of certain other areas. Therefore, the areas to be relinquished consist usually of acreage where drilling has not been successful and are considered non-core lease acreage.

 

Except as described above, we do not have any material undeveloped acreage related to our production concessions expiring in the near term.

 

See "—Legal and Regulatory Framework and Relationship with the Argentine Government—Law No. 27,007 (amendment of the Hydrocarbons Law)” for a description of new terms that apply to new production concessions or exploration permits, other than those already governed by previous laws.

 

Argentine Exploration Permits and Exploitation Concessions

 

Based on 2018 production, Argentina is the first largest producer of natural gas and the fifth largest producer of crude and condensate oil in Central and South America, according to the 2019 edition of the BP Statistical Review of World Energy published in June 2019. Oil has historically accounted for the majority of the country’s hydrocarbon production and consumption, although the relative share of natural gas has increased rapidly in recent years.

 

The following table shows our gross and net interests in productive oil and gas wells in Argentina by basin, as of December 31, 2019:

 

    Wells (1)  
    Oil     Gas  
Basin   Gross     Net     Gross     Net  
Neuquina     4,679       3,689       1,849       1,310  
Golfo San Jorge     7,793       7,299       73       73  
Cuyana     779       718       0       0  
Noroeste     46       24       89       45  
Austral     111       111       57       57  
Onshore     13,408       11,841       2,068       1,485  
Offshore     91       46       -       -  

 

 

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    Wells (1)  
    Oil     Gas  
Basin   Gross     Net     Gross     Net  
Total     13,499       11,887       2,068       1,485  

 

(1) A “gross well” is a well in which we own a working interest. A “net well” is deemed to exist when the sum of fractional ownership working interests in gross wells equals one. The number of net wells is the sum of the fractional working interests owned in gross wells expressed as whole numbers and fractions of whole numbers

 

As of December 31, 2019, we held 127 exploration permits and production concessions in Argentina. We directly operate 93 of them, including 19 exploration permits and 74 production concessions.

 

Exploration permits: As of December 31, 2019, we held 24 exploration permits in Argentina, 20 of which were onshore exploration permits and 4 of which were offshore exploration permits. We had 100% ownership of 10 onshore permits, and our participating interests in the remainder varied between 50% and 70%. Our participating interests in the 4 offshore permits varied between 37.5% and 100%.

 

Production concessions: As of December 31, 2019, we had 103 production concessions in Argentina. We had a 100% ownership interest in 58 production concessions, and our participating interests in the remaining 45 production concessions varied between 12.2% and 98%.

 

In addition, we have 35 crude oil treatment plants and 12 pumping plants where oil is processed and stored. The purpose of these plants is to receive and treat oil from different fields prior to shipment to our refineries and/or commercialization to third parties, as applicable. See “Item 3. Key Information—Risk Factors—Risks Relating to Our Business—Our business depends to a significant extent on our production and refining facilities and logistics network.”

 

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

 

Approximately 95% of our proved crude oil reserves in Argentina are concentrated in the Neuquina (60%) and Golfo San Jorge (35%) basins, and approximately 85% of our proved gas reserves in Argentina are concentrated in the Neuquina (75%), and Austral (10%) basins.

 

Joint ventures and contractual arrangements in Argentina

 

As of December 31, 2019, we participated in 10 exploration and 35 production joint ventures and contractual arrangements (27 of which were not operated by us) in Argentina. Our interests in these joint ventures and contractual arrangements ranged from 12.2% to 98%, and our obligations to share exploration and development costs varied under these agreements. In addition, under the terms of some of these joint ventures, we have agreed to indemnify our joint venture partners in the event that our rights with respect to such areas are restricted or affected in such a way that the purpose of the joint venture cannot be achieved. For a list of the main exploration and production joint ventures in which we participated as of December 31, 2019, see Note 28 to the Audited Consolidated Financial Statements. We are also a party to a number of other contractual arrangements that arose through the renegotiation of service contracts and risk contracts and their conversion in exploitation concessions and exploration permits, respectively.

 

Oil and Gas Reserves

 

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

 

Information on net proved reserves as of December 31, 2019, 2018 and 2017 was calculated in accordance with the SEC rules and Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 932, as amended. Accordingly, crude oil

 

 

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prices used to determine reserves were calculated each month for crude oils of different quality produced by the Company. Consequently, to calculate our net proved reserves as of December 31, 2019, the Company considered the realized prices for crude oil in the domestic market taking into account the effect of export taxes as in effect as of each of the corresponding years (until 2021, in accordance with Law 27,541). For the years beyond the mentioned periods, the Company considered the unweighted average price of the first-day-of-the-month for each month within the twelve-month period ended December 31, 2019, which refers to the Brent prices adjusted by each different quality produced by the Company.

 

Additionally, since there are no benchmark market natural gas prices available in Argentina, the Company considered the realized prices in the domestic market according to the SEC and FASB’s ASC 932 rules.

 

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

 

Net reserves are defined as that portion of the gross reserves attributable to the interest of YPF after deducting interests owned by third parties. In determining net reserves, the Company excludes from its reported reserves royalties due to others, whether payable in cash or in kind, where the royalty owner has a direct interest in the underlying production and is able to make lifting and sales arrangements independently. By contrast, to the extent that royalty payments required to be made to a third party, whether payable in cash or in kind, are a financial obligation, or are substantially equivalent to a production or severance tax, the related reserves are not excluded from the reported reserves despite the fact that such payments are referred to as “royalties” under local rules. The same methodology is followed in reporting our production amounts.

 

Gas reserves exclude the gaseous equivalent of liquids expected to be removed from the gas on concessions and leases, at field facilities and at gas processing plants. These liquids are included in net proved reserves of NGLs.

 

Technology used in establishing proved reserves additions

 

YPF’s estimated proved reserves as of December 31, 2019 are based on estimates generated through the integration of available and appropriate data, utilizing well-established technologies that have been demonstrated in the field to yield repeatable and consistent results. Data used in these integrated assessments include information obtained directly from the subsurface via wellbore, such as well logs, reservoir core samples, fluid samples, static and dynamic pressure information, production test data, and surveillance and performance information. The data utilized also include subsurface information obtained through indirect measurements, including high quality 2-D and 3-D seismic data, calibrated with available well control. Where applicable, geological outcrop information was also utilized. The tools used to interpret and integrate all this data included both proprietary and commercial software for reservoir modeling, simulation and data analysis. In some circumstances, where appropriate analog reservoir models are available, reservoir parameters from these analog models were used to increase the reliability of our reserves estimates.

 

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

 

Net Proved Developed and Undeveloped Reserves as of December 31, 2019

 

The following table sets forth our estimated net proved developed and undeveloped reserves of crude oil, NGLs and natural gas at December 31, 2019.

 

 

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Proved Developed Reserves   Oil (1)
(mmbbl)
    NGL
(mmbbl)
    Natural Gas
(bcf)
    Total (2)
(mmboe)
 
Consolidated Entities                        
South America                        
Argentina     301       38       1,743       650  
Chile     -       -       -       -  
Total Consolidated Entities     301       38       1,743       650  
Equity-Accounted Entities                                
South America                                
Argentina     -       -       -       -  
Chile     -       -       -       -  
Total Equity-Accounted Entities     -       -       -       -  
Total Proved Developed Reserves     301       38       1,743       650  

 

Proved Undeveloped Reserves   Oil (1)
(mmbbl)
    NGL
(mmbbl)
    Natural Gas
(bcf)
    Total (2)
(mmboe)
 
Consolidated Entities                        
South America                        
Argentina     312       22       498       423  
Chile     -       -       -       -  
Total Consolidated Entities     312       22       498       423  
Equity-Accounted Entities                                
South America                                
Argentina     -       -       -       -  
Chile     -       -       -       -  
Total Equity-Accounted Entities     -       -       -       -  
Total Proved Undeveloped Reserves     312       22       498       423  

 

Total Proved Reserves (2) (3)   Oil (1)
(mmbbl)
    NGL
(mmbbl)
    Natural Gas
(bcf)
    Total (2)
(mmboe)
 
Consolidated Entities                        
Developed Reserves     301       38       1,743       650  
Undeveloped Reserves     312       22       498       423  
Total Consolidated Entities     613       60       2,241       1,073  
Equity-accounted entities                                
Developed Reserves     -       -       -       -  
Undeveloped Reserves     -       -       -       -  
Total Equity-Accounted Entities     -       -       -       -  
Total Proved Reserves     613       60       2,241       1,073  

 

(1) Includes crude oil (oil and condensate).

 

(2) Volumes of natural gas in the table above and elsewhere in this annual report have been converted to barrels of oil equivalent at 5,615 cubic feet per barrel.

 

(3) Proved crude oil and NGL reserves of consolidated entities include an estimated approximately 88 mmbbl of crude oil and 6 mmbl of NGLs in respect of royalty payments which, as described above, are a financial obligation or are substantially equivalent to a production or similar tax. Proved natural gas reserves of consolidated entities include an estimated approximately 259 bcf in respect of such payments.

 

For information regarding changes in our estimated proved reserves during 2019, 2018 and 2017, see Note 39 to the Audited Consolidated Financial Statements.

 

The paragraphs below explain in further detail the most significant changes in our proved undeveloped reserves during 2019, 2018 and

 

 

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2017.

 

Changes in our proved undeveloped reserves during 2019

 

YPF had an estimated volume of net proved undeveloped reserves of 423 mmboe at December 31, 2019, which represented approximately 39% of the 1,073 mmboe total reported proved reserves as of such date. This compares to estimated net proved undeveloped reserves of 358 mmboe as of December 31, 2018 (approximately 33% of the 1,080 mmboe total reported proved reserves as of such date).

 

The 18% total net increase in net proved undeveloped reserves in 2019 is mainly attributable to:

 

Extensions and discoveries, which added 137 mmboe (276 bcf of Gas and 88 mmbbl of Oil) of proved undeveloped reserves mainly from shale oil and gas projects from Vaca Muerta formation at Neuquina basin.

 

Revised projects at Vaca Muerta formation which resulted in additional 19 mmboe (17 mmbbl of Oil and 11 bcf of Gas).

 

New improved recovery projects, adding approximately 5 mmboe of proved undeveloped secondary recovery reserves. The most important additions belong to Golfo San Jorge and Neuquina basins.

 

This was partially offset by:

 

Ongoing successful development activities related to proved undeveloped reserves projects, which allowed a transfer of approximately 67 mmboe (31 mmboe corresponding to Vaca Muerta projects) to proved developed reserves. The main contributions are related to Development Wells (53 mmboe) mainly in Neuquina basin and improved recovery projects (14 mmboe) mainly in Golfo San Jorge and Neuquina basins.

 

Change of development strategy and other project revisions in certain areas which resulted in a downwards revision of 23 mmboe from previous projects, mainly from Neuquina, Austral and Cuyana basins.

 

Some primary and improved recovery oil projects development schedules were modified or canceled, resulting in a 6 mmboe proved undeveloped reserves reduction, mainly in Golfo San Jorge and Neuquina basins.

 

YPF’s total capital expenditure to continue the development of reserves was approximately U.S.$ 1,221 million during 2019, of which U.S.$ 945 million was allocated to projects related to proved undeveloped reserves.

 

As of December 31, 2019, we did not have material amounts of proved undeveloped reserves in individual fields or countries that have remained undeveloped for five years or more after being disclosed as proved undeveloped reserves.

 

Changes in our proved undeveloped reserves during 2018

 

YPF had estimated a volume of net proved undeveloped reserves of 358 mmboe at December 31, 2018, which represented approximately 33% of the 1,080 mmboe total reported proved reserves as of such date. This compares to estimated net proved undeveloped reserves of 266 mmboe as of December 31, 2017 (approximately 29% of the 929 mmboe total reported proved reserves as of such date).

 

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

 

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

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

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

 

This was partially offset by:

 

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

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

 

 

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

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

 

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

 

As of December 31, 2018, we did not have material amounts of proved undeveloped reserves in individual fields or countries that have remained undeveloped for five years or more after being disclosed as proved undeveloped reserves.

 

Changes in our proved undeveloped reserves during 2017

 

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

 

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

 

Ongoing successful development activities related to proved undeveloped reserves projects, which allowed a transfer of approximately 82 mmboe to proved developed reserves. Main contributions are related to development wells (62 mmboe) mainly in Neuquina basin, improved recovery projects (9.5 mmboe) mainly in Golfo San Jorge and Neuquina basins, and Gas Compression Projects (9.5 mmboe) in Austral and Neuquina basins.

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

Some primary and improved recovery oil projects development schedules were modified or canceled, resulting in a 2.5 mmboe proved undeveloped reserves reduction, mainly in Neuquina and Golfo San Jorge basins.

 

This was partially offset by:

 

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

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

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

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

 

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

 

As of December 31, 2017, we did not have material amounts of proved undeveloped reserves in individual fields or countries that have remained undeveloped for five years or more after being disclosed as proved undeveloped reserves.

 

Internal controls on reserves and reserves audits

 

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

 

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

 

Estimates of ultimate recovery are obtained by applying recovery factors to the original quantities of petroleum in place. These factors

 

 

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are based on the drive mechanisms inherent in the reservoir, analysis of the fluid and rock properties, the structural position of the reservoir and its production history. In some instances, comparisons are made with similar production reservoirs in the areas where more complete data is available.

 

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

 

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

 

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

 

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

 

(a) The Reserves Audit (“RA”) is separate and independent from the Upstream segment. RA’s activity is overseen by YPF’s Audit Committee, which is also responsible for supervising the procedures and systems used in the recording of and internal control over the Company’s hydrocarbon reserves. The primary objectives of the RA are to ensure that YPF’s proved reserves estimates and disclosure are in compliance with the rules of the SEC, the FASB, and the Sarbanes-Oxley Act, and to review annual changes in reserves estimates and the reporting of YPF’s proved reserves. The RA is responsible for preparing the information to be publicly disclosed concerning YPF’s reported proved reserves of crude oil, NGLs, and natural gas. In addition, the RA is also responsible for providing training to personnel involved in the estimation of reserves and reporting process within YPF. The RA is managed by and staffed with individuals that have an average of more than 20 years of technical experience in the petroleum industry, including in the classification and categorization of reserves under the SEC guidelines. The RA staff includes several individuals who hold advanced degrees in either engineering or geology, as well as individuals who hold bachelor’s degrees in various technical studies. Several members of the RA are registered with or affiliated to the relevant professional bodies in their fields of expertise.

 

(b) The Reserves Auditor, who has headed the RA since June 2017, is responsible for overseeing the preparation of the reserves estimates and reserves audits conducted by third party engineers. The current Reserves Auditor has over 35 years of experience in geology and geophysics, reserves estimates, project development, finance and general accounting regulations. Prior to becoming the Reserves Auditor, he was the general manager in E&D, and before that he worked as the Director for Exploration at YPF. He holds a degree in geology from the National University of Patagonia, and postgraduate courses at IAE Austral University. Consistent with our internal control system requirements, the Reserves Auditor’s compensation is not affected by changes in reported reserves.

 

(c) A quarterly internal review by the RA of changes in proved reserves submitted by the Upstream business segment and associated with properties where technical, operational or commercial issues have arisen.

 

(d) A Quality Reserve Coordinator (“QRC”) is assigned to each Upstream business segment of YPF to ensure that there are effective controls in the estimation of proved reserves and approval process of the estimates of YPF and the timely reporting of the related financial impact of proved reserves changes. Our QRCs are responsible for reviewing proved reserves estimates. The qualification of each QRC is made on a case-by-case basis with reference to the recognition and respect of such QRC’s peers. YPF would normally consider a QRC to be qualified if such person (i) has a minimum of 5 years of practical experience in petroleum engineering or petroleum production geology, with at least three years of such experience in charge of the estimation and evaluation of reserves, and (ii) has either (A) obtained, from a college or university of recognized stature, a bachelor’s or advanced degree in petroleum engineering, geology or other related discipline of engineering or physical science, or (B) received, and is maintaining in good standing, a registered or certified professional engineer’s license or a registered or certified professional geologist’s license, or the equivalent thereof, from an appropriate governmental authority or professional organization.

 

(e) A formal review through technical review committees to ensure that both technical and commercial criteria are met prior to the commitment of capital to projects.

 

(f) Our internal audit team examines the effectiveness of YPF’s financial controls, which are designed to ensure the reliability of reporting and safeguarding of all the assets and examines YPF’s compliance with the law, regulations and internal standards.

 

(g) All volumes booked are submitted to a third party reserves audit on a periodic basis. The properties selected for a third party reserves audit in any given year are selected on the following basis:

 

i. all properties on a three-year cycle; and

 

ii. recently acquired properties not submitted to a third party reserves audit in the previous cycle and properties with respect to which there is new information which could materially affect prior reserves estimates.

 

 

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For those areas submitted to a third party reserves audit, YPF’s proved reserves figures have to be within 7% or 10 mmboe of the third party reserves audit figures for YPF to declare that the volumes have been ratified by a third party reserves audit. In the event that the difference is greater than the tolerance, YPF will re-estimate its proved reserves to achieve this tolerance level or should disclose the third party figures. YPF has adopted the above-mentioned procedure by approving the corresponding internal policy.

 

In 2019, DeGolyer and MacNaughton audited certain YPF operated and non-operated areas in the Neuquina, Golfo San Jorge, Cuyana and Noroeste basins of Argentina and the Austral basin of Chile. These audits were performed as of December 31, 2019, and the audited fields contain in aggregate approximately 383 mmboe of proved reserves (100 mmboe of which were proved undeveloped reserves) as of such date, which represented approximately 36% of our proved reserves and 24% of our proved undeveloped reserves as of December 31, 2019. Copies of the related reserves audit reports are filed as an exhibit to this annual report.

 

We are required, in accordance with Resolutions No. 324/06 and 69/16 of the Argentine Secretariat of Hydrocarbon Resources, to annually file by March 31 details of our estimates of our oil and gas reserves and resources with the Argentine Secretariat of Hydrocarbon Resources, as defined in that resolution and certified by an external auditor. The aforementioned certification and external audit only have the meaning established by Resolutions No. 324/06 and 69/16 and are not to be interpreted as a certification or external audit of oil and gas reserves under SEC rules. We last filed such a report for the year ended December 31, 2018. Estimates of our oil and gas reserves filed with the Argentine Secretariat of Hydrocarbon Resources are materially higher than the estimates of our proved oil and gas reserves contained in this annual report mainly because: (i) information filed with the Argentine Secretariat of Hydrocarbon Resources includes all properties of which we are operators, irrespective of the level of our ownership interests in such properties; (ii) information filed with the Argentine Secretariat of Hydrocarbon Resources includes other categories of reserves and resources that are not included in this annual report, which are different from estimates of proved reserves consistent with the SEC’s guidance contained in this annual report; and (iii) the definition of proved reserves under Resolutions No. 324/06 and 69/16 is different from the definition of “proved oil and gas reserves” established in Rule 4-10(a) of Regulation S-X. Accordingly, all proved oil and gas reserve estimates included in this annual report reflect only proved oil and gas reserves consistent with the rules and disclosure requirements of the SEC.

 

Oil and gas production, production prices and production costs

 

The following table shows our crude oil (including oil and condensate), NGL, and gas production on an as sold and annual basis for the years indicated. In determining net production, we exclude royalties due to others, whether payable in cash or in kind, where the royalty owner has a direct interest in such production and is able to make lifting and sales arrangements independently. By contrast, to the extent that royalty payments required to be made to a third party, whether payable in cash or in kind, are a financial obligation or are substantially equivalent to a production or severance tax, they are not excluded from our net production amounts despite the fact that such payments are referred to as “royalties” under local rules. This is the case for our production in Argentina, where royalty expense is accounted for as a production cost.

 

 

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Oil and Condensate Production (1) 

  2019     2018     2017  
            (mmbbl)          
Consolidated Entities                        
South America                        
Argentina     83       83       83  
Chile    

      -       -  
Total Consolidated Entities     83       83       83  
Equity-Accounted Entities                        
South America                        
Argentina     -       -       -  
Chile     -       -       -  
Total Equity-Accounted Entities     -       -       -  
Total Oil Production (2)     83       83       83  

 

NGL Production (1) 

 

2019 

   

2018 

   

2017

 
            (mmbbl)          
Consolidated Entities                        
South America                        
Argentina     14       14       19  
Chile     -       -       -  
Total Consolidated Entities     14       14       19  
Equity-Accounted Entities                        
South America                        
Argentina     -       -       -  
Chile     -       -       -  
Total Equity-Accounted Entities     -       -       -  
Total NGL Production (3)     14       14       19  

 

Natural Gas Production (1) 

  2019     2018     2017  
            (bcf)          
Consolidated Entities                        
South America                        
Argentina     440       461       475  
Chile     -       -       -  
Total Consolidated Entities     440       461       475  
Equity-Accounted Entities                        
South America                        
Argentina     -       -       -  
Chile     -       -       -  
Total Equity-Accounted Entities     -       -       -  
Total Natural Gas Production (4) (5)     440       461       475  

 

Oil Equivalent Production (1) (6) 

  2019     2018     2017  
            (mmboe)          
Consolidated Entities                        
Oil and Condensate     83       83       83  
NGL     14       14       19  
Natural Gas     78       82       85  
Equity-Accounted Entities                        
Oil and Condensate     -       -       -  
NGL     -       -       -  
Natural Gas     -       -       -  
Total Oil Equivalent Production     175       179       187  

 

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* Not material (less than 1).

 

(1) Loma La Lata Central and Loma La Lata Norte (southern and northern parts of the Loma La Lata field) in Argentina contain approximately 19% of our total proved reserves expressed on an oil equivalent barrel basis. Oil and condensate production in these fields was approximately 9, 8 and 6 mmbbl for the years ended December 31, 2019, 2018 and 2017, respectively. NGL production in these fields was approximately 5, 5 and 8 mmbbl for the years ended December 31, 2019, 2018 and 2017, respectively. Natural gas production in the Loma La Lata field was 97, 109 and 127 bcf for the years ended December 31, 2019, 2018 and 2017, respectively.

 

(2) Crude oil production for the years ended in December 31, 2019, 2018 and 2017 includes an estimated 12, 12 and 12 mmbbl, respectively, in respect of royalty payments which are a financial obligation or are substantially equivalent to a production or similar tax.

 

(3) NGL production for the years ended in December 31, 2019, 2018 and 2017 includes an estimated 1, 2 and 2 mmbbl, respectively, in respect of royalty payments which are a financial obligation or are substantially equivalent to a production or similar tax. Equity-accounted entities production of NGL in respect of royalty payments which are a financial obligation or are substantially equivalent to a production or similar tax is not material.

 

(4) Natural gas production for the years December 31, 2019, 2018 and 2017 includes an estimated 60, 61 and 64 bcf, respectively, in respect of royalty payments which are a financial obligation or are substantially equivalent to a production or similar tax. Equity-accounted entities production of natural gas in respect of royalty payments which are a financial obligation or are substantially equivalent to a production or similar tax is not material.

 

(5) Does not include volumes consumed or flared in operations (whereas sale volumes shown in the reserves table included in “Supplemental Information on Oil and Gas Producing Activities (Unaudited)—Oil and Gas Reserves” include volumes consumed in operations).

 

(6) Volumes of natural gas have been converted to barrels of oil equivalent at 5,615 cubic feet per barrel.

 

The composition of the crude oil produced by us in Argentina varies by geographic area. Almost all crude oil produced by us in Argentina has very low or no sulfur content. We sell substantially all the crude oil we produce in Argentina to our Refining and Marketing business segment. Most of the natural gas produced by us is of pipeline quality. All of our gas fields produce commercial quantities of condensate, and substantially all of our oil fields produce associated gas.

 

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The following table sets forth the average production costs and average sales price expressed in Ps/boe by geographic area for 2019, 2018 and 2017:

 

Production costs and sales price   Total   Argentina   Chile
             
Year ended December 31, 2019                        
Lifting costs     620.44       619.55       4,001.12  
Local taxes and similar payments (1)     31.09       30.97       501.45  
Transportation and other costs     64.51       64.33 (3)     752.17  
Average production costs     716.05       714.85       5,254.74  
                         
Average oil sales price     2,351.81       2,351.81        
Average NGL sales price     1,167.69       1,167.69        
Average natural gas sales price (2)     1,038.96       1,038.96        
                         
Year ended December 31, 2018                        
Lifting costs     348.68       348.68        
Local taxes and similar payments (1)     22.92       22.92        
Transportation and other costs     97.77       97.77        
Average production costs     469.37       469.37        
                         
Average oil sales price     1,774.87       1,774.87        
Average NGL sales price     1,052.96       1,052.96        
Average natural gas sales price (2)     739.49       739.49        
                         
Year ended December 31, 2017                        
Lifting costs     228.68       228.68        
Local taxes and similar payments (1)     7.49       7.49        
Transportation and other costs     48.19       48.19        
Average production costs     284.36       284.36        
                         
Average oil sales price     888.48       888.48        
Average NGL sales price     368.07       368.07        
Average natural gas sales price (2)     477.00       477.00        

 

(1) Does not include ad valorem and severance taxes, including the effect of royalty payments which are a financial obligation or are substantially equivalent to such taxes, in an amount of approximately Ps. 226.21 per boe, Ps. 162.08 per boe, and Ps. 89.67 per boe for the years ended December 31, 2019, 2018 and 2017, respectively.

 

(2) Includes revenues from the Gas Plan. See “Item 4. Legal and Regulatory Framework and Relationship with the Argentine Government—Market Regulation—Natural gas—Natural Gas Stimulus Programs.”

 

(3) Includes (38.2) Ps/boe million corresponding to the implementation of IFRS 16. For more information See Note 2.b.12) to the Audited Consolidated Financial Statements.

 

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Drilling activity in Argentina  

The following table shows the number of wells drilled by us or consortiums in which we had a working interest in Argentina during the periods indicated.

 

    For the Year Ended December 31,
    2019   2018   2017
Gross wells drilled (1)                        
Oil     8       10       10  
Gas     3       5       7  
Exploratory productive     11       15       17  
Dry     12       6       2  
Total - Exploratory     23       21       19  
                         
Oil     305       313       325  
Gas     105       131       158  
Development productive     410       444       483  
Dry     -       1       4  
Total - Development     410       445       487  
                         
Net wells drilled (2)            
Oil     7       7       7  
Gas